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Home My WebLink About06.a.3) Update on financial matters (Fieldman, Rolapp; UAAL; and CCCERA64.3 Central Contra Costa Sanitary District August 15, 2013 TO: HONORABLE BOARD OF DIRECTORS FROM: THEA VASSALLO, FINANCE MANAGEq_6 VIA: CURT SWANSON, PROVISIONAL GENERAL MANAGER SUBJECT: UPDATE ON THE STATUS OF THE FOLLOWING FINANCIAL MATTERS: • FIELDMAN, ROLAPP & ASSOCIATES CONSULTING CONTRACT, • $5 MILLION UAAL PAYMENT, AND CCCERA 12 -31 -12 ACTUARIAL VALUATION The following is a summary of the requested information for the benefit of the newly appointed General Manager, Management, and the full Board. Fieldman, Rolapp & Associates — Pension Obligation Bonds (POBs) Analysis The idea of issuing POBs to offset some or all of the District's Unfunded Actuarial Accrued Liability (UAAL) was analyzed for approximately a one -year period (April 2012 — March 2013) by the last two General Managers, staff, and the Budget and Finance Committee. It was determined that issuance of POBs was not in the best interest of the District at this time due to various uncontrollable factors. Fieldman, Rolapp & Associates presented a final summary of its findings at the March 7, 2013 Board meeting. No further action was taken by the Board due to the various risk factors associated with POBs, the additional sewer service charge (SSC) rate increase required to cover the additional debt, and a desire to reserve the District's bonding capacity for funding of capital projects. On June 10, 2013, the District received Fieldman Rolapp's final report, "Update to Memorandum on Management of Pension Liabilities and Impact on District Cash Balances and Financing Capacity," which included corrections to its November 5, 2012 memorandum and the analysis model. The contract with Fieldman Rolapp has been completed and subsequently has been closed. Status of $5 Million Additional UAAL Payment An additional $5 million payment toward the UAAL is included in the Fiscal Year (FY) 2013 -14 Operations and Maintenance (O &M) Budget and is scheduled for payment in December 2013. In terms of the timing and impact on the UAAL balance, the only difference between making the $5 million prepayment in July as opposed to December is the amount of market gains or losses that may occur during this time. Payment in either month would show up in the 2013 valuation, and both would result in a UAAL retirement rate decrease for FY 2014 -15. If payment were delayed until June 2014, the District would miss any intervening market gains and losses, and the payment would not appear until the 2014 valuation. The District, however, would still have the same UAAL rate reduction starting in FY 2014 -15 since the District will receive immediate credit toward the UAAL balance. One of the primary reasons for making the additional UAAL payment in December this year is the amount of cash on hand in July. Current cash flow projections indicate the District will barely have enough funds available to cover its bills until receipt of the first installment of the SSC revenue from the County. The first installment is due by the third week of December 2013. It is prudent to make the additional $5 million pay -down after receiving the first installment in the event cash flow from July- December is higher than forecasted for the Funds Available. One reason for this year's cash flow shortfall is the size of the pension prepayment made each July. In the seven years prior to depooling and its associated assumption changes, the pension prepayment represented approximately 15 percent of total O &M expenses. This year, the prepayment check was nearly 21 percent of the entire year's O &M expenses. Meanwhile, the District's forecasting models have kept the Funds Required percentage at 32 percent of the next year's O &M expenses. To pay an additional $5 million in July would have represented over 27 percent of this year's O &M expenses. The District would have needed to borrow money or drastically change its spending and payment procedures in order to handle the additional payment any earlier. Another option would be to opt out of the retirement prepayment plan; however, this would not be fiscally prudent as the plan had a net savings to the District of almost $600,000 in FY 2012 -13. In order to make future UAAL payments in July, the Board would need to account for that payment with higher SSC rates the fiscal year prior to the payment, assuming the District continues with the "pay as you go" route and not short- term debt finance. That way, the cash is on hand at the beginning of the fiscal year in which the payment is to be made. On a positive note, the District is anticipating a further UAAL rate reduction starting in FY 2014 -15 due to the realization of positive investment gains in the past few years and removal of the large 2008 investment loss from the Contra Costa County Employees' Retirement Association's (CCCERA's) five -year investment smoothing return, assuming no investment losses or other unfavorable market performance during July- December 2013. CCCERA Actuarial Valuation Dated December 31, 2012 (Issued by Segal July 15, 2013) CCCERA's actuarial valuation and review as of December 31, 2012 values the District's assets at $184.2 million. The District's UAAL is valued at $142.5 million, which is an increase of $33.4 million over the prior year. The District's funded ratio is 56.4 percent. It is important to point out, however, that there are $157.0 million in total valuation net deferred gains due to five -year smoothing. The recognition of the $157.0 million in market gains is expected to have a positive impact on the future funded ratio and contribution rate requirements in the near future, assuming no future investment losses or other unfavorable experience. The net deferred gains of $157.0 million represent approximately 3 percent of the total market value of assets. The District's average employer contribution rate was 73.9 percent for 2012 and 58.4 percent for 2011, an increase of 15.5 percent. The average member contribution rate was 11.3 percent for 2012 and 10.0 percent for 2011, an increase of 1.3 percent. There are two new entries in the 2012 valuation that increased the District's UAAL — Actuarial Loss and Assumption Change: Actuarial Loss: The Actuarial Loss was $12.6 million. The majority of this amount, 70 percent, was due to the large market losses in 2008 that are still being recognized under CCCERA's five -year smoothing. The remaining 30 percent was due to District and employee contributions being $3.7 million below the estimated annual amount. The majority of employees did not receive their retroactive contract increases until calendar year 2013, which resulted in suppressed 2012 contributions. The retroactive pay and contributions will be reflected in the 2013 valuation. Assumption Change: The loss due to Assumption Change was $22.5 million and resulted from the triennial economic and experience studies. Segal estimates that over 70 percent of this amount is due to the assumed investment return rate being lowered from 7.75 percent to 7.25 percent. Since the value of assets is expected to grow more slowly and the benefit payouts will remain the same, the difference needs to be made up through increased contributions. This increase in the UAAL is for all the past contributions that were lower than they would have been under an assumed earnings rate of 7.25 percent. The remaining 30 percent of this figure is made up of other economic assumption changes, such as the lower inflation assumption, and demographic changes that are specific to District employees and retirees. See Exhibit 1 for additional summary and information of December 31, 2012 valuation. The Budget and Finance Committee will be discussing this information when it meets on August 12, 2013. Staff will be available at the Board meeting to respond to questions from Board Members. Attached Supporting Document., 1. Exhibit 1— Summary and information from CCCERA December 31, 2012 Actuarial Valuation Central Contra Costa Sanitary District CCCERA Summary of District's UAAL Date Initial UAAL Balance Years Pay Down UAAL Balance Years Pay Down Established Source Amount 12/31/2011 Remaining fm Inception 12/31/2012 Remaining Amount 12/31/2007 Beginning Balance 36,185,000 33,338,142 11 (2,846,858) 32,090,896 10 (1,247,246) 12/31/2008 Actuarial Loss 3,709,835 3,664,806 15 (45,029) 3,620,465 14 (44,341) 12/31/2009 Actuarial Loss 10,118,261 10,071,912 16 (46,349) 9,993,574 15 (78,338) 12/31/2009 Assumption Change 2,003,000 1,993,825 16 (9,175) 1,978,317 15 (15,508) 12/31/2009 Depooling 20,037,235 19,945,450 16 (91,785) 19,790,317 15 (155,133) 12/31/2010 Actuarial Loss 18,178,489 18,167,454 17 (11,035) 18,095,219 16 (72,235) 12/31/2010 Assumption Change 11,479,648 11,472,679 17 (6,969) 11,427,063 16 (45,616) 12/31/2011 Actuarial Loss 10,514,535 10,514,535 18 - 10,508,152 17 (6,383) 112, 226,003 109,168,803 107, 504,003 12/31/2012 Actuarial Loss 12,564,241 - - - 12,564,241 18 - 12/31/2012 Assumption Change 22,455,342 - - - 22,455,342 18 - 35,019,583 35,019,583 109,168,803 (3,057,200) 142,523,586 (1,664,800) 147,245,586 + $33.4M CCCERA Summary of District's (Employer) Contribution Rates Normal % of Payroll Tier Costs + UAAL = Total Change Hired before 1 -1 -11 Hired after 1 -1 -11 & before 1 -1 -13 Hired on or after 1 -1 -13 (PEPRA) 21.53% 53.83% 75.36% - 19.22% 53.83% 73.05% -2.31% 10.92% 53.02% 63.94% -9.11% General 2012 CCCERA Plan and Member Data Valuation Value of Assets UAAL Funded Ratio 2012 X5.482.257.062 $2,279.058.473 70.64% 5 -Year Avg 10 -Year Avg Exhibit 1 Returns Members Market Actuarial Valuation Active Vested Pensioners* Total 13.31% 2.25% 2.24% 8,640 2,288 8,517 19,445 2.60% 2.36% 2.34% * Includes Pensioners, Disableds, and Beneficiaries. 6.74% 4.24% 4.59%