What is the CalPERS Challenge?
Given unfunded pension obligations, our collective challenge (aka The CalPERS Challenge) is: How to effectively secure the solvent financial future of the City, its employees, and its retirees while ensuring the delivery of public services and stewardship of public resources.
What is CalPERS?
The California Public Employees' Retirement System is an agency in the California executive branch that "manages pension and health benefits for more than 1.6 million California public employees, retirees, and their families". Wikipedia
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Frequently Asked Questions
Defined Benefit Plans (DBPs) are pension plans in which an employee receives fixed benefits that are based on length of service and salary earned at the time of retirement. The City’s relationship with CalPERS to provide a DBP to its employees dates back to 1945 when the initial plan was approved by Riverside voters by Special Election on June 5. Further, the City’s Charter (Article X – Retirement), requires a CalPERS retirement for City employees.
The City has several employee groups with different CalPERS DBP formulas. The formula represents the percent of salary for each year employed with the City that a plan member will receive at or after the specified age. A defined contribution plan (DCP), such as a 401K, is a dollar contribution to a retirement fund. The total retirement in a DCP is generally based on the amount of assets and growth of the money.
Two-thirds of Funds Come from Investments
Historically, more than 60% of all funds paid to CalPERS retirees comes from investment earnings. When CalPERS does not meet its investment return goals, the City will pay more.
Citywide CalPERS Cost Overview
Over the next five years (FY 2018-19 to FY 2022-23), the City anticipates its annual retirement expenditures to increase by 35.35% from approximately $73.1 million to $98.9 million. The UAL projections are based on the City’s most recent CalPERS actuarial reports dated July 2018 which report data as of June 30, 2017; the normal cost projections are sourced from the adopted FY 2018-2020 Biennial Budget and FY 2018-2023 Five-Year Plans. The information below provides a five-year look at the City’s overall pension costs and pension costs in the General Fund, including Measure Z.
The City’s retirement plans went from having an excess of cash (i.e. super-funded, or funded above 100%) to being under-funded. This is mainly due to investment losses by CalPERS during the Great Recession, which impacted all California agencies’ retirement plans managed by CalPERS. Currently, the City’s CalPERS plans are funded at 78.2% (Miscellaneous) and 73.2% (Safety). Additional factors have also contributed to increasing costs:
- Retroactive retirement benefit enhancements for City employees between 2001 and 2006;
- Long-term investment returns not meeting expectations (e.g. 8.1% over the last five years, 5.6% over the last 10 years, and 6.1% over the last 20 years);
- The resulting changes in the CalPERS anticipated return-on-investment rate over the past 15 years, from 8.25% to 7.00%; and
- CalPERS retirees living longer
As a result of the above factors, which contributed to the decline in overall retirement plan funding levels, California public entities such as the City of Riverside must increase their future payments into the CalPERS system. The payment levels are determined by CalPERS, and they are increasing exponentially.
The City has Taken Several Steps Over the Years to Reduce Pension Costs
- 2003-2004 – The City issued Pension Obligation Bonds to extinguish the Unfunded Accrued Liability at that time, and to reduce future annual payments.
- 2011-2012 – Required all new CalPERS employees (Tier 2) to pay the employee portion of CalPERS pension costs.
- 2013 – Established lower pension benefits for new (PEPRA/Tier 3) employees, resulting in lower pension costs.
- 2016 – Existing employees not currently paying the employee share of CalPERS retirement costs began doing so. Currently, the savings impact of this action are mitigated by the California Rule.
- 2017 – Refinanced $30 million Bond Anticipation Note using Measure Z Funds. Allowed a fixed interest rate for the pension related debt and an accelerated payoff of the principal balance.
- 2018-2020 – Pre-pay the UAL at the beginning of the Fiscal Year to save 3.5% ($1.2 million/year).
- Every Year – Implement operational efficiencies, where possible, to minimize costs and impact to service levels as CalPERS costs increase.
Actuarial Report – An actuarial valuation is a type of appraisal which requires making economic and demographic assumptions in order to estimate future liabilities. The assumptions are typically based on a mix of statistical studies and experienced judgment.
Bond Anticipation Note (BAN) – A short-term obligation that is issued for temporary financing needs. The principal payoff may be covered by a future longer-term bond issue. These notes normally have maturities of one year or less and interest is payable at maturity rather than semi-annually.
California Rule – The California Rule is the result of a 1955 court case (Allen v. City of Long Beach) that concludes that an employee’s pension benefit as of the date of hire constitutes a contractual obligation. The California Supreme Court ruled that “Changes in a pension plan which result in a disadvantage to employees should be accompanied by comparable new advantages”. The 1955 ruling is currently being contested.
Defined Benefit Plan (DBP) – A type of pension plan in which an employer/sponsor promises a specified monthly benefit upon retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age.
Defined Contribution Plan (DCP) – A type of retirement plan in which a certain amount or percentage of money is set aside each year by a company (or employee) for the benefit of each of its employees. Benefits directly depend upon individual investment returns.
Discount Rate – Also known as the expected rate of return or the assumed rate of return. It is the estimated long-term average return expected to be earned on investments.
Employee Contribution – The portion of normal cost required to be paid by the employee, subject to the local agencies negotiated memorandums of understanding with applicable employee groups.
Employer Contribution – The portion of normal cost required to be paid by the employer, determined by periodic actuarial valuations under state law and based on the agency’s benefit formulas and employee groups covered.
Funded Ratio - Percentage of assets available today to pay all of the pension benefits promised to employees.
Normal Costs – The annual cost of service accrual for the upcoming fiscal year for active employees. The normal cost should be view as the long-term contribution rate for existing employees.
Pension Obligation Bond (POB) – Taxable bond that some state and local governments have issued as part of an overall strategy to fund the unfunded portion of their pension liabilities by creating debt.
PEPRA - Public Employees’ Pension Reform Act of 2013 – A pension reform bill that went into effect January 1, 2013. The bill impacts new public employees and establishes a limit on the amount of compensation that can be used to calculate a retirement benefit.
Superfunded – A term used to describe periods in which total available CalPERS assets exceed the total CalPERS liability.
Unfunded Accrued Liability (UAL) – Portion of the plan’s unfunded liability that is not funded by the plan’s asset value.
The City maintains a strict commitment to collective bargaining which includes the requirement to meet and confer on any changes affecting wages, hours, promotions, benefits, and other employment terms. The City will not engage in activity that may be seen to run counter to the ability of the City and the Unions to communicate openly and honestly during the collective bargaining process, to find solutions that will ultimately benefit the City of Riverside. For simplicity, the City colloquially refers to this commitment as performing in “good faith” with the Unions and unrepresented employees alike.
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