HomeMy WebLinkAboutStaff Report 2212-05133.Adopt Revised Retiree Benefit Funding Policy (Formerly ‘Pension Funding Policy’) for the
Financial Planning of Employee Pension and Other Post-Employment Benefits
(OPEB)/Retiree Healthcare Plans
Item No. 3. Staff Report Page 1 of 7
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CITY COUNCIL
STAFF REPORT
From: City Manager
Report Type: CONSENT AGENDA
Lead Department: Administrative Services
Meeting Date: February 6, 2023
TITLE
Adopt Revised Retiree Benefit Funding Policy (Formerly ‘Pension Funding Policy’) for the Financial
Planning of Employee Pension and Other Post-Employment Benefits (OPEB)/Retiree Healthcare
Plans
RECOMMENDATION
The Finance Committee and Staff recommend that the City Council adopt revisions to the Retiree
Benefit Funding Policy (formerly ‘Pension Funding Policy’) used to inform long term financial
planning of these benefits.
EXECUTIVE SUMMARY
This report concludes a series of meetings with the Finance Committee to review the status of
pension and Other Post-Employment Benefit (OPEB) “retiree healthcare” plans and the Pension
Funding Policy that guides the long-term financial planning of these benefits. The revisions to this
policy, recommended for Council adoption as unanimously approved by the Finance Committee
include:
1) Modify title from “Pension Policy” to “Retiree Benefit Policy” to recognize the inclusion
of retiree healthcare plans
2) Formalize changes approved by the City Council since adoption of the policy:
a. Add language for proactive planning of retiree healthcare plans
b. Reduce the discount rate used to calculate Section 115 Trust contributions, from
6.2% to 5.3% for pension and 6.25% to 5.75% for retiree health
3) Modify the investment strategy of Section 115 Trusts
a. Change the Pension Trust portfolio from Moderately Conservative to Balanced
b. Invest in a more conservative portfolio once plans are 75-80% funded or the City’s
actuary recommends disbursements
4) Modify the reporting requirement for periodic actuary review
a. Extend reporting from 3 to 4 years to include plan changes resulting from CalPERS
Asset Liability Management (ALM) and Experience Studies
b. Include a recalculation of the amortization schedule for the Unfunded Accrued
Liability (UAL) at the lower discount rate
Item No. 3. Staff Report Page 2 of 7
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BACKGROUND
The City has taken several proactive steps to address rising pension costs and long-term liabilities,
including cost-sharing in labor agreements, and 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 Pension Policy sets the following goals and principles:
Funding Goal and Timeframe: Target of reaching a 90 percent funded status by FY 2036
(within 15 years)
Funding Components: 1) Fund the Normal Cost (“pay go” costs) of annual pensions at a more
conservative discount rate than CalPERS; 6.2% as compared to 7.0% used by CalPERS at policy
adoption. 2) City Manager discretion to make additional contributions from excess Budget
Stabilization Reserve (BSR) above the City Council approved target BSR level.
Use of Funds: 1) City Manager must identify the impacts on the funding goal and timeframe
to modify the transmission of contributions to the PARS Trust Fund. 2) Any transmission of
funds from PARS to CalPERS will require City Council approval.
Reporting: 1) Every three years, staff will consult with an actuary to inform the City Council
on the progress the City has made towards its goal. 2) 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
Consistent with reporting requirements of the policy and City Council direction, periodic actuary
reviews are conducted to assess and respond to changes impacting the City’s pensions and
retiree healthcare plans and the funding available to meet those benefit costs. As part of this
process, the policy is evaluated for potential revisions, including the formalization of changes
approved by the City Council since adoption of the policy, and budgetary practices used to inform
the financial planning of these benefit costs. To facilitate in this review, staff engaged in several
meetings with the Finance Committee, outlined below:
September 20, 2022: Review the California Public Employees’ Retirement System (CalPERS)
Pension Annual Valuation Reports as of June 30, 2021 (CMR 146283):
1 City Council Staff Report January 23, 2017 https://www.cityofpaloalto.org/files/assets/public/agendas-minutes-
reports/reports/city-manager-reports-cmrs/year-archive/2017/7553.pdf
2 City Council Staff Report November 30, 2020 https://www.cityofpaloalto.org/files/assets/public/agendas-
minutes-reports/reports/city-manager-reports-cmrs/year-archive/2020-2/id-11722.pdf
3 Finance Committee Staff Report November 20, 2022 https://www.cityofpaloalto.org/files/assets/public/agendas-
minutes-reports/agendas-minutes/finance-committee/2022/20220920/20220920pfcs.pdf
Item No. 3. Staff Report Page 3 of 7
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•Annual reports issued by CalPERS provide an update on the assets and accrued liabilities
of plans, determine minimum employer contributions for the coming fiscal year (FY 2024),
and communicate significant changes in actuarial assumptions or policies.
•CalPERS plans experienced favorable outcomes due to a 21.3 percent investment return;
this report does not include the impact from a preliminary investment loss of 6.1 percent
or higher expected for the period ending June 30, 2022.
•CalPERS completed an Asset Liability Management (ALM) and Experience Study in
November 2021 resulting in several notable outcomes, such as reducing the discount rate
from 7.0 to 6.8 percent and changing the asset allocation of investments.
•CalPERS reports do not contemplate policy measures such as cost-sharing with employees
and accumulated savings in the Pension Trust.
October 18, 2022: Review Pension and Other Post-Employment Benefits (OPEB) (“retiree
healthcare”) Trust Funds with Plan Providers (CMR 148294):
•The City maintains two Section 115 Trusts to prefund retiree benefit costs: 1) the “Pension
Trust” administered by the Public Agency Retirement System (PARS); and 2) the California
Employers’ Retiree Benefit Trust (CERBT) Fund for OPEB plans administered by CalPERS.
•The City has discretion to select the risk tolerance of investments and control the
inflow/outflow of funds; the Finance Committee reaffirmed policy direction to transmit
Additional Discretionary Payments (ADPs) from the Pension Trust to CalPERS for amounts
that exceed one year employer payment, this is expected to occur in the next 2-3 years.
•Report includes a detailed overview of trust status, including historical performance, risk
profiles of portfolios, and other investment options for consideration.
December 6, 2022: Review Revised Actuary Pension Analysis using Alternative Assumptions to
CalPERS and Review Potential Modifications to the Pension Funding Policy (CMR 147485):
•The City engaged with outside actuary Foster & Foster (formerly Bartel and Associates) to
complete a comprehensive analysis of the City’s pension plans, progress towards meeting
funding goals, and other risk mitigation strategies.
•The analysis considers alternative economic and demographic assumptions to CalPERS,
including a preliminary investment loss for the period ending June 30, 2022, cost-sharing
with employees, and use of accumulated savings in the Pension Trust.
•Actuary results project that the City will meet the 90 percent funded goals by FY 2034
(Miscellaneous plan) and FY 2036-37 (Safety plan); the City’s practice of transmitting
excess one-time savings will help reach goals sooner.
DISCUSSION
The Finance Committee and staff recommend that the City Council adopt revisions to the policy
4 Finance Committee Staff Report October 18, 2022 https://www.cityofpaloalto.org/files/assets/public/agendas-
minutes-reports/agendas-minutes/finance-committee/2022/20221018/20221018pfcs.pdf
5 Finance Committee Staff Report December 6, 2022 https://www.cityofpaloalto.org/files/assets/public/agendas-
minutes-reports/agendas-minutes/finance-committee/2022/20221206/20221206pfcsm-late-packet.pdf
Item No. 3. Staff Report Page 4 of 7
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that formalize changes approved by the City Council since adoption of the policy and modify
budgetary practices that inform long term financial planning of these benefits. A summary of the
current Pension Policy and revisions is included in Attachment A and discussed in more detail in
this report. A red-lined copy of the policy is included in Attachment B.
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. Therefore, this report includes a revision to the policy to add language for proactive
funding of retiree healthcare benefits approved by the City Council and change the title 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 of 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
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 145026).
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, mitigating 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:
As discussed with plan providers at the October 18, 2022 meeting, investments made in these
funds are required to be used to pay retiree pension and healthcare costs respectively. However,
6 Finance Committee Staff Report June 7, 2022 https://www.cityofpaloalto.org/files/assets/public/agendas-
minutes-reports/agendas-minutes/finance-committee/2022/20220607/20220607pfcsm-final.pdf
Item No. 3. Staff Report Page 5 of 7
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the City has the discretion to select the investment risk tolerance and control the inflow and
outflow of funds. Ultimately, the balance maintained, and 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.
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.
Change the Pension Trust Portfolio from Moderately Conservative to Balanced:
The City’s Pension Trust is invested in a Moderately Conservative portfolio, this is the second
most conservative of five (5) portfolios: Conservative, Moderately Conservative, Moderate,
Balanced, and Capital appreciation. This report includes a recommendation to shift funding to a
Balanced portfolio, which offers higher expected returns.
The City's CERBT Fund is invested in a Strategy 1 portfolio, which offers the highest expected
return of three (3) portfolios: Strategy 1, Strategy 2, and Strategy 3. 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.
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 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 November 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
Item No. 3. Staff Report Page 6 of 7
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changes to economic and demographic assumptions that inform overall liability and employer
cost.
Modify actuary reporting to include a recalculation of the amortization schedule for the Unfunded
Accrued Liability (UAL) using the lower discount rate:
The annual payment to CalPERS reflects two billing components:
1) Normal Cost (‘pay-go’) for current employees, and
2) Unfunded Accrued Liability (UAL).
The UAL is realized when actual experience of plans differs from assumptions and is paid over a
20-year amortization timeline. As outlined in the policy, the City uses a lower discount rate as
compared to CalPERS to calculate the Normal Cost and contributes amounts exceeding the
required payment to the Pension Trust. At the December 6, 2022 meeting, the Finance
Committee requested that actuary reporting also include a recalculation of UAL at the lower 5.3%
discount rate. This recalculation is provided for informational purposes and does not impact
policy-directed funding levels (Attachment C).
FISCAL/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
Council action on this item is not a project as defined by CEQA because the status update and
revisions to the City’s retiree benefit policy is a fiscal activity which does not involve any
commitment to any specific project which may result in a potentially significant physical impact
on the environment. CEQA Guidelines section 15378(b)(4).
ATTACHMENTS
Attachment A: Pension Funding Policy Overview and Recommended Revisions
Attachment B: Red-lined Pension Policy
Attachment C: Unfunded Accrued Liability (UAL) Amortization Schedule at 5.3% Discount Rate
APPROVED BY:
Kiely Nose, Administrative Services Director
Item No. 3. Staff Report Page 7 of 7
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Report #: 2212-0513
Dear Mayor and Council Members:
On behalf of City Manager Ed Shikada, please see below for staff responses to questions from
Councilmembers Tanaka and Veenker regarding the Monday, February 6 Council Meeting consent
agenda items.
Item 3, Adopt Revised Retiree Benefit Funding Policy (Formerly ‘Pension Funding Policy’) for the
Financial Planning of Employee Pension and Other Post-Employment Benefits (OPEB)/Retiree
Healthcare Plans
1. The staff report states that the discount rate change is prompted in part by the CalPERS
study published in November 2021. However, the current economy is substantially different
than it was then, due to factors such as the pandemic and ongoing supply chain issues. Is
the report still accurate given the substantial changes we have seen over the past year?
Staff response: Yes, the report remains informative; as a long-term investor policies reflect
estimates and projections over a longer period of time typically 10 and 20 year returns and
short term volatility is expected. Although policy adjustments occur at a more measured
pace, staff plan on an annual basis the City’s financials taking into consideration the
immediate impacts of the near-term market performance as part of its proactive funding both
through modeling projected discount rates as well as annual actuarial valuations provided by
CalPERs that update for actual experience each year.
2. The staff report states that the change of portfolio from moderately conservative to
balanced is projected to increase returns. During this economic downturn, is it still a good
decision to increase the risk of our investments in this way?
Staff response: This is a policy decision for the City Council to opine on the risk profile of
investments in Section 115 Trusts. Staff coordinated a study session with trust plan providers
with the Finance Committee and a review of the proactive funding policy and this change in
portfolio was a motion by the Committee unanimously approved for Council consideration.
Additional details and materials from this discussion are provided in the staff report issued
October 18, 2022 (CMR 14829).
3. One of the proposed changes to the Retiree Benefit Funding Policy increases the actuary
reporting to four years to better align with CalPERS studies. Given the importance of this
fund and high pension liabilities, why is the reporting period so infrequent? Wouldn’t the
success of this fund be improved by an annual or biennial reporting period, while also
syncing with the CalPERS studies?
Staff response: The ALM is a formal and comprehensive study completed on a four-year cycle.
CalPERS continues to issue annual valuations to inform the status of the City’s pension plans,
including significant changes to the plans, employer payments for the coming fiscal year, and
funded status. Staff continues to monitor actual plan experience for major discrepancies, such
as investment returns that do not meet target levels and uses software tools to estimate cost
impacts as part of the organization’s financial planning. Alignment of the review of the City’s
proactive funding policy with the CalPERS ALM study ensures timely reporting and
opportunity to realign the City’s policy, as needed, with the most current actuary assumptions
and experiences.
4. Another proposed change is switching from a moderately conservative portfolio to a
balanced portfolio, specifically from 15% to 58% in equities. What are the historic rates of
return of both the balanced and moderately conservative portfolios, and how close have
they been to the projected growth figures?
Staff response: The historical returns for the Pension Trust are above. For reference, historical
performance and detailed overview of portfolio options are included in the October 18, 2022
staff report (CMR 14829), Attachments B.
Conservative
Moderately
Conservative Moderate Balanced
Capital
Appreciation
1-year -10.0% -10.7% -11.6% -12.2% -14.0%
5-year 2.0% 3.1% 4.6% 5.3% 6.4%
10-year 2.8% 4.1% 5.9% 6.7% 8.0%
Item 4, Approval of Professional Services Agreement with Townsend Public Affairs, Inc. (C23183770)
in the Amount Not-to-Exceed $558,000 for State and Federal Legislative Advocacy Services and
Grant Consulting and Compliance Services for a Period of Three Years with the Option to Renew for
Two Periods of One Year Each; CEQA status—not a project
1. Has Palo Alto previously used any Legislative Advocacy or Grant Consulting Services?
Staff response: Yes, the City has been in engaged with a legislative advocacy firm since the
early 2010s. The City contracted grant consulting assistance services starting in 2022 for a
short-term pilot contract.
2. How much in grant funding has the City of Palo Alto received in the year of 2022? How
much is this amount projected to increase under TPA’s assistance?
Staff response: The City is significantly ramping up its application and management related to
grants. In working with a grant consulting firm, staff is working towards standardizing its
processes to identify, apply for, track, report on, and comply with grant requirements in a
more central way. In 2022, the City was awarded over $30 million based on the grant
opportunities available. Future grant awards depend on grant opportunities, applicability to
the City, and the City’s success in grant applications. Successful grant applications require
projects to have demonstrated significant progress and solidification of intended plans.
3. The agreement with Townsend, I note the not-to-exceed amount. I don’t see any minimum
or monthly/annual retainer. Is that correct?
Staff response: Townsend proposed to bill monthly and the monthly amount they will charge
for all 3 task service areas are $15,500 per month for all services including reasonable
business and travel expenses.
ATTACHMENT A: Pension Funding Policy Overview and Recommended Revisions
CalPERS Pension (baseline) Current Pension Policy Recommended 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) -
Fu
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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 Assumptions1
Employee Contributions (+) Cost-sharing with employees - -
Investment Returns - - -
In
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- (+) Pension Trust invested in a
Moderately Conservative
portfolio
(+) OPEB/Retiree Healthcare
Trust (CERBT) invested in a
Strategy 1 portfolio
Pension Trust
▪(-) Pension Trust invested in a
Balanced portfolio
▪(+) 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)
ATTACHMENT A: Pension Funding Policy Overview and Recommended Revisions
CalPERS Pension (baseline) Current Pension Policy Potential Policy Revisions
Al
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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
OPEB Trust
▪ (+) Actuarial determined disbursements
recommended to fund a portion of the
‘pay-go’ costs once investment goals
are met (above)
Re
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Re
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- 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.
City of Palo Alto - Pension Retiree Benefit Funding Policy
Determination of an appropriate level for proactive Pension and Other Post-Employment
(OPEB)/Retiree Healthcare Funding is a policy decision. The overarching goal of a Pension
Retiree Benefit Funding Policy is to ensure that the City of Palo Alto avoids service-delivery
crowd-out by increasing annual pension and retiree healthcare costs. This must be balanced
against immediate impacts to service delivery in order to fund proactive contributions.
Pension: The City is statutorily required to make the CalPERS Actuarial Determined Contribution
(ADC) on an annual basis. The ADC is made up of two parts, the Normal Cost (NC), which
represents the pay-as-you-go portion of costs, and the Unfunded Accrued Liability (UAL)
payment, which represents the catch-up portion of costs. CalPERS currently calculates both the
NC and the UAL based on a discount rate of 7.06.8%. CalPERS amortizes any difference between
investment returns and that discount rate as part of its UAL calculation over 20 years. In a year
when CalPERS does not meet its target (loss) the City has to pay more over the next 20 years. In
a year when CalPERS exceeds its target (gain) the City would be able to pay less over the next
20 years. The timeframe of 20 years for amortizing gains and losses is recent; they were
amortized over 30 years through the June 30, 2018 valuation).
OPEB/Retiree Healthcare: Bi-annually, the City engages actuary consultancy services to
calculate the annual ADC to the OPEB Trust for the coming two fiscal years. Contributions to the
trust are voluntary and used to generate returns to pay the liability.
Additionally, the City recognizes the importance of ensuring that pension and retiree healthcare
obligations included in the City’s financial reports, such as the Comprehensive Annual Financial
Report (CAFR)Annual Comprehensive Financial Report (ACFR), are consistent with CalPERS.
Reports such as the CAFRACFR impact the City’s credit rating and thereby influence areas such
as bond financing that the City may seek to obtain.
However, the City also recognizes that CalPERS calculated annual costs are based on a discount
rate, annual rates of return, and other variables that might not align with actual experience nor
perhaps with expected experience. To address these shortcomings, the City is establishing
established a Pension Retiree Benefit Funding Policy to guide proactive pension and retiree
healthcare contributions to the City’s section 115 Trusts:.
•Pension Trust Fund, administered by the Public Agency Retirement Services (PARS); and
•California Employers’ Retiree Benefit Trust (CERBT) Fund for the OPEB plans,
administered by CalPERS.
This policy provides direction to the City regarding a desired funding target in relation to
CalPERS and OPEB actuary valuations, the timeframe over which to achieve that target, and
actions that are required until the target is met. There are contingencies that provide an
additional range of options if certain circumstances are met and some that require additional
actions if other criteria are satisfied.
Attachment B: Redlined Pension Funding Policy
Funding Goal and Timeframe: Through this policy, the City’s target is to fund 90% of the
CalPERS and OPEB actuary determined liability by FY 2036. The City will strive to reach the
target of 90% of the CalPERS determined liability within( 15 years timeframe). If the City only
paid the CalPERS ADC it would take at least 30 years to reach full funding of the CalPERS
determined liability. CalPERS’ 30-year timeframe to reach full funding is also predicated on
every single one of their actuarial assumptions materializing. Thus, a 15-year timeframe to fund
90% of the CalPERS determined liability represents a commitment from the City above and
beyond the CalPERS ADC.
Funding Components: In order to achieve the target of 90% funding by FY 2036, the City will
calculate what the Normal Cost portion of annual pension costs would be if a discount rate of
6.2% were used instead of the CalPERS rate for the Miscellaneous and Safety Groups across the
organization. use the CalPERS ALM survey or other external investment projections to inform
discount rates for the calculation of Pension (NC only) and OPEB (Total ADC), subject to City
Council approval; this rate is expected to differ from the rate assumed by CalPERS. This
additional cost will be included as part of the City’s standard budget process and transmitted to
the City’s Irrevocable section 115 PARS Pension Trust Fund (PARS Trust Fund or PARS) and
CERBT Trust Fund. Should the City reach its goal of 90% funding before FY 2036, the City
Manager will report the status to the City Council with a recommendation on whether the
practice should be continued, modified, or discontinued. The City Manager must identify the
impacts on the funding goal and timeframe to modify the transmission of the additional
contributions to the PARS and CERBT Trust Funds.
In addition to the contributions required by this Pension Funding Policy, the City will examine
additional opportunities for proactive contributions to the PARS and CERBT Trust Funds.
Furthermore, the City Manager will include recommendations on whether funding should be
transmitted from PARS to CalPERS as part of the annual budget process. This may change from
year-to-year depending on the circumstances and level of funding accumulated. Some years
may result in accumulating additional funding in PARS, while others may result in transferring
an amount greater than a single year of additional contributions, calculated through the lower
discount rate, to CalPERS. City Council approval is required for use of accumulated funds in
PARS either to CalPERS as an Additional Discretionary Payment (ADP) or to offset a portion of
the standard ADC.
An additional action that will does not require City Council approval is transfer of excess Budget
Stabilization Reserve (BSR) above 18.5% to the PARS Trust Fund. The BSR Policy will be
amended to confer discretion to the City Manager to make this transfer. The BSR Policy
currently confers discretion to the City Manager to transfer excess BSR above 18.5% to the
Infrastructure Reserve. Once amended, the BSR Policy will confer authority to the City Manager
to proactively fund infrastructure and pension obligation needs through transfers to the
Infrastructure Reserve and to the PARS Trust Fund. Additionally, through standard reports to
the City Council (such as Year-End, Mid-Year, or another City Manager’s Report) the City
Attachment B: Redlined Pension Funding Policy
Manager will include actions for additional contributions from funds other than the General
Fund to maintain alignment with the contributions from the General Fund via excess BSR. City
Council approval is required for these contributions from funds other than the General Fund.
The City will work to proactively monitor its pension funding position through not only its
CalPERS and OPEB actuary reports but also by continuing to use an outside actuary as a
consultant to model different scenarios. The City will continue to transmit the CalPERS reports
on an annual basis and OPEB actuary reports on a bi-annual basis.
Once every three four years, the City will consult with an outside actuary to provide an update
on the progress the City has made towards the goal of reaching a funding goal of 90% funded
status of funding of the CalPERS determined liability by FY 2036 and update the City Council.
Additional actions may come out of those reports and discussions with the City Council.
Service Delivery Outcomes: The goal of the Pension Retiree Benefit Funding Policy is to prevent
service delivery crowd-out by the increased costs of pension and retiree healthcare obligations.
If the City’s efforts to proactively contribute to the long-term pension and retiree healthcare
obligations would result in service delivery impacts in the short-term, the City Manager will
identify those impacts and recommendations to mitigate them, as appropriate, through the
budget development process.
Fiscal Impacts: If the General Fund’s revenues are projected to decline more than 7.5% year-
over-year, the City Manager will return to the City Council with recommendations addressing
the implications for the City’s proactive funding contributions for the coming year through the
budget development process.
Attachment B: Redlined Pension Funding Policy
December 23, 2022 1
CONTRIBUTION PROJECTIONS - MISCELLANEOUS
Impact of 5.3% Discount Rate Change
Attachment C: Unfunded Accrued Liability (UAL) Amortization Schedulate at 5.3% Discount Rate
December 23, 2022 2
CONTRIBUTION PROJECTION - SAFETY
Impact of 5.3% Discount Rate Change
Attachment C: Unfunded Accrued Liability (UAL) Amortization Schedulate at 5.3% Discount Rate