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HomeMy WebLinkAbout07.b. Consider response to CCCERA's phase-in optionCentral Contra Costa Sanitary District � �• ' BOARD OF DIRECTORS POSITION PAPER Board Meeting Date February 3, 2011 Subject: RESPOND TO CONTRA COSTA COUNTY EMPLOYEES' RETIREMENT SYSTEM'S (CCCERA) THREE YEAR PHASE -IN OPTION FOR THE DE- POOLING FINANCIAL IMPACT TO THE DISTRICT Submitted By: Initiating Dept.IDiv.: RANDALL M. MUSGRA VES ADMINISTRATION DIRECTOR OF ADMINISTRATION REVIEWED AND RECOMMENDED FOR BOARD ACTION F f M graves K. Alm -A- &9 - - � �_ AV J m . Kelly, en al Manager ISSUE: The Contra Costa County Employees' Association (CCCERA) Board approved de- pooling at the employer level on October 14, 2000, effective December 31, 2002. The impact to the District is an increase in the Unfunded Actuarial Accrued Liability (UAAL) of approximately $20,000,000. CCCERA is providing an option to phase -in the impact over a three year period, thereby reducing the implementation burden on the District while increasing the total cost by approximately $1,500,000. The District must notify CCCERA by February 8, 2011 of the District's position. RECOMMENDATION: Direct staff to provide a written response stating that (1) the District has put forth several questions and concerns to CCCERA regarding de- pooling and is waiting to receive answers prior to taking a position on retroactive de- pooling, and (2) the District does not select to phase -in to the UAAL payment for de- pooling. FINANCIAL IMPACTS: The implementation of de- pooling would increase the District's Unfunded Actuarial Accrued Liability (UAAL) by $20,037,235 as of December 31, 2009. The phase -in approach would add another approximately $1,500,000 in interest expense over eighteen years. ALTER NATIVESICONSIDERATIONS: The District's response to the phase -in option, at an additional cost of approximately $1,500,000, is independent of the Board's position on CCCERA's implementation of retroactive de- pooling. Staff is recommending that the Board reject the phase -in option irrespective or independent of the Board's position regarding retroactive implementation of de- pooling. BACKGROUND: At the November 3, 2010 CCCERA Board meeting, a discussion occurred regarding the impact and feasibility of implementing the de- pooling financial impacts over a three year period of time. The proposal came from the Safety member of the CCCERA Board. The proposal came back to the CCCERA Board at their December 8 meeting at which time the CCCERA Board approved the ability for employers to accept or decline the phase -in approach. This action was reported to the District Board. The phase -in only applies to the portion of the employer contribution POSITION PAPER Board Meeting Date: February 3, 2011 subject: RECEIVE REPORT ON CONTRA COSTA COUNTY EMPLOYEES' RETIREMENT ASSOCIATION (CCCERA) DE-POOLING AND 2009 RATE CALCULATIONS AND PROVIDE DIRECTION TO ACCEPT OR REJECT CCCERA'S POSITION rate increase due to de- pooling and excludes all other increases in employer contributions rates due to investment losses, changes in actuarial assumptions and methods, etc, that occurred in the December 31, 2009 valuation. On January 4, 2011 the District received a letter from CCCERA offering the District the ability to phase -in the impacts of de- pooling to the employer contribution rates over the next three years and requested a response by February 8, 2011. Staff recommends the Board decline the phase -in offer due to increased cost of approximately $1.8 million and the negative impact to the District's Annual Financial Statement. A proposed letter responding to the offer is attached along with the letter from CCCERA. The Budget and Finance Committee reviewed the letter at the January 1 8 th meeting and any recommended changes. will be submitted to the Board for consideration at this Board meeting. RECOMMENDED BOARD ACTION: Direct staff to provide a written response stating that (1) the District has put forth several questions and concerns to CCCERA regarding de- pooling and is waiting to receive answers prior to taking a position on retroactive de- pooling, and (2) the District does not select to phase -in to the UAAL payment for de- pooling. Central Contra DRAFT Sanitary District FAX: (925) 676 -7211 JAMES M. l�CEL L Y January � �, 20� � general Manag Ms. Marily Leedom `CENTON L. ALM y counsel for the District Chief Executive officer Contra Costa count E {519 ��� -���� y p yees Association 1 355 Willow Way, Suite 221 Concord CA 94520 ELAINE R. BDEI- I1l1iE ' Secretary of the District P�T�1►1M =re nn . The District received your letter dated December 29, 2010, regarding the ability to phase -in contribution rates due to de- pooling. We understand this to mean that the Contra Costa County Employees' Retirement Association (CCCERA) Board is continuing to move forward with the plan to de- -pool. As District representatives have stated at the CCCERA Board meetings, the District is not interested in deferring the imp act of de on District contribution rates. Please note that this letter addresses only the phase -in question, and should not be viewed as suggesting that the District has in any way modified its questions or contentions as stated in the December 27, 2010 letter to the CCCERA Board. The District is appreciative of the CCCERA Board's consideration of the impact to rates and service level provided to the District's customers. The District is concerned about the additional interest cost to delay the de- pooling implementation. Sincerely, James M. Kelly General Manager Central Contra Costa Sanitary District cc: Central Contra Costa Sanitary District Board of Directors Kenton Alm, District Counsel John Bartel, Actuary 1 573079.1 (9 Recycled Paper ka ccY,r�� r ` V Employees' Fbtirement Association � 1355 willow way suite 221 concord ca 94520 925.521.3960 fax 925.646.5747 December 29, 201 Via E -mail rmus raves centralsan.org & Mail Randy Musgraves Central Contra Costa Sanitary District 5019 Imhoff Place Martinez, CA 94553 Re: Phase - in of Contribution Rates due to Depooling Dear Nh-. Musgraves, At the December 8, 2010 Board meeting the Board took action .to approve a three year phase -in of contribution rates for those employers who will experience an additional increase in contribution rates due to depooling. The Board will allow the phase -in based on requests from each applicable employer. The report presented by The Segal Company (attached) shows that your employer contribution rate will increase by 6.12 %, due to the de pooling process. Based on Board action, you may choose to phase -in these increased contribution rates over a period of 3 years. Any unpaid contribution amounts, plus interest, must be paid to CCCERA by the end of the third year. This method would result in a lower contribution rate for the first part of the three year period, but also add additional amounts to be paid in the final year. Interest will accrue on the amounts not paid to CCCERA during the normal three year contribution period. In addition, you may be required to disclose additional information regarding actual contributions made to CCCERA versus the Annual Required Contributions (ARC) on your financial statements per Government Accounting Standards .Board (GASB) requirements. Please see additional detail in the attached Segal report on this matter. The Board agreed to allow up to 60 days from the date of the Board action for each affected employer to request this 3 year phase -in period. Please let us know of your interest in this phase -in process as soon as possible, but no later than February 8, 2011. Please contact me with any questions regarding this matter. Sincerely, Marilyn Le Fef Retirement xe cutive Officer _�'T_SEGAL THE SEGAL COMPANY 100 Montgomery Street Suite 500 Sari Francisco, CA 94104 -4398 T 4 # 5.263, 8200 t= 4 15.263, 8290 %w/w.segalco.com November 3 0, 2010 Ms, M arilyn Leedom Chief Executive Officer Contra Costa County Employees' Retirement Association 1355 willow way, Suite 221 Concord, CA 94520 Re: Contra Costa County Employees' Retirement Association Possible Three-Year Please -in of Increases in Employer Contribution Rates Due to Depooling Dear Marilyn: On November 3, 2010, the Board directed us to provide information on the possibility of offering a three -year "phase-in" of the increases in employer contribution rates due to depooling. This letter discusses the issues involved with this possible phase -iii, we also provide illustrations of the phased -in contribution rates and the incremental impacts of the phase -in on the ultimate employer contribution rates after the phase -in is over. Issues Raised by a Coirtribution phase -in Throughout this letter, we are assuming that the phase -in would only be offered to those employers that experience an increase in their contribution rate due to depooling in the December 31, 2009 Actuarial 'valuation. The phase -in only applies to the portion of the employer contribution rate increase due to depooling and excludes all other increases in employer contribution rates due to investment losses, changes in actuarial assumptions and methods, etc. that occurred in the December 31, 2009 valuation. Please note that the increases in employer contribution rates due to depooling have bath Normal Cost and Unfunded Actuarial Accrued Liability (UAAL) amortization components. There are a few issues that would arise if the phase -in were to be implemented. One key issue concerns the impact of the phase -in on financial reporting requirements for the Association and the employers. Another issue is the impact of the phase - in on each employer's ultimate contribution rate after the phase -in is over. Benefits, Compensation and HR Const}lti:ng Offices thf the United States and Canada Founding Member of the Multinational Group of Actuaries and Consultants, a global affdiatiort of independent firms r A I C Mils. Marilyn Leedom November 30, 2010 Page 2 Impact of Phase -in on Financial Reporting At the close of each calendar year, the Association's accounting expense or Annual Required Contribution (ARC) under Governmental Accounting Standards (GAS) 25 and 27 is reported in the plan and employer financial statements, respectively. The ARC rates are generally the same as the contribution rates determined in the actuarial valuation. For example, the Contribution rates recommended in the December 31, 2009 actuarial valuation report would generally determine the ARC for an employer's 2010 -2011 fiscal year. For at least the last six years the actual employer contributions that were made during the calendar year have been equal to the ARC. Exhibit I (page 63) of the December 31, 2009 Actuarial Valuation Report slows that the "percentage [of ARC] contributed" has been 100% for each of those years. If the phase -in were to be implemented, then the actual contributions shown for future years in this Exhibit (that include periods during which the phase -in is in effect) will end up being less than the ARC shown for those same periods. This will lead to a "percentage contributed" of less than 100% for each of those years, indicating that the plan's ARC accounting expense (based on GAS 25 and 27) is not being firlly funded each year. This has ramifications for the financial statements of those employers that tale part in the phase -in. Unless the Board were to change the underlying funding policy upon which the ARC is based, the difference between the ARC accounting expense and actual contributions would need to be reported under GAS 27 as a Net Pension Obligation (NPO) for that employer. The NPD goes on the employer's balance sheet and represents the accumulated total of any differences between the ARC and actual contributions. This can raise perception issues as to why the employer is no longer funding their full accounting expense for pensions even though, as discussed next, future contributions will make up for those shortfalls. Impact of phase -in on Employer Conti *ibution bates The top part of the attachment to this letter shows the increase in employer contribution rates in the December 31, 2009 actuarial valuation due to depooling. As noted earlier, we are only showing cost groups that experienced an increase in their contribution rate due to depooling. Section (A) shows the employer contribution rates that would be paid over the next few fiscal years if the phase -in is not implemented. Mote that, in order to highlight the effect of the phase - ill, these rates do not include the impact of the actuarial gains or losses that are expected to occur (i.e. they do not reflect any of the significant deferred investment losses that are yet to be recognized). Section (B) includes the rate reductions that would apply if the phase -in were to be implemented. Also shown is an illustration of the employer rates over the next few fiscal }Tears reflecting the phase -in. Here we note that these rates also do not (yet) reflect the "contribution losses" that will result from the phase -in. Under the phase -in, the plan is not receiving the full UAAL amortization payments. That means that the future UAAL will be larger than expected and so that actuarial loss will increase future UAAL contributions. 5110744v2/05337.013 Ms. Marilyn Leedom November 30, 2010 Page 3 Section (C) is shnilar to Section (B), but the impact of contribution losses that are specifically from the phase -in have also been reflected. Each of these contribution losses will be amortized over a period of 18 year's starting with the actuarial valuation that follows the contribution loss (i.e., following the year of the phased -in contribution), In summary, this illustrates that the incremental impact of depooling on each employer's ultimate contribution rate will be 7.84% higher than it would have been had the phase -in had not taken place. For example, for Date Group 7 (County Safety Tier A Enhanced) the effect of pooling (without phase -in) is a rate increasc of 3.19% of pay which would bring the employer rate to 52.42 %. with phase -in the employer's ultimate rate (ignoring other fixture gains and losses) would be 52,67 %, which is 0.25% of pay higher. Thus the depooling cost of 3.19% increases by 0.25% of pay, or 7.84% (0.25% / 3.19% = 7.84 %). In practice, the actual employer contribution rates will also reflect the impact of any other actuarial gains and losses that occur in future valuations, including the significant deferred investment losses that will be recognized in the next few valuations. As in all matters pertaining to the interpretation and application of the law, you should be guided by the advice of the plans legal counsel as to any legal considerations related to the phase -in issue. Please let us know if you have any questions. Sincerely, Paul .Angelo, FSA, EA, MAAA Senior Vice President and Actuary JZM/gxk Enclosure cc: Rick Koehler John Monroe, A.SA, EA. 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