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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. Policies for Addressing Unfunded Retirement Costs February 18, 2020 Page 2 of 5 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 Policies for Addressing Unfunded Retirement Costs February 18, 2020 Page 3 of 5 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. Policies for Addressing Unfunded Retirement Costs February 18, 2020 Page 4 of 5 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 Policies for Addressing Unfunded Retirement Costs February 18, 2020 Page 5 of 5 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.