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CITY OF
NEWPORT BEACH
City Council Staff Report
Agenda Item No. 14
April 9, 2013
HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL
FROM: Finance Department
Dan Matusiewicz, Finance Director
949 - 644 -3126, danm @newportbeachca.gov
PREPARED BY: Susan Giangrande, Budget Manager
APPROVED: 7)�„ A"
TITLE: CaIPERS Rate Adjustment Election & Fixed Declining Amortization
Period
ABSTRACT:
CaIPERS is providing agencies with the opportunity to phase -in contribution rate
increases related to the recent CaIPERS changes in actuarial assumptions. Staff
recommends that the City implement the new rates without the phase -in option in order
to realize long -term savings in interest expense. Additionally, staff is recommending
that the City begin amortizing its unfunded pension liability over a fixed declining
amortization period versus the current 30 -year rolling amortization methodology.
RECOMMENDATION:
Authorize the Finance Director to direct the CalPERS Actuary to not phase -in the impact
of the most recent changes in actuarial assumptions and to implement a "fresh start"
liability amortization methodology, as described in this report, for both the miscellaneous
and safety plans.
FUNDING REQUIREMENTS:
There is no additional appropriation required in the current year; however, if the
proposed recommendation is approved, the City will pay more on an accelerated
schedule, with the goal of substantially reducing the unfunded liability. By paying an
additional $72.2 million over 30 years, the City's unfunded liability will be reduced by
$185.7 million, thus avoiding $113 million of interest expense. Additional employer costs
will begin in Fiscal Year 2013 -14 and will be included in the proposed operating budget
in this and subsequent fiscal years (see Attachment).
CaIPERS Rate Adjustment Election & Fixed Declining Amortization Period
April 9, 2013
Page 2
DISCUSSION:
City employee pensions are funded through employee and employer contributions. The
employee contributions are based on a fixed percentage while the employer contribution
rate is adjusted annually based on actuarial determined assumptions that include future
salary increases, employees' age at retirement, retiree life expectancy, and investment
rate of return.
CaIPERS changed several assumptions last year, including:
• Inflation assumption lowered from 3.00% to 2.75%
• Payroll growth assumption lowered from 3.25% to 3.00%
• Discount rate (investment rate of return) lowered from 7.75% to 7.5%
The net effect of the assumption changes increased the City's Actuarial Accrued
Liability (AAL) approximately $12.6 million and is expected to increase the City's
employer rates annually by 1%-2% ($460,000 — $920,000) for miscellaneous plans and
2 % -3% ($630,000 - $945,000) for safety plans for a 20 -year period.
CaIPERS is offering employers the opportunity to phase -in the effect of the rate
increases related to the new assumptions over a two -year period. The deadline for
notifying CalPERS of the City's decision on whether to phase -in the rate adjustments is
by May 1, 2013. Finance staff contacted the City's CalPERS actuary to review how the
phase -in option would affect the City's employer contributions. If the City does not
phase -in the rate adjustments, the annual contribution will increase approximately
$765,000 further in year one (FY 2013 -14), but would be $82,000 lower on average for
each of the next 19 years. The elimination of the rate adjustment phase -in also results
in a reduction to the interest expense of almost $800,000 over the 20 -year amortization
period.
Another action the City can take to reduce the City's unfunded liabilities is to accelerate
the amortization period of remaining unfunded pension liabilities. Currently, the
unfunded liability in the amount of $225.5 million for both miscellaneous and public
safety is amortized over multiple amortization bases. The current CalPERS policy
amortizes the City's unfunded liability over a rolling 30 -year period which results in a
modest increase in the City's liability each year (negative amortization). Finance staff
asked the City's CaIPERS actuary to develop a single "fresh start" base calculation for
both the miscellaneous and safety plans on a fixed declining amortization schedule.
The new funding period for the miscellaneous plan is recommended to be 21 years and
for the safety plan, 26 years. The funding period was calculated to maintain rates that
are close to the current amounts, but more importantly to amortize the unfunded
liabilities over a fixed declining period versus the current rolling 30 -year amortization
CalPERS Rate Adjustment Election & Fixed Declining Amortization Period
April 9, 2013
Page 3
methodology. The methodology will provide a payment roadmap for the City to
substantially pay -off its current unfunded pension liability over a fixed period of time.
Council's recent actions to decrease pension costs include reducing the size of our
workforce, establishing partnerships with employees to pay more of the City's pension
costs, and the adoption of lower pension benefits for new hires. Those significant efforts
can be furthered by authorizing the Finance Director to direct the CalPERS Actuary to
not phase -in the impact of the most recent changes in actuarial assumptions and to
implement a "fresh start" for both miscellaneous and safety plans as described above.
Both actions will accelerate the City's unfunded liabilities payment schedule and further
mitigate pension costs for future generations. By increasing our payments by $72.2
million over 30 years, we will reduce the City's unfunded liability by $185.7 million, thus
avoiding $113 million of interest expense (see Attachment).
The Finance Committee discussed this issue on February 28, 2013, and concurred with
the Finance Department recommendation. The Finance Committee directed staff to
bring this item to the full City Council and fund the first year of additional cost of
$817,404 from the General Fund's CalPERS reserve. Alternatively, Council can direct
the Finance Director to take no further action on this matter and amortize the unfunded
liabilities over the current rolling 30 -year amortization period with the current CalPERS
rate smoothing methodology.
ENVIRONMENTAL REVIEW:
Staff recommends the City Council find this action is not subject to the California
Environmental Quality Act ( "CEQA ") pursuant to Sections 15060(c)(2) (the activity will
not result in a direct or reasonably foreseeable indirect physical change in the
environment) and 15060(c)(3) (the activity is not a project as defined in Section 15378)
of the CEQA Guidelines, California Code of Regulations, Title 14, Chapter 3, because it
has no potential for resulting in physical change to the environment, directly or
indirectly.
NOTICING:
The agenda item has been noticed according to the Brown Act (72 hours in advance of
the meeting at which the City Council considers the item).
CalPERS Rate Adjustment Election & Fixed Declining Amortization Period
April 9, 2013
Page 4
Submitted by:
an Matusiewicz
Finance Director
Attachments: Miscellaneous & Safety Plan Phase -in and Fresh Start Calculations
CalPERS Rate Adjustment Election & Fixed Declining Amortization Period
April 9, 2013
Page 5
City of Newport Beach Combined Safety and Miscellaneous CalPERS Amortization Schedule
Fresh Start Over 21 years Miscellaneous Plan /26 years Safety Plan
No Phase -In Period for Changed Assumptions
Year
Fiscal Year
End
Expected
Payroll
Current Policy
(Multiple Bases)
Fresh Start
(Single Base)
Change in
Contribution
Amount
(A)
Current Policy
Market Value of
Assets
Fresh Start
Market Value of
Assets
Reduction in
Unfunded
Liability
(B)
2011 -12
73,845,896
-
-
-
353,644,371
353,644,371
-
2012 -13
76,061,273
-
-
-
395,265,970
395,265,970
-
2013 -14
78,343,111
20,603,286
21,420,690
817,404
467,354,699
467,354,699
-
1
2014 -15
80,693,405
22,456,785
22,517,750
60,965
456,773,632
456,773,632
-
2
2015 -16
83,114,207
23,482,524
23,649,208
166,684
481,684,702
481,684,702
-
3
2016 -17
85,607,633
24,531,337
24,816,106
284,769
510,484,224
511,307,042
822,818
4
2017 -18
88,175,862
25,603,787
26,019,520
415,734
543,345,439
544,291,337
945,898
5
2018 -19
90,821,138
26,700,444
27,260,553
560,109
579,744,935
580,929,564
1,184,629
6
2019 -20
93,545,772
27,821,898
28,540,342
718,444
619,976,692
621,536,825
1,560,133
7
2020 -21
96,352,145
28,968,752
29,860,060
891,308
664,357,483
666,453,116
2,095,633
8
2021 -22
99,242,710
30,141,625
31,220,913
1,079,288
713,228,603
716,045,231
2,816,628
9
2022 -23
102,219,991
31,341,154
32,624,145
1,282,991
766,957,725
770,708,809
3,751,084
10
2023 -24
105,286,591
32,567,991
34,071,036
1,503,045
825,940,907
830,870,542
4,929,634
11
2024 -25
108,445,188
33,822,810
35,562,907
1,740,097
890,604,736
896,990,539
6,385,803
12
2025 -26
111,698,544
35,106,297
37,101,116
1,994,819
961,408,646
969,564,884
8,156,238
13
2026 -27
115,049,500
36,419,162
38,687,063
2,267,902
1,038,847,400
1,049,128,368
10,280,969
14
2027 -28
118,500,985
36,004,115
40,322,192
4,318,077
1,123,453,769
1,136,257,448
12,803,678
15
2028 -29
122,056,015
37,325,194
42,007,988
4,682,793
1,215,801,407
1,231,573,409
15,772,002
16
2029 -30
125,717,695
38,537,376
43,745,981
5,208,606
1,316,507,938
1,335,745,781
19,237,843
17
2030 -31
129,489,226
39,915,094
45,537,750
5,622,657
1,424,468,627
1,449,496,006
25,027,378
18
2031 -32
133,373,903
37,391,608
47,384,918
9,993,309
1,541,983,115
1,573,601,378
31,618,263
19
2032 -33
137,375,120
38,714,935
49,289,158
10,574,223
1,669,666,532
1,708,899,293
39,232,761
20
2033 -34
141,496,374
37,820,169
51,252,194
13,432,025
1,808,456,661
1,856,291,804
47,835,142
21
2034 -35
145,741,265
39,135,651
44,760,816
5,645,165
1,955,268,221
2,016,750,526
61,482,306
22
2035 -36
150,113,503
40,479,984
46,611,976
6,131,992
2,114,584,148
2,191,321,917
76,737,769
23
2036 -37
154,616,908
41,853,851
48,499,775
6,645,924
2,285,118,818
2,381,132,945
96,014,126
24
2037 -38
159,255,415
43,454,417
50,445,899
6,991,482
2,469,948,159
2,578,845,936
108,897,777
25
2038 -39
164,033,078
44,895,393
52,452,111
7,556,718
2,670,183,255
2,793,421,010
123,237,756
26
2039 -40
168,954,070
46,368,263
37,856,334
(8,511,929)
2,887,019,531
3,026,190,101
139,170,571
27
2040 -41
174,022,692
47,873,801
39,488,301
(8,385,500)
3,121,940,868
3,278,587,064
156,646,197
28
2041 -42
179,243,373
46,489,429
41,170,968
(5,318,461)
3,376,153,928
3,552,155,405
176,001,477
29
2042 -43
184,620,674
46,299,554
42,905,815
(3,393,738)
3,651,148,979
3,831,782,311
180,633,331
30
2043 -44
190,159,294
47,435,000
44,694,422
(21740,579)
3,948,529,196
4,134,269,040
185,739,844
Total
1,088,958,399
1,160,377,319
72,236,324
Interest Ex pens a Avolded(B -A) 113,503,520