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Home My WebLink About0224.092f I I - April 23, 1992 HONORABLE CITY COUNCIL Palo Alto, California ..... -.. Attention: Finance committee REVISED TO INCLUD~ 8 ~8XOIf or PUBLIC ElfPLOYEES RETIR.EMENT SYSTEM (PQ.~_l~!!!g YEAR Members of the council~ Report ip Brief' The Public Employees Retirement system (PERS) has offered the city the opportunity to request that PERS extend by either 11 or 16 years the date by which the City's unfunded liability for pension obligations will be paid Off. Estimated annual budget savings from a ~6-year extension would be $560,000 for the General Fund and $80,000 for the Enterprise Funds --but the city would be making annual payments for an additional 16 yea~s. In light of the city'S current budget constraints and possible PE..q.S Board action to force the City to extgnd the funding year anyway, staff reco~ends that COQ~cil accept the PERS offer of a 16-year extension. Background: Like virtually all other member agencies in PERS, the City carries on its books each year an "'unfunded liabili tyh for retirement obliqations. This unfunded liability is equal to the amount by which the present value of the City'S actuarially-deter~;~ed pension benefit oOligations exceeds the value of the Ci~~'s accumulated assets in PERS. The PERS actuaries calculated that Pelo Alto's unfunded liability as of July 1. 1991 ~as $9.9 million. Since the retirement plan's assets are valued to market each year, and because actuarial assumptions are often changed i the estimate of the unfunded liability changes each year as well. In the last 4 years, the estimate of unfunded liability has ranged from $8.2 to $11. 6 million. "1 iaillatiDq tb'-_ID!'-l!n~.4 __ ~_labi 1 i ty Like other member agencies of PERS, the City is making annual contributions to PERS to pay <:lff the unfunded liability. These contributions are a fixed percentage of the City payroll. That percentaqe is currently 7.006 percent of payroll for the Police category; 6.774 percent for Fire; ann t.210 percent for all other 61I1ployees. Under the current actuarial assumptions and contribu tion rates, the entire unfunded liability would be paid off by the year 2000. Staff has leal'ned from PERS that the PERS B-oard is likelY, in the next year or two, to require all me~er agencies (and presumably the State itself) to lIextend the funding year" to either 2011 or 2016. In the meantime FERS l1as formally asked the City if it vi shes to extend the funding year now. Extending the funding year for eliminating the unfunded liability is analogous to extending the life of a home Il'.ortgage. Less money is paid each year, but pa}~cnts are made for more years, in this case, for eitner 11 or 16 more years. For Palo Alto, extending the funding year to the year 2016 ... ould irn:J"t'1.ediately reduce the City's PERS contribution rate for the Police category by 3.689 percent of payroll; for Fir-e, by 3.567 percent; and for all other employees, !:-y 0.637 percent. {The reduction"" '"''':"'.!!::! !:-~ ~il.gntly smaller if the funding year .ere extended only to the year 2011.) As a result of extending t1'-e. funding year to 2016, the annual dollar pay~ent to PERS for the City's unfunded liability would be reduced by half. This .... ·ould translate to an expenditure reduction through the year 2000 of approximately $640,000 total annually ($560,000 General FUnd). O( course, payments to PERS ,",QuId continue through 2016 instead of terminating in 2000; 'With no inflationary increa~e. this would mean the City would pay approxi mately $3 million more over the period required to fully fund its liability .... ith PER$. This is shown in Attachment 1. ('£he annual redUction throu9h 2000 of payments based on a funding year of 2011 ~ould be slightly less --approximately $550,000 total, of ~hich $480,000 is Ceneral Fund.) This change would not affect any retiree or employee's pension benefit. It i. consistent .,ith generally accepted accounting principles. The City may flnd it prudent to keep its moneJ' out of PERS longer, given the political pressure on PERS that has surfaced during the State budget crises of recent years. On the other hand, PERS earns a higher rate of return than the City does~ 'Which argues for placing more ~oney ~ith PERS. CMR:224 ~92 2 L 1 I 1 1 I - - RJocodure should Council decide to acc-ep.t the. PERS off.er to extend the funding year now, State law requires that a public ~eetinq be held at least two '.teeks p't"ior to Council adopticn of the t .... o resolutions needed to request the extension. (Attachr:.ents 2 and 3 show the resolutions in draft form as suggested by PERS.) At that meeting, the city must, according to PERS, "make public the future annual cost implications of the proposed liability extensions." Stat:! RacQmmand.atio!'l. In light of the City"s current :budget constraints l and possible PERS Board action to forCE: the Ci ty to extend the funding year anyway, staff recommends that Council approve the concept of extending the PERS funding year to 2016. After that approval, staff -will schedule a public meeting to pl:esent the future c,;;.st implications described in this report. After that meetir.q, staff will return to Council for adoption of the final resolutions. Respectfully submitted, ~~ KEVIN RIPER Assistant Finance Director --t2 f jeL " .J .. EMILY HARRISON Director of J'.i..n.ance <' I l .1>5-c ~:n"'-,--__ _ W~AM 2.AN~ City \Manaqer A.ttachl:o.ent.s =:224:92 'L ~;. /~ A';' J , - - . - ATTACHMENT 1 &~NUAL PAYMENT TO P£RS UNDER ALTERNATIVE SCENJoSHOS FOR ELIMINATING THE CI'rY' S fJNFUNDED LIABILITY Funding Funding '{ear Year 2000 2016 ( C'1.l;"rent) (PropOse~; 1991-92 $1,216,300 $575,900 1992-93 1,216,300 575,900 1993-94 1,216.300 575,900 1994-95 1,2Hi,300 575,900 1995-96 1,216,300 575,900 1996-97 1.216~300 575 /900 1997-98 1,216,300 575,900 1998-99 1,216,300 575,900 H99-2000 1,216,3CO 575,900 2000-2001 1,216,300 575,900 2001-20C: -0-575,900 2002-2003 -0-575,900 2003-2004 -0-575,900 2004-2005 -0-575,900 2005-2006 -0-575,900 2006-2007 -0-575,900 2007-2008 -0-575,900 2008-2009 -0-575,900 2009-2010 -0-575,900 2010-2011 -0-575,900 2011-2012 -0-575,900 2012-2013 -0-575,900 ;;:013-2014 -0-515,900 2014-2015 -0-575,900 2015-;2016 -0-S7S ,S00 201.6-2017 0-575.900 Total $12,163,000 $14,973,400 Source: PERS actuary Note: All figures are in consta,nt 1991-92 dollars~ Actual dollars will be larger, based on inflation and sa.lary increases. 1992-93 would b~ first year of full effect~ CKR,224:92 4 • RESOI.rU'rrON NO. RESOWTION OF THE COUNCIL OF 'I'HE C'ITY OF PALO ALTO REQUESTING THE PUBLIC EMPLOYEES' RETIREME~T SYSTEM TO EXTEND THE FUNDING PERIOD FOR CURRENT SERVrCE, DEATH BENEFITS AND 1959 S\.J"RVIVOR BENEFITS AC'!'UAAI AL LIABILITIES FOR THE CITY OF PALD ALTO WHEREAS, the city of Palo Alto {~Cityn) is a contracting ag~ncy of the Public Employees' Retirement System '~PERS"); and WHEREAS, current City budget City to seek an E:xtension of the service, death benefits and 1959 liabilities; and constrai~ts have prompted th~ f'.mding period for current survivor Benefits actuarial WHEREAS I the City has been ~dvised by the Contract Services Division of PERS that the City may request the extension of its funding period for the miscellanecu5~ fire l and police categories for current service, death benefits/ and 1959 Survivor Benefits actuarial liabiliti.es to June 30, 2016 1 under the terms of the contract with PERS; NOW, THEREFORE / the Council of the Ci t}i of Palo Al t.o does RESOLVE as follows: SECTION 1. The City council hereby approves and authorizes the request of an extension of the funding period for the current service l death benefits and 1959 survivor Benefits actuarial liabilities to June 30, 2016, under the terms of the cont~act with PERS, and further authorizes the City Clerk to forward t~o certified copies of this resolution to the Public Employees I Retirement System. ~10N_-.-1.. The City council finds tr.at the action her.::by approveQ does not constitute a project under the California Environmental Quality Act l and, theref~re, no environ~ental assessment is re~~ired. INTRODUCED A.'ID PASSED: AYES: NOES: ABSE}'iT: ABSTENTIONS: 1 ,-". • APPROVED: M"ayor------------------- APPROVED AS TO TDRM, city Manager Sr. Asst~ City Attorney Director of finance i I - :~ RESOLUTION ::w. RESOWTION OF THE COUNCIL of THE CITY OF PAW ALTO REQUESTING THE PUBLIC EMPLOYEES' rtETlREMENT SYSTEM TO EXTEND THE FUNDrNG pE.RrOD FOR PRIOR SERVICE lICTtlARIAL LIABILITIES FOR THE CrTY OF PALO ALT') WHEREAS, the city of Palo Al to ("City'" j is a contracting agency of the Public Employees I Retirement System {"PERS"'): and WHEREAS, the City has been advised by tr.e Contract Services Division of PERS that the city may request the extensicn of its funding period for the po!ice category for prior service actuaria~ liabilities to June 3D, 2016, under th~ te~s of the contract with PERS; NOW, THEREFORE, the Council of the City of Palo Alto does PESOLVE as follows: SECTION L The City Council hereby approves and authorizes the request of an extension of the fund~ng period for the police category for prior actuarial liabilities to June 30. 2016~ unoer the terms of the contract with PERS, and fUrther authorizes the city clerk to f04Ward twa certified copies of this resolution to the Public E:nployees I l(etirement Systerr .. SECTION 2. The city Council finds that the action hereby approved does not constitute a project under the california Environmental Quality Act, and, therefore, no environmental assessment is required. INTRODUCED AND PASSED: AYES: NOES: AE~ENT: ABSTENTIONS: ATTEST: APPROVED: City Clerk Mayor APPROVED A.<:; TO FO~"f: city Mana.ger Sr. Asst. City Attorney Director of Finance