CalPERS Miscellaneous, Safety Fire (Classic), Safety Police (Classic), PEPRA Safety Fire, and PEPRA Safety Police – June 30, 2019 Annual Valuation Reports and Information Regarding the CalPERS Employer Rate History and Future Employer Rate Estimates

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, 2019 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 30th of the prior year is used to set the Employer Rates for the upcoming year.  The employer rates for FY 21/22 are based on the June 30th, 2019 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 21/22.  CalPERS regularly conducts comprehensive analyses of all actuarial assumptions and methods with the next such review anticipated in 2021.

The discount rate is used to estimate future investment returns and the contributions required to meet the liabilities.  For the year ended June 30, 2020, CalPERS has reported investment returns of 4.7%, significantly below the target of 7.0%.  Shortfalls in investment returns at CalPERS result in higher contribution requirements for the City of Rocklin.  The historical rate of return at CalPERS over the last 20 years has been 5.8%.  This performance has caused increases to both our unfunded liabilities and our required contributions.

The June 30, 2019 annual valuation reports include discount rate sensitivity analysis.  These analyses provide another point of view when considering the current funded status of our five plans.  These can be found on the following pages of the corresponding reports.

Miscellaneous, page 26; Safety Police, page 18; PEPRA Safety Police, page 17; Safety Fire, page 18; PEPRA Safety Fire, page 17.

With the 20-year investment return average from CalPERS at 5.8%, the actual Unfunded Liability and Funded Status would more likely be similar to those given for the 6% Discount Rate given in the “Sensitivity to the Real Rate of Return Assumption” table.  Below is a comparison of the published valuation report numbers and those adjusted to reflect a lower discount rate of 6%.

Unfunded Liability Comparison

Funded Status Comparison

As can be seen above, with a discount rate of 6%, our unfunded liability would be $30.6 M higher, a 52.8% increase, and the funded level of our plans would reduce significantly.

In FY 19/20, the City made pension contributions totaling $6.6 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 21/22 is 28.170% (up from 25.525% in FY 20/21).  This rate is intended to provide the Estimated Total Employer Contribution of $3,434,456.
• The Funded Ratio of the Plan, as of 6/30/19, is 69.5% (up from 69.2% as of 6/30/18).
• The Unfunded Accrued Liability, as of 6/30/19, was $28,752,237 (up from $27,320,128 as of 6/30/18).

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 21/22, the plan Employer Rates will be: 
• Safety Fire (Classic) – 44.740% (up from 42.371%)
• Safety Police (Classic) – 43.810% (up from 41.322%)
• PEPRA Safety Fire – 13.500% (down from 14.563%)
• PEPRA Safety Police – 13.310% (down from 13.400%)
• These rates are intended to provide the required Estimated Total Employer Contributions of:
• $1,989,596 for Safety Fire (Classic) (up from $1,771,353)
• $2,670,809 for Safety Police (Classic) (up from $2,392,744)
• $23,229 for PEPRA Safety Fire (up from $14,113)
• $168,597 for PEPRA Safety Police (up from $134,304)
• The Funded Ratio for the plans, as of 6/30/19, is:
• Safety Fire (Classic) – 74.8% (up from 74.5%)
• Safety Police (Classic) – 75.4% (up from 75.0%)
• PEPRA Safety Fire – 98.2% (up from 95.4%)
• PEPRA Safety Police – 95.5% (up from 90.2%)
• The Unfunded Accrued Liability, as of 6/30/19, is:
• Safety Fire (Classic) - $12,588,829 (up from $11,830,474)
• Safety Police (Classic) - $16,470,787 (up from $15,435,598)
• PEPRA Safety Fire - $2,013 (down from $3,334)
• PEPRA Safety Police - $37,455 (up from $56,400)

Conclusion

The total Unfunded Accrued Liability for the City of Rocklin, as of June 30, 2019, is $57,851,321 (up from $54,645,934, as of June 30, 2018).  The employer cost to the City of Rocklin in FY 19/20 was $6.6 M, and budgeted to be $7.6 M in FY 20/21.  This annual cost will climb to approximately $10.0 M by FY 26/27.  These costs 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 increasing payments to the UAL to save the City considerable interest costs, and achieve long-term pension sustainability.