G.7 - Unfunded LiabilitiesCity of Grand Terrace
Unfunded Pension &
OPEB Liabilities
Unfunded Pension & OPEB Liabilities
Unfunded Pension Liability CalPERS
For CalPERS, the City has three plans, Miscellaneous Plan, PEPRA Miscellaneous Plan,
and the Miscellaneous Second Tier Plan. Per the CalPERS Actuarial Valuation dated
June 30, 2020, the unfunded liability and funded ratio for each of the Plans is as follows:
Misc.PEPRA Second
Plan Plan Tier Plan
Unfunded Accrued Liability 5,526,787$ 56,733$ 53,849$
Funded Ratio 67.70%88.50%91.20%
June 30, 2020 Valuations
Unfunded Pension & OPEB Liabilities
For CalPERS, the City has three plans, Miscellaneous Plan, PEPRA Miscellaneous Plan,
and the Miscellaneous Second Tier Plan. Per the CalPERS Actuarial Valuation dated
June 30, 2020, the unfunded liability and funded ratio for each of the Plans is as follows:
Misc.PEPRA Second
Plan Plan Tier Plan
Unfunded Accrued Liability 5,526,787$ 56,733$ 53,849$
Funded Ratio 67.70%88.50%91.20%
June 30, 2020 Valuations
The annual costs for each of the Plans is made up of the Normal Cost and the Unfunded
Accrued Liability (UAL). For Fiscal Year 2022-23 those costs are as follows:
Misc.PEPRA Second
Plan Plan Tier Plan Total
Normal Cost 7,731$ 47,544$ 31,938$ 87,213$
UAL Contribution 579,800 10,202 7,856 597,858
587,531$ 57,746$ 39,794$ 685,071$
Unfunded Pension & OPEB Liabilities
The Normal Costs are based on the City’s payroll and are reasonable and
within the City’s annual budget.We need to have a way to reduce the UAL
payment or find an alternative way to fund it annually.I have attached
Schedules for each of the Plans which shows the current amortization
schedules and two alternative schedules based on a 15 Year and a 10 Year
amortization schedule.For the Miscellaneous Plan with a 15-year
amortization period there is an estimated savings of $606,245 and with a 10-
year amortization period there is an estimated savings of $1,741,469.
Unfunded Pension & OPEB Liabilities
Reasons to Prefund
•Greater expected rate of return (discount rate)which lowers your liabilities.
•Investment flexibility with Section 115 Trust compared to restrictions on
general fund investments (Govt. Code 53216).
•Contributions into trust are “assets”that offset liabilities on the financial
statements.
•Can help with the City’s credit ratings.
•OPEB assets are accessible for OPEB expenses at any time.
•Prefunding has no downside other than market fluctuation (like pension).
Unfunded Pension & OPEB Liabilities
Additional Discretionary Employer Contributions
CalPERS allows employers to make additional discretionary payments (ADPs)at
any time and in any amount.These optional payments serve to reduce the UAL
and future required contributions and can result in significant long-term savings.
The ADPs can be used to stabilize annual contributions as a fixed dollar amount,
percent of payroll or percent of revenue.The schedules as mentioned above are an
example of how the ADPs reduce the City’s costs.
Unfunded Pension & OPEB Liabilities
IRS Section 115 Trust
Governmental entities can establish an IRS Section 115 Trust,these are irrevocable and must be used forpensionorOPEBobligations.A couple of the companies that provide the Section 115 Trusts have IRSPrivateLetterRulingsontheirPlans.CalPERS also offers a Section 115 Trust.
This would provide the City with an alternative to sending funds to CalPERS that will allow for greater localcontroloverassets,investment by a professional fund management team selected and monitored by theCity,with future excess contributions transferred to CalPERS at the City’s discretion to reduce the City’s NetPensionLiability.
These programs can be established as a multiple employer trust so that public agencies regardless of sizecanjointheprogramtoreceivethenecessaryeconomiesofscaletokeepadministrativefeeslowandavoidanysetupcosts.The trust permits the City,under federal and state law,to invest in a more diversified arrayofinvestmentstomaximizeinvestmentreturnslongterm.
Unfunded Pension & OPEB Liabilities
Funding Plans
•Pension Obligation Bonds
•Use one-time revenue sources
•Lower the minimum General Fund Reserve level percentage
•Contribute a certain percentage of any given year’s realized General Fund
surplus
•Annual appropriation in each year’s budget
Unfunded Pension & OPEB Liabilites
Unfunded Other Post Employment Benefit Plan
The City’s OPEB Plan currently does not have any plan assets and is a pay
as you go.We budget and make the retiree medical premiums each fiscal
year which is approximately $36,000 per fiscal year.
As of June 30,2021 the unfunded OPEB Liability was $1,964,307 with a
discount rate of 1.92%,because the City does not have any plan assets.
Unfunded Pension & OPEB Liabilities
California Employers’ Retiree Benefit Trust Fund (CERBT)
The CERBT is Section 115 trust fund dedicated to prefunding OPEB for all eligible California Public Agencies. By joining this trust fund, California public agencies can help finance future costs in a large part from investment earnings provided by CalPERS.
Prefunding provides the following benefits:Contribute to preserving a positive credit ratingGenerate investment income from employer-controlled contributions to pay for future retiree benefitsReduce future employer cash flow requirements and budget dependency with investment incomeReduce the OPEB Liability reported on the City’s annual financial statementsHaving plan assets allows the use of a higher discount rate which in turns lowers the reported liability
The money earned can be used on annual basis to make the retiree medical payments and can free up additional funds for the General Fund budget.
Unfunded Pension & OPEB Liabilities
•Questions