The URL can be used to link to this page

Home My WebLink About0111.095@ City of Palo Alto City Manager's Report ----------,-_. TO: AtTENTION: FROM: DATE: SUBJECT: HONORABLE CITY COUNCIL FINANCE COMMITTEE CITY MANAGER DEPARTMEI\'T: FINANCE JANUARY 19, 1m CMR!111:95 RECOMMENDATION TO RETAIN SURPLlrs IN CITY'S MISCELLANEOUS EMPLOYEE ASSET ACCOUNT WITH THE PVBUC EMPLOYEES RETIREMENT SYSTEM ~ This report provic!es inf<lrnllltion regarding management of the City'. surplus asset account held by the Publi<: Elnployees RetiremenI: System (PEltS). Staff recommends retaining a balance of $2.1 S million in ib Miscefianeous employee asset acCount. in order to ensure sIab!c petJSioo contribution rates and 10 alloy; optimal return on the City's investment in the retiremeIII system. EXtCUIJYt SUMMARY bt May 1994, the City was I1OIili« by PERS tl>at, as • resul1 of the most recent actuarial wluatioo, a ""'Plus ISSeI balance of 52.3 million existed in the City's non-safety (MiKellaneous) account with PERs, as wen as a $192,000 balance in tl1e Sl1lplus asset account ror the safety members categO<)!. PERS requm Ibe City to f.rst use any soch balances to offset unfunded liabilities wilkh resulted from final year conversions of salary. as discussed in a previous report (CMR;343:94). In the Mi=Uaneous category. liab11ities of 5180,000 need to be funded from the surplus asSCI account The entice surplus in tll;: Safety employee cafego!)' v.ilI be Spenl 00 this liability. In !his report, staff recommends thai the remainUlg $2.1 S million in its MiscelIan .. >u< surplus asSCI account be retained in the City'. account with PI;J'.,s. 0" A surplus asset account in an employ ... ·s PERS ac.:ount """un wben assets exceed Ibe account liabilities, which indicates an "overfund"mg" of the account. The last lime the Gty 0lL11\:95 I'a&< I olC 1 ~ .. bad a significanl surplus asset account was ill fiscal year 1990-9\. The City exercised its opOOIi 10 use !he entire l>aIlIlICe 0( surplus account monies 10 offset current c;oottibution requirements, resulting in operating budget savings lOr that fiscal year. PERS Coptn"bgtjoD Rates Employ .. coolributioo rates are deIe!mined by periodic actuarial valuations, whlch are based 011 !he benefit ~ulas and employee groups O(each employer. sa lOIS. passod in 1991, will impact !he actuarial rate-setting process, by eliminating swplu. asset accounts lOr PERS etnployers and requiring instead that an surplus amounts be 1rar!sferred 10 etnployer "reserve' accoonls. The !e.·ol of each employer's reserves will !hen be coosidered as an additional facIoc: in de'.ennining !he cOOlnbution rates lOr the participating agency_ The provisions 0( sa 1015 arc being pbased in over. five-year period. By July I, 1997, each emplQyer's account with PERS ,,'JI represent" closed system. where surpluses of. prior year are indu<fed .in !he calculation o(!he employ.,'. c;oolributioo rate fOr !he cwrent year. The intent is 10 limit wide fluctuations in an employer's pension costs from one year 10 the oexI, in Ibe absence of significant events ()f changes in the employer's pension program. sa leiS supports the accounting and budgeting perspective that !he oF.setting 0( cwren! year employer c;oottibution.s with prior y= surpluses results in a misallocation of pension coots between fiscal years, hindering the accurate projection 0( future pensioo costs, and <:ompticating on, atlemp( 10 onalyze !be fund"IDg status 0( • pensioo program_ More stable pensioo rates, regulated in part by !be City'. reserve balance, should result from allowing the current surplus 10 remain in the City's account with PERS. PERS In""imoal Rates Rates eomed 00 PERl> investments are credi.!ed back 10 the appropriate member acCOWlts. In addition 10 being the largest public pensioo fund in the United Sla'es, rERS is om 0( the largest investment pools in !be world. By the year 2000, PERS investments are projec'.ed \0 be well ove< $100 billion. N. assets have grown. &II increasing percentage 0( benefits have been and will continue 10 be funded by investment income, which is 1here!Ore • significant fac'.oc in estabHshlng member conlnbution rates. no table below <:ompares P£RS investment rates 0( return lOr recer>! years with those 0( the City's port.!OOO_ . Pag. J.t4 Year 1989 1990 1991 1992 1993 Av .... g. 0_ PERS Total Fund Perfonruince IS.7 9.7 6.S U.S II.S 11.24 (%) City's Investment Return (%) 8.69 B.9 8.6 7.9 6.5 B.11 . Because of its large portfolio and investment management resources, "'bich includes exIemal managers, advisors and coosultants :0 pro>ide researcb. recommendations amI risk analysis. inv_ by PERS .. ill most likely result in a bigher rate of return on these asse!3 than !be City could earn through its OM> investment program. The In> .. tment polky utilized by PERS in investing pension fund monieo allows rnoce tIexll>i1ity than !be City's, havU!g 110 legal restrlctioos or requL.-ements on investments other than thalll' . .,y be prudent, div=ified and COIIIpIy with any legislated =trictioos. A major objective of the PERS pension investment program is 10 bold contribution rates down, by achieving maximum )oog-(OI1II investment returns. IIBf"ded P.uiop RegeN ObliptiQa In eddl.tion 10 1he exiSleDce of the surplus asset account, PERS has also nOOfied the City of a significant drop in !be City'. un1imcIed liabilities ",ith PERS. AD "unfunded liabilily" exis1s when 1he present value of an employer'. act:uarially-deter:rnined pension '-"...fit obIigatioos exceeds the value oflhe a«UInD!ated assets in fr.e employer's """",mts with PEltS. In !be las! seven years, Ibe City'. unfunded pension henefit obligation bas ranged from $1.110 $13.6 million, as actuarial assumptions used in the valuatioo of the plan's assets and liabilities "'" often adjusted. Due 10 significalll changes in !be actuarial assump!iocs with resp=' 10 interest rate and pro.iected saIazy increases, PERS actuaries a.kulated Palo Alto's IlI>fuOOed liability 10 be ""gath>. S7S2,OOO III ~ 30, 1994. Since !be rates paid 10 PERS include a cootributioo factor 10 payoff unfunde4 liabilities, this negative liability should serve 10 reduce the City', contribution rate. Althoogh [\lis measure has been volatile, the existence of the tuneD! negative unfunded liability ret1ects well on 1he adequacy of the City's funding of its peru;ion program. and bodes wen b more stable pension contribution rates b: the future. RECOMMENDATION Because of the desirability of stable pension costs regu'ated throogh the cootn'butioo rate· se&ting process. and the aVlll1abilily of • higher rate of return 00 these monies when invested with PERS, staff recommends that the City'. current surplus asset account. ---,~:-~;:-~----- ": :-\,.'" ....... ---:-;-~...:. ... -v .---'" .... , .. 1'o&<3ol4 • w -. t [ ;~.;->o:5·";~~ : .. <.;. balanee in the Miscenaneous employee calego<)' be :etained in !be City'. reserve account wi1h PER&. Implementation 0( 1hls action requirc1; no lOrmaI notification by the City to PERS. FISCAL OOACf Allowing 1M swpIus asset accOum to remain wir.bin the lIllIIlagemenl 0( PERS will C<lQtri1)ute to the lowering and stabilization 0( the City'. COOInOutioo rates to PERS (Wei' time. while being invested in & m8llll« that will most b'kely yield the highest possible return on the City's <X>Il!ributloos. ENYJRQNME!'fiAL ASSF,SSMEN]' Management of the City', asset a«:oIIIl! with PERS is not a project for JlUIPOSeS of !be Califomia En, AOittueutal Quality Act PREPARED BY: Carol Perrell, Accounting Manager CITY MANAGER APPROVAL: ce nrl CMIl:ll1:95 he' 4 0(4 j