Andy Schiltz, Principal Management Analyst

Kim Sarkovich, Assistant City Manager/CFO

CalPERS Miscellaneous, Safety Fire (Classic), Safety Police (Classic), PEPRA Safety Fire, and PEPRA Safety Police – June 30, 2018 Annual Valuation Reports and information regarding the CalPERS Employer Rate history and future Employer Rate estimates.

Funding for CalPERS pension plans is derived from two sources: investment returns and contributions.  The contributions include employer and employee contributions, which are calculated on pensionable pay (salaries and other forms of compensation as designated by law).  Each year, CalPERS prepares annual valuation reports to determine the required Employer Rates for the upcoming Fiscal Year (FY).  Because of the time it takes to create the actuarial reports for all CalPERS agencies, data available on June 30^th of the prior year is used to set the Employer Rates for the upcoming year.  The employer rates for FY 20/21 are based on the June 30^th, 2018 data, which we are presenting to you today.  The Employee Rates for Classic CalPERS members are statutorily set at 7% for Miscellaneous and 9% for Safety.  The Employee Rates for PEPRA CalPERS members are generally set at 50% of Normal Cost.  Normal Cost being the portion of the cost of projected benefits allocated to the current plan year.

In December of 2016, the CalPERS board approved lowering the discount rate from 7.5% to 7% over the following three years.  The provided actuarial reports utilize a 7% discount rate in formulating the minimum employer rates for FY 20/21.  CalPERS regularly conducts comprehensive analyses of all actuarial assumptions and methods.

In FY 18/19, the City made pension contributions totaling $6.17 million. 

A copy of each of the actuarial reports for the City of Rocklin (Miscellaneous, Safety Fire, Safety Police, PEPRA Safety Fire, and PEPRA Safety Police) has been included.    

REPORT HIGHLIGHTS

Miscellaneous Plan (including Miscellaneous PEPRA)

• The Miscellaneous Employer Rate for FY 20/21 is 25.525% (up from 23.876% in FY 19/20).  This rate is intended to provide the Estimated Total Employer Contribution of $3,038,750.
• The Funded Ratio of the Plan, as of 6/30/18, is 69.2% (down from 70.5% as of 6/30/17).
• The Unfunded Accrued Liability, as of 6/30/18, was $27,320,128 (up from $23,748,232 as of 6/30/17).

Safety Risk Plans

• CalPERS created risk-sharing pools in 2005 in order to minimize volatility in pension costs for smaller employers.  Employee groups with less than one hundred (100) members are included in Risk Pool Plans.  At inception, both the Fire Safety and Police Safety groups had less than one hundred (100) members, and are included in Risk Pool plans.  Once a plan is a member of a risk-sharing pool, it will remain there for the life of the plan.
• In FY 20/21, the plan Employer Rates will be: 
• Safety Fire (Classic) – 42.371% (up from 38.240%)
• Safety Police (Classic) – 41.322% (up from 37.536%)
• PEPRA Safety Fire – 14.563% (up from 14.106%)
• PEPRA Safety Police – 13.400% (up from 13.366%)
• These rates are intended to provide the required Estimated Total Employer Contributions of:
• $1,771,353 for Safety Fire (Classic)
• $2,392,744 for Safety Police (Classic)
• $14,113 for PEPRA Safety Fire
• $134,304 for PEPRA Safety Police
• The Funded Ratio for the plans, as of 6/30/18, is:
• Safety Fire (Classic) – 74.5% (down from 76.0%)
• Safety Police (Classic) – 75.0% (down from 76.2%)
• PEPRA Safety Fire – 95.4% (down from 95.6%)
• PEPRA Safety Police – 90.2% (down from 92.8%)
• The Unfunded Accrued Liability, as of 6/30/18, is:
• Safety Fire (Classic) - $11,830,474 (up from $10,069,778)
• Safety Police (Classic) - $15,435,598 (up from $13,092,735)
• PEPRA Safety Fire - $3,334 (up from $1,639)
• PEPRA Safety Police - $56,400 (up from $25,934)

Discount Rate Review

On December 21, 2016, the CalPERS board approved lowering the Discount Rate from 7.5% to 7.0% over the subsequent three fiscal years (FY 18/19 to FY 20/21).  The lowering of the Discount Rate means the plans will see increases in both the Normal Cost (the cost of pension benefits accruing in one year for active members) and the accrued liabilities.  The changes for accrued liabilities are amortized with a 5-year ramp, a 20-year stability period, and a 5-year ramp down.  The 5-year ramp up defers the impact of the changes; however, this mechanism also sets up periods of negative amortization.  These rate changes will result in significant increases to the City’s Employer Rates over the next six years.

Potential Effect of Discount Rate Assumptions

The City’s Employer Rates for the Plans are projected to increase as follows:

• Miscellaneous – from 23.876% in FY 19/20 to 28.698% in FY 25/26
• Safety Fire (Classic) – from 38.240% in FY 19/20 to 48.366% in FY 25/26
• Safety Police (Classic) – from 37.536% in FY 19/20 to 47.027% in FY 25/26
• PEPRA Safety Fire – from 14.106% in FY 19/20 to 13.000% in FY 25/26
• PEPRA Safety Police – from 13.366% in FY 19/20 to 13.871% in FY 25/26

The City’s Estimated Total Employer Contributions for the plans are projected to increase as follows:

• Miscellaneous – from $2,836,564 in FY 19/20 to $3,912,829 in FY 25/26
• Safety Fire (Classic) – from $1,573,819 in FY 19/20 to $2,315,745 in FY 25/26
• Safety Police (Classic) – from $2,109,118 in FY 19/20 to $3,118,728 in FY 25/26
• PEPRA Safety Fire – from $12,884 in FY 19/20 to $14,605 in FY 25/26
• PEPRA Safety Police – from $71,077 in FY 19/20 to $159,228 in FY 25/26
• Total for all plans – from $6,603,462 in FY 19/20 to $9,521,134 in FY 25/26

CalPERS Actuarial Analysis

In our February 26, 2019 presentation, we stated staff would be working with a consultant to develop additional strategies to pay down the Unfunded Accrued Liability.  Attached is an Executive Summary and the full analysis report from our consultant, Bartel Associates, LLC, discussing options and the impacts of alternative funding plans.  These options include the phase-in of a 15-year amortization of the UAL or increasing the City’s contributions by 1% per year, up to an extra 4% per year.  These options would save the City over $12 million in interest costs over the next 20 years and improve the long-term sustainably of the retirement plans. 

Conclusion

The total Unfunded Accrued Liability for the City of Rocklin, as of June 30, 2018, is $54,645,934 (up from $47,823,255, as of June 30, 2016).  The employer cost to the City of Rocklin in FY 19/20 was $6.6 M, and is budgeted to be $7.7M in FY 20/21.  This annual cost will climb to approximately $9.5 M by FY 25/26.  This cost will have a significant impact on the City’s financial stability in the coming years.  Based on the analysis, staff recommends City Council continue with the key management practices, and where budget permits, consider increase payments to the UAL up to the additional 4% level to save the City considerable interest costs, and achieve long-term pension sustainability.