HomeMy WebLinkAbout7294 RESOLUTION NO. 7294
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
ARCADIA, CALIFORNIA, ADOPTING AN UNFUNDED
ACCRUED LIABILITY FUNDING POLICY.
WHEREAS, CaIPERS has instituted a series of pension cost increases that have
dramatically altered the public pension cost structure in California; and
WHEREAS, the changes instituted by CaIPERS will require all California
governmental agencies to reevaluate their operations or risk facing insolvency; and
WHEREAS, the City of Arcadia's Citizen's Financial Advisory Committee ("CFAC")
has made recommendations within the Comprehensive Pension Management Plan to
address increasing pension costs; and
WHEREAS, the CFAC identified multiple strategies needed to effectively address
rising pension costs; and
WHEREAS, the Unfunded Accrued Liability ("UAL") is the difference between (a)
the total value of pension benefits owed to current and retired employees or dependents
and, (b) the total assets on hand; and
WHEREAS, an identified expenditure control strategy to address increasing
pension costs it to accelerate current and future UAL payments to CaIPERS to reduce
the City's total pension liability; and
WHEREAS, on an annualized basis, it is possible that the City will incur new UAL
costs that may arise in the future, with the objective of funding the CaIPERS pension plan
at a level of 100 percent of the total accrued liability, whenever possible; and
WHEREAS, to facilitate payment of future UAL costs in a timely manner and to
reduce the risk that future UAL costs pose to the City's financial position, the City Council
desires to adopt the Unfunded Accrued Liability Funding Policy, attached hereto as
Exhibit "A";
NOW, THEREFORE, THE CITY COUNCIL OF THE CITY OF ARCADIA DOES
HEREBY RESOLVE, DETERMINE, AND ORDER AS FOLLOWS:
SECTION 1. The City Council of the City of Arcadia finds that all of the facts set
forth in the Recitals of this Resolution are true and correct. The City Council hereby adopts
the Unfunded Accrued Liability Funding Policy, attached hereto as Exhibit "A".
SECTION 2. The City Clerk shall certify to the adoption of this Resolution.
[SIGNATURES ON NEXT PAGE]
Passed, approved and adopted this 18th day of February, 2020.
77b
M. 'or of the City of Arcadia
ATTEST:
jq
City Clerk
APPROVED AS TO FORM:
P.
Stephen P. Deitsch
City Attorney
STATE OF CALIFORNIA )
COUNTY OF LOS ANGELES ) SS:
CITY OF ARCADIA )
I, GENE GLASCO, City Clerk of the City of Arcadia, hereby certifies that the
foregoing Resolution No. 7294 was passed and adopted by the City Council of the City of
Arcadia, signed by the Mayor and attested to by the City Clerk at a regular meeting of said
Council held on the 18th day of February, 2020 and that said Resolution was adopted by
the following vote, to wit:
AYES: Amundson, Beck, Tay, Chandler, and Verlato
NOES: None
ABSENT: None
y Clerk ..['ity of Arcadia
Exhibit"A"
CITY OF ARCADIA
ADMINISTRATIVE POLICY
Subject: Policies for Addressing Unfunded Retirement Costs
Effective Date: February 18, 2020
Policy Objective:
The purpose of this statement of Policies for Addressing Unfunded Retirement
Costs ("Policy") is to establish a methodology for funding benefits obligations
accruing under the City of Arcadia unfunded retirement costs. In the
development of such policy, the City strives to reduce its unfunded California
Public Employees' Retirement System (CaIPERS) and other post-employment benefits
(OPEB) liabilities, collectively "unfunded retirement costs", in the most cost-
efficient manner possible. It is the policy goal to attain a funding level of 85%
or greater, where current assets plus future assets from employer
contributions, employee contributions, and investment earnings should be
sufficient to fund Plan benefits.
This Policy recognizes that there will be investment marketplace volatility and
that actual economic and demographic experience will differ from assumed
experiences. Accordingly, this Policy is intended to provide flexibility to smooth
such volatility and experience in a reasonable, systematic, and financially
sound manner. As such, the City will be required to continually monitor its
unfunded retirement costs. Further, it is the intent that this Policy comply with
all applicable laws, rules and regulations (collectively "Laws"). In the event that
this Policy conflicts with any such Law, the applicable Law shall prevail.
Authority:
City Council Resolution No. 7294 (Adopted February 18, 2020)
Assigned Responsibility:
City Manager and the Administrative Services Director
General Policy:
Background:
The primary goal of funding the City's unfunded retirement cost plan is to
ensure that sufficient assets will be accumulated to deliver promised
benefits when they come due and to protect pension and retiree medical
benefits in situations that involve employer insolvency or bankruptcy.
Establishing sound funding guidelines promotes fiscal responsibility and
benefit security to current active employees and those retired from the City.
The City's overall objective is to fund the CALPERS pension plan and
retiree medical benefit (OPEB) to a level of 85% or greater, at any given
time of the total accrued liability, whenever possible.
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February 18, 2020
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Analysis:
The purpose of this funding policy is to establish a framework for funding
the City of Arcadia's defined benefit pension and OPEB plans, taking into
account factors that are relevant to the plan and the City. These factors
include:
• The financial position of the City;
• Stability of the plan and/or the affordability of the annual
contributions;
• Benefit security;
• The terms of the CALPERS contract for Arcadia, along with any
related collective bargaining agreement; and
• Minimum funding requirements under State law.
There are a number of advantages to developing a funding policy to
address an unfunded accrued liability. These advantages include the
following:
• Establishing a funding policy provides the framework to ensure
proper management of future liabilities. The adoption of a funding
policy will ensure a disciplined decision making process, which will
contribute to better predictability in funding.
• Having a written summary of the funding policy that is accessible
to the City, constituents, and various financial institutions will help
improve the transparency of funding decisions and increase their
understanding of pension and retiree medical benefit funding
issues.
• The exercise of developing this funding policy improves the
identification, understanding, and management of the risk factors
that affect the variability of funding requirements and the security
of benefits for the organization and its employees.
Funding Options
City staff has identified eight (8) feasible solutions to address unfunded
retirement liabilities, which are a combination of internal budgeting and
policy directives, as well as financing mechanisms:
1) Cost Sharing & Contract/MOU Provisions — The City shall
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February 18, 2020
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incorporate a mechanism within the MOUs to revisit employee
contribution levels in the event of significant or unexpected
changes. CaIPERS makes regular adjustments to its normal costs
and unfunded accrued liability (UAL) as a result of actual investment
performance as well as changes in benefit levels and actuarial
assumptions. These changes typically impact both normal costs
payments as well as UAL. From time to time, the City may retain the
services of a financial advisor and/or actuary to develop financial
projections for the expected increase costs/savings of proposed
changes to benefit levels made during bargaining unit negotiations.
2) Examination of Medical Benefit Levels And Eligibility Criteria
—The City shall periodically review its costs of medical benefits,
eligibility age criteria (i.e., retiree medical benefits), and coverage
levels; both in comparison to benchmark cities and to ensure
long-term fiscal sustainability.
3) Allocation Of Liabilities Among Funds/Projects—The City shall
establish internal budgeting policy to confirm the fair share or
allocation of current pension/OPEB costs as well as unfunded
liabilities to each respective fund/project - per regulatory
guidelines.
4) Allocation of Additional Discretionary Payments (ADPs) with
Reserves, Surpluses, or One-time Monies —To the extent that
the City has excess reserves, year ending Operating Budget
surpluses, and/or One-time Monies, the City shall endeavor to
apply 50% of such savings toward its unfunded retirement costs
at the recommendation of the City Manager and/or their
designee. The City seeks to maintain adequate levels of reserves
in accordance to its stated reserve goal of a 20% General Fund
Contingency Reserve.
The 50% target level is a stated policy goal; however, individual
funding decisions shall be made on a case-by-case basis when
determining the recommended level of funding.
In order to maximize interest costs savings, the City shall apply
this portion of such monies toward the CaIPERS Amortization
Bases with the longest remaining term (maturity), and then into
the City's 115 OPEB Trust. Specific recommendations regarding
how much monies to apply toward unfunded pension or OPEB
liabilities shall be made by the City Manager and/or their
designee.
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From time to time, staff may engage an independent Municipal
Advisor to assist with performing analysis and all pre-funding
decisions, using the City's customized pension model; and, shall
provide proper documentation of the analysis and decision-making
process.
5) Synthetic Fresh Start —To the extent that the City has identified
additional resources (one-time monies, budget surpluses, or
excess reserves) to apply toward its unfunded retirement costs, the
City shall to apply these monies through a synthetic Fresh Start or
"soft" Fresh Start mechanism. Under a Synthetic Fresh Start the
City keeps making its annual UAL payments, and makes additional
discretionary payments (ADPs) each year. Although combined total
annual payments could be similar to a Fresh Start amortization there
are two distinct advantages:
• Additional Discretionary Payments eliminate future interest
charges and thus generate significant savings.
• ADPs provide budgetary flexibility — payments can be
adjusted based on available excess resources. Under a
Fresh Start Amortization, UAL payments are fixed.
In general, such monies shall be applied toward the Amortization
Base with the longest remaining term to maturity in order to
maximize total savings.
6) Tax-Exempt Exchange—To the extent the City has funds set aside
to pay for future capital projects, the City shall seek to finance such
projects with tax-exempt bonds and use the scheduled budget
amounts to pre-pay the UAL, provided that such bonds provide an
interest rate that is at least 2.5% less than the current/expected
Discount Rate established by CaIPERS. The City shall use the
scheduled UAL payments to pay the debt service on the bonds and
derive savings from the interest cost differential.
7) Pension Obligation Bonds (POBs) —The City may from time-to-
time use bonds to "refinance" a portion of its unfunded pension or
OPEB liability. Bonds should be issued as part of a comprehensive
plan to address the City's unfunded liabilities. Since these bonds
are issued on a taxable basis, they carry a higher interest rate than
traditional municipal "tax-exempt" debt. The City shall adhere to the
following general criteria to address Government Finance Officers
Association concerns:
• Unfunded liabilities should not exceed the 95% funding level,
after the application of bond proceeds.
• The bonds shall not be structured to defer payments or extend the
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final maturity date.
• Bonds shall be structured with standard call provisions (e.g.,
100%-102% in 10 years).
• Bonds shall not finance current or normal costs; they shall only
be used to refinance unfunded pension and OPEB liabilities.
• The interest rate on bonds shall be at least 2.0-2.5% less than
the current/projected CaIPERS Discount Rate.
• Bonds should provide demonstrated cash flow savings -a target
minimum of 10% net present value savings (except for refunding
bonds).
These policies are intended to provide general guidelines. Each individual
decision shall require analysis and review on a case-by-case basis. This policy
document is intended to serve as a living document, which will require periodic
review and be updated to take into account changes in the City's financial position
and funding status over time.