HomeMy WebLinkAboutStaff Report 14748City of Palo Alto (ID # 14748)
Finance Committee Staff Report
Meeting Date: 12/6/2022 Report Type: Action Items
City of Palo Alto Page 1
Title: Pension Policy and Retiree Healthcare Review and Update
From: City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that the Finance Committee review and accept the revised actuarial pension
analysis using alternative assumptions and recommend City Council adoption of modifications
to the Pension Funding Policy used to guide financial planning of these benefits.
Executive Summary
In alignment with the Pension Funding Policy and Council direction, periodic reviews are
conducted to assess and respond to changes impacting the City’s pensions and Other Post -
Employment Benefits (OPEB) plans and the funding available to meet those benefit costs. This
report focuses on actuarial analysis using alternative assumptions to CalPERS. These results will
be used to inform the status of pension plans, progress towards meeting funded status goals,
and other risk mitigation strategies.
As part of this review, staff recommends memorializing any practices adjusted since adoption
of the policy and discussing further policy modifications or budgetary practices used to inform
long term financial planning of these benefits. Potential policy revisions recommended include:
•Adding proactive planning for Other Post-Employment Benefits (OPEB)/retiree
healthcare to policy, consistent with City Council actions
•Assuming a more conservative discount rate for supplemental contributions from 6.2
percent to 5.3 percent (Pension) and from 6.25 percent to 5.75 percent (OPEB), as
approved by the City Council
•Adding language for investment strategy of Pension and OPEB Trusts, including more
conservative investment allocations once 75-80% funded, or when the City’s actuary
recommends disbursements
•Identifying areas of focus for accumulated savings, such as rat e stabilization and
Additional Discretionary Payments (ADPs) to CalPERS, such as
o ADPs in excess of one-year employer contribution (current policy)
o No ADPs, accumulate savings in Pension Trust
2 Late Packet
Packet Pg. 62
City of Palo Alto Page 2
o ADPs for excess BSR contributions and/or supplemental contributions only
•Modifying actuary reporting from 3 to 4 years to align with CalPERS Asset Liability
Management (ALM) process and Experience Study
Background
The City has taken several proactive steps to address rising pension costs and long-term
liabilities, including cost-sharing in labor agreements, establishing an irrevocable Section 115
Pension Trust (“Pension Trust”) (CMR 75531), and adopting a Pension Funding Policy (CMR
117222). The Pension Policy is an evergreen policy that automatically renews until goals are
complete, subject to modification at the City Council’s direction. The policy identifies a path
forward for the City to address its pension obligations on an ongoing basis, ensure prudent and
proactive financial planning, and avoid significant impacts to service delivery.
The current Pension Funding Policy sets the following goals and principles:
Funding Goal and Timeframe:
•Target of reaching a 90 percent funded status of the CalPERS determined liability within
fifteen years (FY 2036).
Funding Components:
•‘pay go’ costs also known as Normal Cost (NC) of annual pension costs to be funded with
a discount rate of 6.2%, more conservative than CalPERS rate of 7.0%.
•Discretion to the City Manager to make additional contributions from excess Budget
Stabilization Reserve (BSR) above the City Council approved target BSR level.
Use of Funds:
•City Manager must identify the impacts on the funding goal and timeframe to modify
the transmission of contributions to the PARS Trust Fund.
•Any transmission of funds from PARS to CalPERS will require City Council approval.
Reporting:
•Every three years, staff will consult with an actuary to inform the City Council on the
progress the City has made towards its goal
•Staff will report to the City Council through the annual budget process on the status of
the PARS section 115 pension trust fund, recommended contributions to the PARS fund,
and potential transmission of any funds from PARS to CalPERS for the coming fiscal year
In alignment with the policy and Council direction, periodic reviews are conducted to assess and
respond to changes impacting the City’s pensions and Other Post-Employment Benefits (OPEB)
plans and the funding available to meet those benefit costs. Staff expects as part of this process
1 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-cmrs/year-
archive/2017/7553.pdf
2 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/reports/city-manager-reports-cmrs/year-
archive/2020-2/id-11722.pdf
2
Packet Pg. 63
2 Late Packet
City of Palo Alto Page 3
to memorialize any practices adjusted since the adoption of the policy, review progress towards
policy goals, and discuss and review any modifications to the Pension Policy or budgetary
practices used to inform financial planning of these benefits.
To facilitate this review, staff planned three meetings with the Finance Committee beginning in
September 2022 including: 1) Review of the most current actuarial analysis as distributed by
CalPERS (CMR 146283), 2) Review of the current status of both the Pension and Other Post -
Employment Benefits (OPEB)/retiree healthcare liabilities including the proactive contributions
and discussion with plan providers (CMR 148294), and 3) Review of actuarial analysis based on
alternative assumptions as defined in the Pension Funding Policy and recommended revisions
to the Pension Funding Policy for City Council consideration and adoption (December 6, 2022).
Discussion
This report includes a comprehensive analysis of the City’s pension plans completed by an
outside actuarial consultant, Foster & Foster (Attachment A) formerly Bartel & Associates. This
actuarial analysis provides an updated status of the City’s pension plans, including alternative
calculations as compared to CalPERS for economic and demographic assumptions, funding
policy, and other risk mitigation strategies. Additionally, this analysis considers other factors not
assumed in CalPERS reporting, such as cost-sharing with employees, preliminary investment
losses earned by CalPERS in the most recent reporting period, and accumulated savings in the
City’s Pension Trust. These factors, and the resulting impact on projected employer
contributions and funded status, are to inform discussions on long-term pension obligations
and the progress of meeting policy goals.
Overview of Actuarial Analysis Results
Representatives from Foster & Foster will provide an overview of the detailed presentation of
the attached report that provides an updated status of pension plans, progress towards
meeting funded status goals, and other risk mitigation strategies (Attachment A). As noted
above, this analysis considers alternative assumptions to CalPERS, including:
•Preliminary 6.1 percent investment loss for the period ending June 30, 20225; this loss
will be included in the CalPERS valuation analysis issued in August 2023
•Reduction to discount rate (6.8 percent assumed by CalPERS); ultimately reaching 6.0
percent over 20+ years
•Consideration for employee contributions towards the employer share of costs6
3 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance-
committee/2022/20220920/20220920pfcs.pdf
4 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance-
committee/2022/20221018/20221018pfcs.pdf
5 This has since been revised from an estimate of 6.1 percent to an estimate of 7.4 percent, as reported in the
November 15, 2022 CalPERS Finance and Administration Committee:
https://www.calpers.ca.gov/docs/board-agendas/202211/financeadmin/item-6a-01_a.pdf
2
Packet Pg. 64
2 Late Packet
City of Palo Alto Page 4
•Supplemental contributions to the Pension Trust calculated at the equivalent of a 5.3
percent discount rate for normal cost
•Additional Discretionary Payments (ADPs) from the Pension Trust to the CalPERS plans
for amounts in excess of a one-year employer contribution
Ultimately, the City is expected to reach a 90 percent funded status in the Miscellaneo us plan
by FY 2038, and the Safety plan by FY 2040, without consideration for the City’s Pension Trust.
Once the accumulation of funds in the Pension Trust (no payments to CalPERS) and payments
to CalPERS are considered, the Miscellaneous plan is expected to meet funding targets by FY
2034, whereas the Safety plan is expected to meet funding targets by FY 2036 -37. Of note, this
does not consider future contributions to the Pension Trust using excess BSR, since these
amounts are one-time and tend to vary from year to year; balances already in the trust have
been considered in this analysis. Additional contributions would help the City to reach to target
funded status levels sooner.
Pension Policy Revisions for Consideration
This report concludes the series of meetings initiated with the Finance Committee to review the
status of pension and retiree healthcare plans. Staff recommends memorializing any practices
adjusted since the adoption of the policy and discussing further modifications to the Pension
Policy or budgetary practices used to inform long term financial planning of these benefits. A
summary of the current Pension Policy and potential revisions is included in Attachment B and
discussed in more detail in this report.
Add proactive planning for Other Post-Employment Benefits (OPEB)/retiree healthcare to policy,
consistent with City Council actions
The Pension Policy does not explicitly include language for Other Post-Employment Benefit
(OPEB)/retiree healthcare plans. As directed by the City Council, staff have worked to align the
City’s policy goals for pension and retiree healthcare liabilities since the adoption of the Pension
Policy. A revision is included for Finance Committee consideration to change the title to be
inclusive of both plans, from ‘Pension Funding Policy’ to ‘Retiree Benefit Funding Policy’.
Assume a move conservative discount rate for supplemental contributions from 6.2 percent to
5.3 percent (Pension) and from 6.25 percent to 5.75 percent (OPEB), as approved by the City
Council
Beginning in FY 2023, the City Council approved reducing the discount rate to calculate
supplemental pension contributions from the previously approved rate of 6.2 percent to 5.3
percent over two years; FY 2023 is a transitional year equivalent to a rate o f approximately 5.8
percent. These actions more closely align the discount rate with the CalPERS Asset Liability
Management (ALM) study completed in November 2021, which includes a survey of external
6 The City has negotiated Memoranda of Agreements (MOAs) with labor groups to include provisions for
employees to accept a greater share of pension costs; Miscellaneous groups pick-up 1-2 percent and Safety groups
pick up 3-4 percent of the employer share of pension cost
2
Packet Pg. 65
2 Late Packet
City of Palo Alto Page 5
asset managers and consultants to gain expert projections on expected market returns. In the
most recent ALM study, the median expected returns of survey participants were 5.3 percent
(10-year) and 6.2 percent (20-year). Additionally, the City Council approved the use of a lower
discount rate for supplemental OPEB contributions from 6.25 percent to 5.75 percent, and
alternative assumptions to align with known variables such as investment returns (CMR 14112
as amended by CMR 145027).
A goal of this funding element is to identify a discount rate for the calculation of the normal
cost of pensions that best aligns with actual investment returns, mitigatin g the creation of new
liability bases resulting from these discrepancies to the extent possible. Future adjustments are
anticipated to align planned contributions with anticipated economic and demographic
assumptions, including but not limited to expected investment returns, subject to City Council
approval. Staff expects to use proactive measures to inform changes, such as the ALM study
and other external expert projections. Additionally, staff will continue to monitor any major
factors that contribute to the creation of new liabilities in future CalPERS reporting.
Add language for investment strategy of Pension and OPEB Trusts, including more conservative
investment allocations once 75-80% funded, or when actuary recommend disbursements
In October 2022, staff facilitated a status update of the City’s irrevocable 115 Pension Trust
Fund and the City’s California Employers’ Retiree Benefit Trust (CERBT) Fund for the retiree
healthcare plans with plan providers (CMR 148298). Ultimately, the investments made in these
funds are required to be used to pay retiree pension and healthcare costs respectively.
However, the City has the discretion to select the investment risk tolerance and control the
inflow and outflow of funds. Ultimately, the balance maintained, an d investment strategy(s)
should depend on the intended use of the funds.
As prefunding strategies move the City closer to meeting funded status goals, staff
recommends revising the investment strategy for these funds. When actuary valuations
recommend disbursements or when the balance-maintained approaches 75-80 percent funded
status, the investment strategy should be diversified with an intention of ensuring both stability
and growth of the assets versus an only growth focused goal . This strategy is intended to
preserve assets and mitigate against volatility in the market when the funds are expected to be
disbursed. Currently, the City’s Pension Trust is invested in a Moderately Conservative portfolio,
this is the second most conservative of five (5) port folios. The City's CERBT Fund is invested in a
Strategy 1 portfolio, which offers the highest expected return of three (3) portfolios. Changes to
the investment portfolio selection(s) do not require additional budgetary action, as funds may
be moved from one portfolio to another at the City’s discretion.
7 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance-
committee/2022/20220607/20220607pfcsm-final.pdf
8 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-reports/agendas-minutes/finance-
committee/2022/20221018/20221018pfcs.pdf
2
Packet Pg. 66
2 Late Packet
City of Palo Alto Page 6
Contributions to the OPEB Trust are intended to generate long-term asset growth through
accumulated contributions until returns are sufficient to contribute to a portion of the annual
“pay-go” costs. In consultation with CERBT representatives, staff recommends setting aside 2 -3
years of estimated disbursements in a more conservative portfolio. The alternative assumptions
approved by the City Council for development of the FY 2023 and FY 2024 budget do not
recommend this type of disbursement over the next ten years. Staff expects to monitor the
status of disbursements in future valuations; the next valuation will be completed as of June 30,
2023 for the development of the FY 2025 and FY 2026 budget.
Identify areas of focus for accumulated savings, such as rate stabilization and Additional
Discretionary Payments (ADPs) to CalPERS
The City has discretion to control the inflow and outflow of funds contributed to the Section
115 Pension and OPEB Trusts; contributions to the Pension Trust are held separately from
CalPERS and do not directly pay down pension liabilities, whereas contributions to the OPEB
Trust directly pay down retiree healthcare liabilities. Therefore, the City may use the Pension
Trust as a rate stabilization reserve, where funds may be used to smooth volatility in employer
contributions in any given year, or a “rainy day” reserve in an emergency or in difficult
economic times. Additionally, the City may use the Pension Trust to pay down liabilitie s through
Additional Discretionary Payments (ADPs) to CalPERS. The City may elect to make additional
contributions, above and beyond the required employer contribution, at any time and in any
amount. However, payments made to CalPERS are permanent and cannot be returned.
The Pension policy outlines two funding components: 1) the difference in cost using a more
conservative discount rate to CalPERS for normal cost (“supplemental contributions”); and 2) 50
percent of excess BSR above City Council target levels. Currently, both components are
contributed directly to the Pension Trust. Consistent with the current Pension Policy, the
actuary analysis in this report contemplates ADPs from the Pension Trust to CalPERS once
funding levels exceed a single-year employer contribution. This level of funding is expected in
the next couple of years. This analysis does not consider future contributions to the Pension
Trust using excess BSR, since these amounts are one-time and tend to vary from year to year.
Alternatively, the City may elect to keep contributions in the Pension Trust, with payments to
CalPERS made at a later date. Or, the City may direct one or both components as an ADP to
CalPERS. For example, the City may elect to direct one-time contributions using excess BSR as
an ADP to CalPERS to directly pay down the liability, whereas supplemental contributions using
a lower discount rate would continue to be made to the Pension Trust, or vice versa.
Modify actuary reporting from 3 to 4 years to align with CalPERS Asset Liability Management
(ALM) process and Experience Study
Every four years, CalPERS completes a comprehensive Asset Liability Management (ALM)
process to review the capital market assumptions and strategic asset allocation to ascertain
2
Packet Pg. 67
2 Late Packet
City of Palo Alto Page 7
whether a change in the discount rate, investment profile, and other economic assumptions is
warranted. Additionally, the Actuarial Office completes an Experience Study to review pension
demographics for potential modification. This most recent study was completed in No vember
2021 and resulted in notable changes to reduce the discount rate from 7.0 to 6.8 percent,
reduce price inflation assumptions from 2.5 to 2.3 percent, and revise the asset allocation to
target 1/3 investment in private assets, add 5 percent leverage, and reduce public equity
exposure. Revising policy requirements for actuary reporting from 3 to 4 years will align the
studies and ensure that the City’s analysis includes the most up to date changes approved by
the CalPERS board, including changes to economic and demographic assumptions that inform
overall liability and employer cost.
Resource Impact
Revisions and updates to the City’s Pension Funding Policy will inform the development of the
annual budget, financial planning and analysis of operation, and other long term financial
planning. The funding elements of this policy are intended to support the financial sustainability
of the organization by limiting the risk of generating long-term liabilities due to actual pension
and retiree healthcare plan experience that differs from assumptions, such as lower than
anticipated investment returns.
Stakeholder Engagement
Staff continues to use external consultants for updates on the status and forecast of long -term
liabilities associated with pension and retiree healthcare programs. As in prior years, these
results are used to inform funding policy discussions with the Finance Committee and City
Council. All communication is structured around public hearings to facilitate opportunities for
community input and provide guidance to staff in the budget development process.
Environmental Review
This report is not a project for the purposes of the California Environmental Quality Act.
Environmental Review is not required.
Attachments:
•Attachment A: Foster and Foster Actuarial Analysis_City of Palo Alto Pension Plans
•Attachment B: Pension Funding Policy Overview and Potential Revisions
2
Packet Pg. 68
2 Late Packet
CITY OF PALO ALTO
MISCELLANEOUS & SAFETY PLANS
CalPERS Actuarial Analysis – 6/30/21 Valuation
Preliminary Results
Mary Elizabeth Redding, FSA, EA, MAAA, FCA
Bianca Lin, FSA, EA, MAAA, FCA
Matthew Childs
Foster & Foster, Inc.
October 21, 2022
Contents
n:\calpers\city_of_palo_alto\6-30-21\ba paloaltoci 22-10-21 calpers misc & safety 21.docx
Topic Page
Background 1
Miscellaneous Plan:
Historical Information 15
Projections 25
Safety Plan:
Historical Information 41
Projections 51
Combined Funded Status 65
Leaving CalPERS 67
PEPRA Cost Sharing 69
Paying Down the Unfunded Liability 71
Miscellaneous Projection 81
Safety Projections 91
Actuarial Certification 99
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 69
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 1
DEFINITIONS
PVB - Present Value of all Projected
Benefits:
The value now of amounts due to be
paid in the future
Discounted value (at valuation date -
6/30/21), of all future expected benefit
payments based on various (actuarial)
assumptions
Current Normal Cost (NC):
Portion of PVB allocated to (or “earned” during) current year
Value of employee and employer current service benefit
Actuarial Liability (AAL):
Discounted value (at valuation date) of benefits earned through valuation date
[value of past service benefit]
Portion of PVB “earned” at measurement
October 21, 2022 2
DEFINITIONS
Target- Have money in the bank to cover Actuarial Liability (past service)
Unfunded Liability (UAAL or UAL) - Money short of target at valuation date
If all actuarial assumptions were always exactly met, then the plan assets would
always equal AAL
Any difference is the unfunded (or overfunded) AAL
Every year, the actuary calculates the difference between the expected UAAL and
Actual UAAL. This is a new layer or amortization base
Each new layer gets amortized (paid off) over a period of time as part of the
contribution [rate]
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 70
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 3
HOW WE GOT HERE
Investment Losses
CalPERS Contribution Policy
Enhanced Benefits
Demographics
October 21, 2022 4
HOW WE GOT HERE – INVESTMENT RETURN
Returns (after 2001) shown are gross returns, unreduced for administrative expenses, from CalPERS valuation
reports, when available. The discount rate is based on expected returns net of administrative expenses.
20-Year and 30-Year
average return rates on
6/30/22 are 6.9% and
7.7%, respectively
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 71
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 5
HOW WE GOT HERE – OLD CONTRIBUTION POLICY
Effective with 2003 valuations:
Slow (15 year) recognition of investment losses into funded status
Rolling 30 year amortization of all (primarily investment) losses
Designed to:
First smooth rates and
Second pay off UAL
Mitigated contribution volatility
October 21, 2022 6
HOW WE GOT HERE – ENHANCED BENEFITS
At CalPERS, Enhanced Benefits implemented using all (future & prior) service
Typically not negotiated with cost sharing
City of Palo Alto
Tier 1 Tier 2 PEPRA
Miscellaneous 2.7%@55 FAE1 2%@60 FAE1 2%@62 FAE3
Safety 3%@50 FAE1 3%@55 FAE3 2.7%@57 FAE3
Note:
FAE1 is highest one year (typically final) average earnings
FAE3 is highest three years (typically final three) average earnings
PEPRA tier implemented for new employees hired after 1/1/13
Employee pays half of total normal cost
2022 Compensation limit
Social Security participants: $134,974
Non-Social Security participants: $161,969
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 72
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 7
HOW WE GOT HERE – ENHANCED BENEFITS
Available CalPERS Benefit formulas. City’s formulas shown in red.
For any retirement age, chart shows benefit multiplier (% FAE per year of service)
Be
n
e
f
i
t
M
u
l
t
i
p
l
i
e
r
Retirement Age
October 21, 2022 8
HOW WE GOT HERE – ENHANCED BENEFITS
Retirement Age
Be
n
e
f
i
t
M
u
l
t
i
p
l
i
e
r
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 73
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 9
HOW WE GOT HERE – DEMOGRAPHIC
Around the State
Large retiree liability compared to actives
State average: 56% for Miscellaneous, 65% for Safety
Declining active population and increasing number of retirees
Higher percentage of retiree liability increases contribution volatility
City of Palo Alto percentage of liability belonging to retirees:
Miscellaneous 62%
Safety 71%
October 21, 2022 10
CALPERS CHANGES
April 2013: CalPERS adopted new contribution policy
No asset smoothing or rolling amortization
February 2018: New amortization policy for 2021/22 contributions
Fixed dollar (level) 20-year amortization rather than % pay (escalating)
5-year ramp up (not down) for investment gains and losses
CalPERS Board changed the discount rate to 7%, still phasing in to rates:
Rate Initial Impact Full Impact
6/30/16 valuation 7.375% 18/19 22/23
6/30/17 valuation 7.25% 19/20 23/24
6/30/18 valuation 7.00% 20/21 24/25
In the November 2021 meeting, CalPERS Board adopted new
Discount rate and investment allocation
Discount rate: 6.8% for 6/30/2021. UAL impact matches investment
gain amortization (5-year ramp-up)
Asset allocation has higher investment risk than current portfolio
Experience study (Demographic assumptions)
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 74
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 11
CALPERS CHANGES
Risk Mitigation Strategy
Move to more conservative investments over time to reduce volatility
Only when investment return is better than expected
Lower discount rate in concert
Essentially use ≈50% of investment gains to pay for cost increases
Likely get to 6.0% discount rate over 20+ years
Risk mitigation suspended from 6/30/16 to 6/30/18 valuation
Did not trigger for 6/30/19 or 6/30/20 valuations
First triggered for 6/30/21 valuation – 6.8% discount rate
October 21, 2022 12
CALPERS CHANGES
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 75
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 13
CALPERS CHANGES
Capital Market Assumptions
Asset Class Asset Segment
Near-Term
Return
(5-year)
Long-Term
Return
(20-year)
Volatility
(20-year)
Growth
Global Equity – Cap Weighted 6.8% 6.8% 17.0%
Global Equity – Non-Cap Weighted 5.1% 6.1% 13.5%
Private Equity 8.9% 9.6% 30.1%
Income
Long U.S. Treasuries 0.1% 2.6% 12.4%
Mortgage-Backed Securities 1.2% 2.8% 3.1%
Investment Grade Corporates 0.1% 3.9% 8.5%
Spread Product – High Yield 2.2% 4.7% 9.2%
Spread Product – Sovereigns 3.2% 4.5% 10.4%
High Yield Segment 2.2% 4.6% 9.0%
Real Assets Real Estate 5.3% 5.5% 12.2%
Liquidity Liquidity 0.3% 1.7% 0.8%
Other
Private Debt 6.8% 5.9% 9.9%
Emerging Market Debt 2.7% 4.8% 10.3%
October 21, 2022 14
CALPERS CHANGES
Portfolio Target Allocations
Current
Portfolio
New
Portfolio
Liquidity 1% -
Real Assets 13% 15%
Private Debt - 5%
EM Sov Bonds 1% 5%
High Yield 4% 5%
Investment Grade Corp. 6% 10%
Mtge-backed Securities 7% 5%
Treasury 10% 5%
Private Equity 8% 13%
Global Equity1 50% 42%
Leverage - (5)%
Total 100% 100%
1 Cap and non-cap weighted combined for this table; actual portfolios have specific allocations for each classification.
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 76
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 15
SUMMARY OF DEMOGRAPHIC INFORMATION - MISCELLANEOUS
2001 2011 2020 2021
Actives
Counts 892 765 777 723
Average
Age 45 45 46 46
City Service 9 10 11 11
PERSable Wages $ 58,200 $ 78,800 $ 109,300 $ 110,300
Total PERSable Wages 51,900,000 60,300,000 84,900,000 79,700,000
Inactive Members
Counts
Transferred 223 294 385 386
Separated 242 305 450 463
Retired
Service 389 778 1,028 1,073
Disability 64 73 70 71
Beneficiaries 61 90 125 132
Total 516 941 1,223 1,276
Average Annual City Provided
Benefit for Service Retirees2 $ 16,600 $ 32,300 $ 39,800 $ 41,000
2 Average City-provided pensions are based on City service & City benefit formula, and are not representative of
benefits for long-service employees.
October 21, 2022 16
SUMMARY OF DEMOGRAPHIC INFORMATION - MISCELLANEOUS
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 77
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 17
PLAN FUNDED STATUS - MISCELLANEOUS
June 30, 2020 June 30, 2021
Actuarial Accrued Liability
Active $ 301,000,000 $ 298,300,000
Retiree 549,900,000 594,800,000
Inactive 58,500,000 63,100,000
Total 909,400,000 956,200,000
Assets 592,300,000 720,100,000
Unfunded Liability 317,100,000 236,100,000
Funded Ratio 65.1%75.3%
Average funded ratio for
CalPERS Public Agency
Miscellaneous Plans 72.3% 83.7%
October 21, 2022 18
PLAN FUNDED STATUS - MISCELLANEOUS
City CalPERS Assets and Actuarial Liability ($Millions)
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 78
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 19
PLAN FUNDED STATUS - MISCELLANEOUS
Discount Rate Sensitivity
June 30, 2021
Discount Rate
6.80% 6.30%3 5.80%
AAL $956,200,000 $1,018,100,000 $1,079,900,000
Assets 720,100,000 720,100,000 720,100,000
Unfunded Liability 236,100,000 298,000,000 359,800,000
Funded Ratio 75.3% 70.7% 66.7%
3 Estimated by Foster & Foster.
October 21, 2022 20
PLAN FUNDED STATUS - MISCELLANEOUS
Unfunded Accrued Liability Changes
Unfunded Accrued Liability on 6/30/20 $317,100,000
Expected 6/30/21 Unfunded Accrued Liability 315,200,000
Changes
•Assumption Change (demographics)500,000
•Discount Rate 7% to 6.8%21,700,000
•Asset Loss (Gain) (21.2% return for FY 2021)(94,700,000)
•Contribution & Experience Loss (Gain)(6,600,000)
•Total (79,100,000)
Unfunded Accrued Liability on 6/30/21 236,100,000
Projected Unfunded Accrued Liability on 6/30/22 319,000,000
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 79
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 21
FUNDED RATIO - MISCELLANEOUS
6/30/22 funded status estimated
October 21, 2022 22
FUNDED STATUS (MILLIONS) - MISCELLANEOUS
6/30/22 funded status estimated
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 80
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 23
CONTRIBUTION RATES - MISCELLANEOUS
Benefit
Improvement
2.7%@55 from
2%@55 Benefit
Improvement
2%@55 from
2%@60
October 21, 2022 24
CONTRIBUTION RATES - MISCELLANEOUS
6/30/20 6/30/21
2022/2023 2023/2024
Total Normal Cost 17.8% 19.3%
Employee Normal Cost 7.2% 7.6%
Employer Normal Cost 10.6% 11.7%
Amortization Payments 32.3% 33.1%4
Total Employer Contribution Rate 42.8% 44.8%
2022/23 Employer Contribution Rate 42.8%
Payroll less than Expected 2.7%
6/30/17 Discount Rate & Inflation (5th Year)0.3%
6/30/18 Discount Rate change (4th Year)0.7%
6/30/21 Demog. Assumption change (1st Year, no ramp)1.1%
6/30/21 Risk Mitigation (Normal Cost change)0.8%
Other (Gains)/Losses mainly net investment gain (3.6%)
2023/24 Employer Contribution Rate 44.8%
4 Equivalent to 13.5% of UAL. One year, 6.8% interest on the UAL is 16.7% of payroll. 2023/24 amortization
payment exceeds interest on the UAL, so there is no “negative amortization.”
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 81
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 25
CONTRIBUTION PROJECTION - MISCELLANEOUS
Market Value Investment Return:
June 30, 2022 (6.1%)5
Future returns based on stochastic analysis using 1,000 trials
Single Year Returns at6 25th Percentile 50th Percentile 75th Percentile
Current investment mix – first 10 years,
without risk mitigation -1.8% 6.0% 14.7%
Current investment mix – after 10 years,
without risk mitigation -0.7% 7.5% 16.4%
Assumes investment returns will generally be lower over the next 10 years
and higher beyond that.
Discount Rate decreases due to Risk Mitigation policy – Ultimate rate 6.0%
No Other: Gains/Losses, Method/Assumption Changes, Benefit Improvements
Different from CalPERS projection
Impact of Risk Mitigation Policy:
Net impact of investment gain and discount rate change amortized over 20
years with 5 year ramp up
Same amortization method for all future years
5 Gross return based on July 2022 CalPERS press release.
6 Nth percentile means N percentage of our trials result in returns lower than the indicated rates.
October 21, 2022 26
CONTRIBUTION PROJECTION - MISCELLANEOUS
New hire assumptions:
All new hires assumed PEPRA members and none are Classic members
6/30/21 employee distribution:
Benefit Tier Count 20/21 Payroll
2.7%@55 FAE1 306 $36,349,200
2%@60 FAE1 96 12,519,900
2%@62 FAE3 (PEPRA)321 30,849,900
Employee cost sharing by bargaining group (percentage of pay):
SEIU: 2% effective 12/1/2020
All other groups: 1%
Payroll split by bargaining group: 58% for SEIU and 42% for all other
groups
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 82
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 27
CONTRIBUTION PROJECTION - MISCELLANEOUS
Impact of 21/22 Investment Return
October 21, 2022 28
CONTRIBUTION PROJECTION - MISCELLANEOUS
This page intentionally blank
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 83
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 29
CONTRIBUTION PROJECTION - MISCELLANEOUS
October 21, 2022 30
CONTRIBUTION PROJECTION - MISCELLANEOUS
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 84
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 31
CONTRIBUTION PROJECTION - MISCELLANEOUS
October 21, 2022 32
CONTRIBUTION PROJECTION - MISCELLANEOUS
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 85
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 33
CONTRIBUTION PROJECTION - MISCELLANEOUS
October 21, 2022 34
CONTRIBUTION PROJECTION - MISCELLANEOUS
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 86
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 35
CONTRIBUTION PROJECTION - MISCELLANEOUS
October 21, 2022 36
CONTRIBUTION PROJECTION - MISCELLANEOUS
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 87
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 37
FILLING VACANCIES ANALYSIS - MISCELLANEOUS
Filling Employee Vacancies – Miscellaneous
All payroll increase over CalPERS projections is assumed to be from newly hired
PEPRA employees, increasing only Normal Cost
Payroll growth from permanent, higher-than-expected pay increases for current
employees would also add to the City’s UAL.
Payroll
August 2022 payroll $ 86,382,700
FY 2022/23 budget 104,962,800
Current % employee vacancy 18%
Expected % employee vacancy 7%
Current projected 2023/24 CalPERS payroll from 6/30/2021
valuation report $ 86,604,600
New projected 2023/24 payroll for analysis (22/23 budget with one
year salary inflation, * 93%)100,000,000
October 21, 2022 38
FILLING VACANCIES ANALYSIS - MISCELLANEOUS
Impact of Higher Payroll/Filled Vacancies on Contributions
Miscellaneous with EE Cost Sharing
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 88
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 39
FUNDED STATUS - MISCELLANEOUS
October 21, 2022 40
FUNDED STATUS - MISCELLANEOUS
This page intentionally blank
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 89
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 41
SUMMARY OF DEMOGRAPHIC INFORMATION - SAFETY
2001 2011 2020 2021
Actives
Counts 213 185 174 163
Average
Age 41 41 41 42
City Service 13 12 11 12
PERSable Wages $ 81,800 $ 123,100 $ 155,700 $ 157,900
Total PERSable Wages 17,400,000 22,800,000 27,100,000 25,700,000
Inactive Members
Counts
Transferred 60 62 55 56
Separated 28 34 49 51
Retired
Service 193 198 241 247
Disability 56 157 146 144
Beneficiaries 27 35 48 52
Total 276 390 435 443
Average Annual City Provided
Benefit for Service Retirees7 $ 25,200 $ 47,200 $ 70,400 $ 71,500
7 Average City-provided pensions are based on City service & City benefit formula, and are not representative of
benefits for long-service employees.
October 21, 2022 42
SUMMARY OF DEMOGRAPHIC INFORMATION - SAFETY
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 90
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 43
PLAN FUNDED STATUS - SAFETY
June 30, 2020 June 30, 2021
Actuarial Accrued Liability
Active $ 126,300,000 $ 130,300,000
Retiree 347,200,000 362,600,000
Inactive 13,700,000 16,300,000
Total 487,200,000 509,200,000
Assets 293,900,000 353,300,000
Unfunded Liability 193,300,000 155,900,000
Funded Ratio 60.3%69.4%
Average funded ratio for
CalPERS Public Agency
Safety Plans 69.2% 80.9%
October 21, 2022 44
PLAN FUNDED STATUS - SAFETY
City CalPERS Assets and Actuarial Liability ($Millions)
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 91
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 45
PLAN FUNDED STATUS - SAFETY
Discount Rate Sensitivity
June 30, 2021
Discount Rate
6.80% 6.30%8 5.80%
AAL $509,200,000 $542,500,000 $575,700,000
Assets 353,300,000 353,300,000 353,300,000
Unfunded Liability 155,900,000 189,200,000 222,400,000
Funded Ratio 69.4% 65.1% 61.4%
8 Estimated by Foster & Foster.
October 21, 2022 46
PLAN FUNDED STATUS - SAFETY
Unfunded Accrued Liability Changes
Unfunded Accrued Liability on 6/30/20 $193,300,000
Expected 6/30/21 Unfunded Accrued Liability 195,300,000
Changes
•Assumption Change (demographics)1,800,000
•Discount Rate 7% to 6.8%11,600,000
•Asset Loss (Gain) (21.2% return for FY 2021)(46,600,000)
•Contribution & Experience Loss (Gain)(6,200,000)
•Total (39,400,000)
Unfunded Accrued Liability on 6/30/21 155,900,000
Projected Unfunded Accrued Liability on 6/30/22 198,700,000
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 92
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 47
FUNDED RATIO - SAFETY
6/30/22 funded status estimated
October 21, 2022 48
FUNDED STATUS (MILLIONS) - SAFETY
6/30/22 funded status estimated
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 93
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 49
CONTRIBUTION RATES - SAFETY
Benefit
Improvement
3%@50 from
2%@50
October 21, 2022 50
CONTRIBUTION RATES - SAFETY
6/30/20 6/30/21
2022/2023 2023/2024
Total Normal Cost 30.4% 32.5%
Employee Normal Cost 9.8% 9.9%
Employer Normal Cost 20.6% 22.6%
Amortization Payments 50.6% 51.4%9
Total Employer Contribution Rate 71.1% 74.0%
2022/23 Employer Contribution Rate 71.1%
Payroll less than Expected 3.7%
6/30/17 Discount Rate & Inflation (5th Year)0.6%
6/30/18 Discount Rate change (4th Year)1.2%
6/30/21 Demog. Assumption change (1st Year, no ramp)2.0%
6/30/21 Risk Mitigation (Normal Cost change)1.4%
Other (Gains)/Losses mainly net investment gain (6.1%)
2023/24 Employer Contribution Rate 74.0%
9 Equivalent to 13.5% of UAL. One year, 6.8% interest on the UAL is 16.7% of payroll. 2023/24 amortization
payment exceeds interest on the UAL, so there is no “negative amortization.”
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 94
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 51
CONTRIBUTION PROJECTION - SAFETY
Market Value Investment Return:
June 30, 2022 (6.1%)10
Future returns based on stochastic analysis using 1,000 trials
Single Year Returns at11 25th Percentile 50th Percentile 75th Percentile
Current investment mix – first 10 years,
without risk mitigation -1.8% 6.0% 14.7%
Current investment mix – after 10 years,
without risk mitigation -0.7% 7.5% 16.4%
Assumes investment returns will generally be lower over the next 10 years
and higher beyond that.
Discount Rate decreases due to Risk Mitigation policy – Ultimate rate 6.0%
No Other: Gains/Losses, Method/Assumption Changes, Benefit Improvements
Different from CalPERS projection
Impact of Risk Mitigation Policy:
Net impact of investment gain and discount rate change amortized over 20
years with 5 year ramp up
Same amortization method for all future years
10 Gross return based on July 2022 CalPERS press release.
11 Nth percentile means N percentage of our trials result in returns lower than the indicated rates.
October 21, 2022 52
CONTRIBUTION PROJECTION - SAFETY
New hire assumptions:
All new hires assumed PEPRA members and none are Classic members
6/30/21 employee distribution:
Benefit Tier Count 20/21 Payroll
3%@50 FAE1 92 $15,866,300
3%@55 FAE3 13 2,048,900
2.7%@57 FAE3 (PEPRA) 58 7,830,300
Employee Cost Sharing by Bargaining Group (% of pay):
PAPOA: 3.5% of pay effective 7/1/2019
All other Safety: 4% of pay after 7/1/2021
Payroll: 43% PAPOA and 57% all other groups
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 95
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 53
CONTRIBUTION PROJECTION - SAFETY
Impact of 21/22 Investment Return
October 21, 2022 54
CONTRIBUTION PROJECTION - SAFETY
This page intentionally blank
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 96
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 55
CONTRIBUTION PROJECTION - SAFETY
October 21, 2022 56
CONTRIBUTION PROJECTION - SAFETY
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 97
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 57
CONTRIBUTION PROJECTION - SAFETY
October 21, 2022 58
CONTRIBUTION PROJECTION - SAFETY
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 98
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 59
CONTRIBUTION PROJECTION - SAFETY
October 21, 2022 60
CONTRIBUTION PROJECTION - SAFETY
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 99
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 61
CONTRIBUTION PROJECTION - SAFETY
October 21, 2022 62
CONTRIBUTION PROJECTION - SAFETY
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 100
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 63
FILLING VACANCIES ANALYSIS - SAFETY
Filling Employee Vacancies – Safety
All payroll increase over CalPERS projections is assumed to be from newly
hired PEPRA employees, increasing only Normal Cost
Payroll growth from permanent, higher-than-expected pay increases for
current employees will also add to the City’s UAL
No adjustment has been made to CalPERS projected Safety payroll in this
analysis
Payroll
August 2022 payroll $ 22,597,100
FY 2022/23 budget 27,077,300
Current % employee vacancy 16%
Expected % employee vacancy 7%
Current projected 2023/24 CalPERS payroll from 6/30/2021
valuation report $ 27,969,300
New projected 2023/24 payroll for analysis (2022/23 budget with
one year’s salary growth * 93%)$24,500,000
Result: Use CalPERS projected payroll for this study, with no
adjustment
October 21, 2022 64
FUNDED STATUS - SAFETY
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 101
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 65
COMBINED – MISCELLANEOUS & SAFETY
October 21, 2022 66
COMBINED – MISCELLANEOUS & SAFETY
Funded Status Summary on June 30, 2021
(Amounts in $Millions)
Miscellaneous Safety Total
AAL $ 956 $ 509 $1,465
Assets 720 353 1,073
Unfunded AAL 236 156 392
Funded Ratio 75.3% 69.4% 73.2%
Projected Funded Status Summary on June 30, 2022
(Amounts in $Millions)
Miscellaneous Safety Total
AAL $ 987 $ 524 $1,511
Assets 668 325 993
Unfunded AAL 319 199 518
Funded Ratio 67.7% 62.1% 65.7%
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 102
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 67
LEAVING CALPERS
Participation in CalPERS is governed by State law and CalPERS rules
The following are considered “withdrawing” from CalPERS:
Exclude new hires from CalPERS & giving them a different pension
Stop accruing benefits for current employees
“Withdrawal” from CalPERS:
Treated as plan termination
Liability increased for conservative investments
Liability increased for future demographic fluctuations
Liability must be funded immediately by withdrawing agency
Otherwise, retiree benefits are cut
October 21, 2022 68
LEAVING CALPERS
CalPERS Termination Estimates on June 30, 2021 (Amounts in Millions)
Ongoing Plan Termination Basis
Discount Rate 6.80% 1.00% 2.25%
Miscellaneous
Actuarial Accrued Liability $ 956 $2,053 $1,704
Assets 720 720 720
Unfunded AAL (UAAL) 236 1,333 984
Safety
Actuarial Accrued Liability $ 509 $ 1,152 $ 951
Assets 353 353 353
Unfunded AAL (UAAL) 156 799 598
Total
Unfunded AAL (UAAL) 392 2,132 1,582
Funded Ratio 73.2% 33.5% 40.4%
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 103
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 69
PEPRA COST SHARING
Target of 50% of total normal cost paid by all employees
PEPRA members must pay greater of 50% of total normal cost or bargained
amount if higher
Employer cannot pay any part of PEPRA member required employee
contributions
Employer may impose current employees pay 50% of total normal cost (limited
to 8% of pay for Miscellaneous and 12% for Safety) if not agreed through
collective bargaining
Miscellaneous Plan 2023/24:
Classic Members New Members
Tier 1
2.7%@55 FAE1
Tier 2
2%@60 FAE1
PEPRA
2%@62 FAE3
Employer Normal Cost 15.7% 12.2% 7.00%
Member Normal Cost 8.0% 7.0% 7.25%
Total Normal Cost 23.7% 19.2% 14.25%
50% Target 11.9% 9.6% 7.13%
October 21, 2022 70
PEPRA COST SHARING
Safety Plan 2023/24:
Classic Members New Members
Tier 1
3%@50 FAE1
Tier 2
3%@50 FAE3
PEPRA
2.7%@57 FAE3
Employer Normal Cost 27.3% 26.6% 12.39%
Member Normal Cost 9.0% 9.0% 11.75%
Total Normal Cost 36.3% 35.6% 24.14%
50% Target 18.2% 17.6% 12.07%
PEPRA Member Contributions:
2022/23 2023/24
Group
Total
NC
(Basis)
Member
Rate
Total
Normal
Cost Change
Member
Rate Method
Miscellaneous 12.50% 6.25% 14.25% 1.75% 7.25% PEPRA
Members
Safety 23.54% 11.75% 23.84% 0.30% 11.75% All Active
Members
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 104
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 71
PAYING DOWN THE UAL & RATE STABILIZATION
Where do you get the money from?
How do you use the money?
October 21, 2022 72
WHERE DO YOU GET THE MONEY FROM?
POB:
Usually thought of as interest arbitrage between expected earnings and rate
paid on POB
No guaranteed savings
PEPRA prevents contributions from dropping below normal cost
Savings offset when investment return is good
GFOA Advisory
Borrow from General Fund similar to State
One time payments
Governing body resolution to use a portion of one time money, e.g.
1/3 to one time projects
1/3 to replenish reserves and
1/3 to pay down unfunded liability
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 105
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 73
ADDITIONAL PAYMENTS TO CALPERS
Internal Service Fund
Typically used for rate stabilization
Restricted investments:
Likely low (0.5%-1.0%) investment returns
Short term/high quality, designed for preservation of principal
Assets can be used by governing body for other purposes
Does not reduce Unfunded Liability
October 21, 2022 74
ADDITIONAL PAYMENTS TO CALPERS
Make payments directly to CalPERS:
Likely best long-term investment return
Must be considered an irrevocable decision
Extra payments cannot be used as future “credit”
PEPRA prevents contributions from dropping below normal cost
Option #1: Request shorter amortization period (Fresh Start):
Higher short term payments
Less interest and lower long term payments
Likely cannot revert to old amortization schedule
Savings offset when investment return is good (PEPRA)
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 106
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 75
ADDITIONAL PAYMENTS TO CALPERS
Make payments directly to CalPERS (continued):
Option #2: Target specific amortization bases with an “Additional
Discretionary Payment “ADP” :
Extra contribution’s impact muted by reduced future contributions
CalPERS can’t track the “would have been” contribution
No guaranteed savings
Larger asset pool means larger loss (or gain) opportunity
Paying off shorter amortization bases: larger contribution savings over
shorter period:
e.g. 10 year base reduces contribution 13.7¢ for $1
Less interest savings vs paying off longer amortization bases
Paying off longer amortization bases: smaller contribution savings
over longer period:
e.g. 25 year base reduces contribution 8.2¢ for $1
More interest savings vs paying off shorter amortization bases
Maintaining the current payment schedule – not letting payments
reduce due to extra payment – gives the greatest long-term savings
October 21, 2022 76
IRREVOCABLE SUPPLEMENTAL (§115) PENSION TRUST
Can only be used to:
Reimburse City for CalPERS contributions
Make payments directly to CalPERS
Investments significantly less restricted than City investment funds
Fiduciary rules govern Trust investments
Usually, designed for long term returns
Assets don’t count for GASB accounting
Are considered Employer assets
Over 100 trusts established, mostly since 2015
Trust providers: PARS, PFM, Keenan
California Employers’ Pension Prefunding Trust (CEPPT)
effective July 2019
Strategy 1: 48% stocks / 52% bonds
Strategy 2: 22% stocks / 78% bonds
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 107
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 77
IRREVOCABLE SUPPLEMENTAL (§115) PENSION TRUST
More flexibility than paying CalPERS directly
City decides if and when and how much money to put into Trust
City decides if and when and how much to withdraw to pay CalPERS or
reimburse Agency
Funding strategies typically focus on:
Reducing the unfunded liability
Fund enough to make total CalPERS UAL = 0
Make PEPRA required payments from Trust when overfunded
Stabilizing contribution rates
Mitigate expected contribution rates to better manage budget
Combination
Use funds for rate stabilization/budget predictability
Target increasing fund balance to pay off UAL sooner
October 21, 2022 78
IRREVOCABLE SUPPLEMENTAL (§115) PENSION TRUST
Consider:
How much can you put into Trust?
Initial seed money?
Additional amounts in future years?
When do you take money out?
Target budget rate?
Year target budget rate kicks in?
Before or after CalPERS rate exceeds budgeted rate?
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 108
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 79
COMPARISON OF OPTIONS
Supplemental Trust CalPERS
Flexible Locked In
Likely lower long-term return Likely higher long-term return
Investment strategy choice No investment choice
Does not reduce net pension
liability for GASB reporting
Reduces net pension liability for
GASB reporting
More visible More restricted
October 21, 2022 80
ASSUMPTIONS FOR SECTION 115 TRUST PROJECTIONS
Starting Balances at 6/30/2022
Miscellaneous: $26,375,724+2,273,824 = $28,649,549
Safety: $12,663,549+685,066 = $13,348,616
Future trust earnings assumed to be 4.5%, for PARS Moderately Conservative
fund.
If the Section 115 Trust balance exceeds the CalPERS required contribution,
the excess is transferred to CalPERS as an ADP.
Treated as a gain amortized (reducing future contributions) as a level 20-
year amortization payment
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 109
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 81
PROJECTED SECTION 115 TRUST CONTRIBUTIONS (MISC)
Projected Low Discount Rate Normal Cost12
Current Low Discount
Fiscal ER Normal Cost Discount ER Normal Cost
Year Miscellaneous
13 Safety Rates Miscellaneous Safety
2022/23 $11,250 $6,050 5.8% $15,887 $ 8,194
2023/24 11,730 6,318 5.3% 18,243 9,280
2024/25 11,170 6,371 5.3% 18,380 9,381
2025/26 11,204 6,399 5.3% 18,456 9,455
2026/27 11,423 6,529 5.3% 18,555 9,541
2027/28 11,818 6,756 5.3% 18,668 9,640
2028/29 12,055 6,895 5.3% 18,803 9,742
2029/30 12,303 7,039 5.3% 18,956 9,851
2030/31 12,556 7,167 5.3% 19,120 9,945
2031/32 12,818 7,258 5.3% 19,299 10,000
2032/33 13,086 7,362 5.3% 19,487 10,073
12 Includes movement from Classic to PEPRA employees.
13 Includes higher “filled vacancies” payroll for Miscellaneous
October 21, 2022 82
PROJECTED SECTION 115 TRUST CONTRIBUTIONS (MISC)
Projected CalPERS Normal Cost and Section 115 Trust Contributions
Expected Section 115 Trust Contributions
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 110
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 83
NO TRANSFER FROM 115 TRUST TO CALPERS (MISC.)
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
Projected Total CalPERS and Section 115 Trust Contributions
October 21, 2022 84
NO TRANSFER FROM 115 TRUST TO CALPERS (MISC.)
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 111
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 85
NO TRANSFER FROM 115 TRUST TO CALPERS (MISC.)
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
Funded Status Projections With and Without Section 115 Trust Balance
October 21, 2022 86
NO TRANSFER FROM 115 TRUST TO CALPERS (MISC.)
This page intentionally blank
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 112
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 87
TRANSFERS FROM 115 TRUST TO CALPERS (MISC.)
Projected Total CalPERS Contributions and Section 115 Trust Balance
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
October 21, 2022 88
TRANSFERS FROM 115 TRUST TO CALPERS (MISC.)
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
Impact of Transfers from Section 115 Trust on Total CalPERS Contributions
50th Percentile – CalPERS Contributions 50th Percentile – CalPERS Contributions with Section 115 Trust transfers
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 113
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 89
TRANSFERS FROM 115 TRUST TO CALPERS (MISC.)
50th Percentile – Post-transfer CalPERS contributions
Projected Total CalPERS + Section 115 Trust Contributions
Compared to Original CalPERS Contributions
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
October 21, 2022 90
TRANSFERS FROM 115 TRUST TO CALPERS (MISC.)
Miscellaneous, with EE cost sharing and
higher/filled vacancies payroll
Funded Status Projections – Impact of Funding Policy
50th Percentile – After Section 115 Trust transfers plus Section 115 Trust balance
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 114
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 91
PROJECTED SECTION 115 TRUST CONTRIBUTIONS (SAFETY)
Projected CalPERS Normal Cost and Section 115 Trust Contributions
Safety, with EE cost sharing
Expected Section 115 Trust Contributions
October 21, 2022 92
NO TRANSFER FROM 115 TRUST TO CALPERS (SAFETY)
Projected Total CalPERS and Section 115 Trust Contributions
Safety, with EE cost sharing
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 115
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 93
NO TRANSFER FROM 115 TRUST TO CALPERS (SAFETY)
Safety, with EE cost sharing
October 21, 2022 94
NO TRANSFER FROM 115 TRUST TO CALPERS (SAFETY)
Safety, with EE cost sharing
Funded Status Projections With and Without Section 115 Trust Balance
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 116
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 95
TRANSFERS FROM 115 TRUST TO CALPERS (SAFETY)
Safety, with EE cost sharing
Projected Total CalPERS Contributions and Section 115 Trust Balance
October 21, 2022 96
TRANSFERS FROM 115 TRUST TO CALPERS (SAFETY)
Safety, with EE cost sharing
Impact of Transfers from Section 115 Trust on Total CalPERS Contributions
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 117
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 97
TRANSFERS FROM 115 TRUST TO CALPERS (SAFETY)
Safety, with EE cost sharing
Projected Total CalPERS + Section 115 Trust Contributions
Compared to Original CalPERS Contributions
October 21, 2022 98
TRANSFERS FROM 115 TRUST TO CALPERS (SAFETY)
Safety, with EE cost sharing
50th Percentile – After Section 115 Trust transfers plus Section 115 Trust balance
Funded Status Projections – Impact of Funding Policy
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 118
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
October 21, 2022 99
ACTUARIAL CERTIFICATION
This report presents analysis of the City of Palo Alto’s CalPERS pension plans. The purpose of this report is to provide
the City:
Historical perspective on the plan investment returns, assets, funded status and contributions.
Projections of likely future contributions and the impact of investment volatility
The calculations and projections in this report are based on information contained in the City’s June 30, 2021 and earlier
CalPERS actuarial valuation reports. We reviewed this information for reasonableness, but do not make any
representation on the accuracy of the CalPERS reports.
Future investment returns and volatility are based on Foster & Foster’s Capital Market model which results in long term
returns summarized on page 25.
Future results may differ from our projections due to differences in actual experience as well as changes in plan
provisions, CalPERS actuarial assumptions or methodology. Other than variations in investment return, this study does not
analyze these.
To the best of our knowledge, this report is complete and accurate and has been conducted using generally accepted
actuarial principles and practices. As members of the American Academy of Actuaries meeting the Academy
Qualification Standards, we certify the actuarial results and opinions herein.
Respectfully submitted,
Mary Elizabeth Redding, FSA, EA, FCA, MAAA Foster & Foster, Inc. DRAFT
Bianca Lin, FSA, EA, FCA, MAAA Foster & Foster, Inc. DRAFT
ATTACHMENT A: Actuarial Analysis - City of Palo Alto Pension Plans 2.a
Packet Pg. 119
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
A
:
F
o
s
t
e
r
a
n
d
F
o
s
t
e
r
A
c
t
u
a
r
i
a
l
A
n
a
l
y
s
i
s
_
C
i
t
y
o
f
P
a
l
o
A
l
t
o
P
e
n
s
i
o
n
P
l
a
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
P
o
l
i
c
y
a
n
d
R
e
t
i
r
e
e
ATTACHMENT B: Pension Funding Policy Overview and Potential Revisions
CalPERS Pension (baseline) Current Pension Policy Potential Policy Revisions
Title - Pension Funding Policy (-) Retiree Benefits Funding Policy; add similar language for OPEB
Funded
Status
100% 90% -
Time
frame
30 years 15 Years (FY 2036) -
Fun
d
i
n
g
Com
p
o
n
e
n
t
s
Actuarial Determined
Contribution (ADC):
Normal Cost (NC) or
‘pay-go’, and
Unfunded Accrued
Liability (UAL) amortized
over 20 years
(gains/losses)
(+) Use 6.2% discount rate for
the calculation of Pension
Normal Cost, more conservative
than CalPERS 7.0%
(+) 50% of excess BSR may be
allocated for pension costs (all
funds contribute equally)
(+) Use the CalPERS ALM review or other external investment projections to
inform discount rates for the calculation of supplemental contributions
(+) Consider alternative calculations for economic and demographic assumptions
to align with anticipated experience
Pensions (FY23/FY24)
(-) Discount rate reduced from
6.2% to 5.3% for NC, phase-in over
two years
OPEB (FY23/24)
(+) Discount rate reduced from 6.25%
to 5.75% for ADC
(+) Alternative Assumptions 1
Employee Contributions (+) Cost-sharing with employees - -
Investment Returns - - -
Inv
e
s
t
m
e
n
t
A
l
t
e
r
n
a
t
i
v
e
s
- (+) Pension Trust invested in a
Moderately Conservative
portfolio
(+) OPEB/Retiree Healthcare
Trust (CERBT) invested in a
Strategy 1 portfolio
Pension Trust
(+) More conservative strategy
when reach 75-80% funded status
OPEB Trust
(+) More conservative strategy when
reach 75-80% funded status or when
actuary recommends disbursements
(first to occur); set aside 2-3 years of
estimated disbursements
1 Finance Committee on June 7, 2022 approved several alternative assumptions for OPEB ADC including a zero percent return for 2021-22 (one-time), 5.75%
discount rate (6.25% assumed for Strategy 1), shortened amortization from 22 to 15 years, and additional funding for new staff (CMR 14112 as amended by
CMR 14502)
2.b
Packet Pg. 120
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
B
:
P
e
n
s
i
o
n
F
u
n
d
i
n
g
P
o
l
i
c
y
O
v
e
r
v
i
e
w
a
n
d
P
o
t
e
n
t
i
a
l
R
e
v
i
s
i
o
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n
ATTACHMENT B: Pension Funding Policy Overview and Potential Revisions
CalPERS Pension (baseline) Current Pension Policy Potential Policy Revisions
All
o
w
a
b
l
e
U
s
e
s
of F
u
n
d
i
n
g
The CalPERS Trust is used to
pay retiree pension benefits
for miscellaneous and safety
plans and does not
contemplate use of the
City’s Pension Trust
Use of Pension Trust to be
addressed through annual
budget process or separate City
Council approved action. City
Manager to identify Impacts to
funding goal and timeframe
Additional Discretionary
Payments (ADPs) from PARS to
CalPERS for amounts exceeding
1-yr employer contribution
Pension Trust
(+) Rate stabilization to smooth
volatility in employer
contributions, or in difficult
economic times
(-) Additional Discretionary
Payments (ADPs)
o Alternative 1: No ADPs
o Alternative 2: ADPs for
excess BSR and/or
normal cost
OPEB Trust
(+) Actuarial determined disbursements
recommended to fund a portion of the
‘pay-go’ costs once investment goals
are met (above)
Rep
o
r
t
i
n
g
Req
u
i
r
e
m
e
n
t
s
- Every three years, staff will
consult with an actuary to
inform the City Council on the
progress towards goals
(-) Every four years; align with the CalPERS ALM study
- Status of Pension Trust
reported in the annual budget
process, including
recommended contributions
and potential ADPs for the
coming fiscal year
- OPEB Trust
(+) Status of OPEB Trust reported bi-
annually using outside actuary
consultancy services (current practice)
(+) Indicates that this is in addition to the step to the left while (-) indicates that this is instead of the step to the left.
2.b
Packet Pg. 121
At
t
a
c
h
m
e
n
t
:
A
t
t
a
c
h
m
e
n
t
B
:
P
e
n
s
i
o
n
F
u
n
d
i
n
g
P
o
l
i
c
y
O
v
e
r
v
i
e
w
a
n
d
P
o
t
e
n
t
i
a
l
R
e
v
i
s
i
o
n
s
(
1
4
7
4
8
:
P
e
n
s
i
o
n