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HomeMy WebLinkAbout04.c. Review drafts to adopt two new Board Policies: BP 041, Pension Funding and BP 042, OPEB Funding Page 1 of 15 Item 4.c. CENTRAL SAN BOARD OF DIRECTORS POSITION PAPER DRAFT MEETING DATE: SEPTEMBER 8, 2020 SUBJECT: REVIEW DRAFT POSITION PAPER TO ADOPT THE FOLLOWING NEW BOARD POLICY NOS.: 1) BP 041 - PENSION FUNDING; AND 2) BP 042 - OTHER POST-EMPLOYMENT BENEFITS (OPEB) FUNDING SUBMITTED BY: INITIATING DEPARTMENT: KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION-FINANCE PHILIP LEIBER, DIRECTOR OF FINANCEAND ADMINISTRATION REVIEWED BY: ROGER S. BAILEY, GENERAL MANAGER ISSUE On November 4, 2019, staff presented at a Board workshop a conceptual presentation for a Pension Funding Policy. This concept was again discussed at the March 12, 2020 Financial Planning workshop. A pension funding policy based on that and additional work is presented for potential adoption at this time. Similarly, a funding policy is proposed for other post-employment benefits (OPEB). BACKGROUND The Board has for many years focused on the responsible management and funding of employee-related liabilities including pension and OPEB. This is in keeping with the Board's strategic goal to ensure the long-term financial stability of Central San. In 2009, Central San established an OPEB Trust and, in 2017, established a Pension Prefunding Trust to facilitate additional funding of these obligations. Balances of these Trusts were $69.7 million and $10.3 million, respectively, as of June 30, 2020. General provisions for the addition and withdrawal of funds to and from these Trusts are specified in Central San's Board Policy No. BP 017 - Fiscal Reserves. In an effort to improve the funded status of the pension and OPEB plans, an additional $27.9 million of contributions above the required amounts were made directly to the Contra Costa County Employees' Retirement Association (CCCERA) and to the Trusts. These actions, along with continued focus on ensuring responsible management of these liabilities, have delivered results: • PENSION: Since 2012, the unfunded actuarial accrued liability (UAAL)for pension has been reduced from $142.5 million (56.4% funded) to $74.0 million (82.1% funded) as of the most recent September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 51 of 105 Page 2 of 15 valuation on December 31, 2018. With consideration of the $10.3 million in funds from the Pension Prefunding Trust, the liability would be further reduced to $63.7 million (approximately about 85% funded). • OPEB: Since 2012, the UAAL for OPEB obligations has been reduced from $75.8 million to $11.9 million as of the most recent actuarial report on June 30, 2019, representing about 90%funding based on the current level of assets and the June 30, 2019 liability. Through these efforts, the normal amortization of UAAL, and generally favorable market returns over the past decade, the present funded status of pension and OPEB obligations is very good, though still short of full funding. To ensure continued progress from the current favorable position to fully funded status, consideration of additional policy commitments is worthwhile. The adoption of pension and OPEB funding policies can help ensure this progress continues. National organizations representing the nation's governors, state legislatures, local officials and public finance professionals formed a Pension Funding Task Force and released "Pension Funding:A Guide For Elected Officials" in March 2013, which recommends state and local governments adopt pension funding policies based on the following five general policy objectives: Recommendation Central San CCCERA's normal contribution is based on an Actuarially Determined Contribution (ADC), and the Have a pension funding contribution toward UAAL is also determined to pay policy that is based on an down the liability in a manageable and specified period. 1 actuarially determined contribution. OPEB contribution is based on an ADC, based on a biennial actuarial valuation. The ADC will include both the Normal Cost for current service as well as amortization of the UAAL. The present pension and OPEB practices are Build funding discipline into disciplined in that they require normal cost contribution the policy to ensure that and provide for amortization of unfunded liabilities. 2 promised benefits can be However, the adoption of pension and OPEB funding paid. policies will strengthen this, and for pension it will provide for a matrix of additional annual funding amounts based on funded status. For pension obligations, CCCERA's practice is that intergenerational each annual UAAL layer is recovered over an 18-year Maintain equity that the cost of period. The adoption of the recommended pension employee benefits is paid funding policy would accelerate this by directing 3 additional available funds toward either CCCERA or by the generation of the Pension Prefunding Trust. For OPEB obligations, taxpayers who receives the practice is to amortize UAAL over 16 years. services. These practices balance annual payment stability with intergenerational equity. Both pension and OPEB obligations are met through relatively stable ongoing contributions based on actuarial requirements. Adjustments to contribution rates are based on actuarial requirements based on funding levels and changes in assumptions. 4 Contribute as a stable percentage of payroll. The additional contributions which are recommended September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 52 of 105 Page 3 of 15 per the proposed pension funding policy are intended to also provide for relatively stable contributions over time, while closing the funding gap in a disciplined manner. Require clear reporting to The Central San quarterly financial report shows a show how and when projection of when the pension obligations will be fully 5 pension plans will be fully funded. Similar analysis will be provided on an annual funded. basis in consideration of the proposed budget and fiscal-year closeout. The proposed pension and OPEB funding policies, Attachments 1 and 2 respectively, were developed by Central San staff with consideration of: 1. A review of pension funding policies at other California cities and special districts. This review resulted in the addition of language regarding terminology, goals, transparency and reporting. 2. Input provided by Central San's pension and OPEB consultants, including: (1) PARS, the administrator for the Pension Prefunding and OPEB Trusts; (2) HighMark Capital Management, the investment managers of the trusts; and (3) Bartel Associates (Bartel), Central San's independent actuarial advisor for pension and OPEB matters. 3. Central San Board discussion at the November 2019 and March 2020 workshops regarding the core of the pension funding proposal, which is the matrix that specifies recommended funding actions based on the funded ratio of the pension program. With respect to the matrix recommending funding actions for the pension obligations (below), one change that has been made since this was presented to the Board at the workshops is a modification to column 4 below which indicated the targeted years to close the funding gap. Staff modified this to move from a specified number of years to a formula. The new formula provides similar results, with the following enhancements: 1. The breakpoints for the funding ratio row(Column 1) could have resulted in some significant stair- step results; for example, moving from 79% funded to 80% funded would move the targeted time to close the gap from 10 years to 7 years. The new formula-based approach eliminates this issue, resulting in a more linear approach. 2. The years indicated in the previous matrix (10,7,4,2)were a bit less aggressive than the status quo modelling performed by Bartel as to when the existing UAAL would likely be paid off under the current 18-year per layer amortization approach by CCCERA. Using the formulas instead, the modeling shows a slightly more aggressive payoff. While the policy is not intended to be overly aggressive, it is the intent to close the gap at least somewhat more rapidly than in the absence of a policy, at least in some circumstances. Bartel indicates that considering market value, in addition to actuarial value, would also provide for a reduced time period to close the gap. Accordingly, appropriate language has been included in the policy such that calculations would be provided to the Board for consideration using both the actuarial and market value; the Board could elect to make the contributions based on market value as a more aggressive measure to close the funding gap sooner. The following extract of the matrix illustrates the change. As the rightmost column indicates, the targeted time is close to what was shown before. In the instance if the funded ratio fell significantly below 80%, a targeted goal not to exceed 15 years was added to represent a boundary for the formula. September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 53 of 105 Page 4 of 15 (1) (4) (4) Pension Funding Time to Achieve to Time to Restore to Targeted time for Ratio (CCCERA 100% in years 100% in years new Proposal at and Trust) [PREVIOUS specified Funded MATRIX] [AS REVISED] Ratio Less than 80% (100% -Funded 60%: 15 years 10 years ratio)/2 70%: 15 years 75%: 12.5 years (not to exceed 15) 80%: 10 years Between 80-90% (100% - Funded 80%: 10 years 7 years ratio)/2 85%: 7.5 years 90%: 5 years Between 90-95% (100% - Funded 90%: 5 years 4 years ratio)/2 92%. 4 years 95%: 2.5 years Between 95-100% 2 years (100% - Funded 95%: 2.5 years ratio)/2 98%: 1 year Greater than N/A N/A N/A 100% Central San discussed this matrix with Bartel Associates, who provided analysis regarding the policy under varying future pension return scenarios. Under an "Expected" scenario, of CCCERA returns of 7%, the policy would not result in additional UAAL payments above the CCCERA required amortization over 18 years. So, the current trajectory, where the UAAL is paid off by about 2025-2026 would happen without any additional requirements proposed by the matrix above. Under a more stressed "poor investment return" scenario, where future returns are assumed to match historic returns (with year-to-year volatility) less 2%, Bartel's analysis showed that the matrix above would indicate that additional contributions should be made to close the funding gap in less than 18 years. Based on that, the matrix above appears to offer a reasonably targeted approach towards closing the pension funding gap in a more rapid manner than would be required under the CCCERA approach of amortizing new UAAL layers over 18 years, in circumstances where it may be appropriate. ALTERNATIVES/CONSIDERATIONS The Board could decline adoption of the proposed pension and OPEB funding policies and instead address employee-related liabilities as needed, without a policy framework in place. Alternatively, modifications could be made to the proposed funding policies relating to: 1. For Pension: the period over which funding gaps are to be closed (for example, more rapid targeted closing of the funding gap); 2. For Pension: Basing the recommended Additional Discretionary Payment on market value of assets rather than actuarial value. As drafted, the policies indicate both approaches will be calculated and presented; 3. For Pension: Whether funding gaps should trigger rate adjustments or be covered with "as available" funds (proposed); and September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 54 of 105 Page 5 of 15 4. For OPEB: The proposed pension funding policy focuses on steps that will be taken when pension obligations are less than fully funded. The OPEB funding policy also specifies that the goal for OPEB obligations is also "full funding," but does not specify thresholds by which funding actions would be taken. Adding a matrix to the OPEB funding policy to specify the timeframe to close the funding gap would be an alternative, but is not viewed as essential at this time. Staff recommends potential consideration of this at a later date. FINANCIAL IMPACTS As drafted, the policies would: 1. Specify the principles Central San recognizes in responsible management and reporting of pension and OPEB liabilities. 2. Specify the annual funding requirements for pension and OPEB obligations that cover normal costs and required amortization of UAAL. 3. Strengthen the continuing commitment for responsible management of pension liabilities by providing a matrix of additional funding goals when the pension funded status falls below specified thresholds. 4. Specify ongoing reporting requirements to provide transparency for pension and OPEB funding status. As drafted, the policies would not: 1. Require specific rate adjustments to be implemented to provide funding for the pension obligations if funded status is below the targeted 100% level. Instead, the policy includes a matrix that provides some flexibility by specifying that the funding gap will be targeted to be closed over a specified number of years based on budgeted contributions and available year-end variance funding. The mix between budgeted contributions and available variance funding would be at the discretion of the Board annually. 2. Specify actions to be taken with regard to OPEB funding levels beyond the actuarially required levels for normal contributions and amortization of UAAL over 16 years. This is not viewed as necessary at this time, given the relatively favorable OPEB funding levels compared to peer entities, and the significant progress that has been made toward full funding. COMMITTEE RECOMMENDATION On September 8, 2020, the Administration Committee reviewed both proposed new policies and recommended RECOMMENDED BOARD ACTION Adopt new Board Policy Nos. BP 040 - Pension Funding and BP 041 - Other Post-Employment Benefits (OPEB) Funding, effective immediately. Strategic Plan re-In GOAL THREE:Fiscal Responsibility Strategy 1—Maintain financial stability and sustainability, Strategy 2—Ensure integrity and transparency in financial management September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 55 of 105 Page 6 of 15 ATTACHMENTS: 1. Proposed BP 041 - Pension Funding 2. Proposed BP 042 - OPEB Funding September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 56 of 105 Page 7 of 15 ATTACHMENT 1 Number: BP 041 DRAFT Authority: Board of Directors Adopted: -- Revised: Reviewed: CENTRALSAN Initiating Dept./Div.: Administration/Finance BOARD POLICY PENSION FUNDING OBJECTIVE Central San's primary financial objective is to maintain long-term fiscal stability. Properly monitoring, managing, and funding the District's defined benefit pension obligations is critical to achieving this objective. PURPOSE This policy documents the method the District will use to determine its actuarially determined contributions to fund the long-term cost of benefits to the plan participants and annuitants. The policy also: • Provides guidance in making annual budget decisions; • Demonstrates prudent financial management practices; • Reassures bond rating agencies; and • Discloses to employees and the public how pensions will be funded. Nothing in this policy shall constitute an obligation upon the District, nor an implied contract. The Board of Directors may revoke or amend this policy in the best interests of the District. BACKGROUND Central San provides defined benefit retirement benefits through the Contra Costa County Employees' Retirement Association (CCCERA). CCCERA is a multiple- employer public employee defined benefit pension plan. All full-time District employees are eligible to participate in CCCERA. CCCERA provides retirement and disability benefits, annual cost of living adjustments and death benefits to plan members and their beneficiaries. CCCERA acts as a common investment and administrative agent for participating public entities within the County. Benefit provisions are determined by participating agency policy, CCCERA policy, state statute, and Court decisions. September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 57 of 105 Page 8 of 15 Number: BP 041 PENSION FUNDING Page 2 of 5 The financial objective of a defined benefit pension plan is to fund the long-term cost of benefits provided to the plan participants. In order to assure that the plan is financially sustainable, the plan should accumulate adequate resources in a systematic and disciplined manner over the active service life of benefitting employees. This policy outlines the method the District will utilize to determine its actuarially determined contributions to fund the long-term cost of benefits to the plan participants and annuitants and, in addition, provides a framework for additional contributions to be made to (1) CCCERA or (2) the Secondary Pension Trust to meet the goal of having a fully funded pension. The Secondary Pension Trust, also referred to internally as the "Pension Prefunding Trust," is an irrevocable IRC Section 115 Pension Trust and serves as a supplemental trust to help address pension unfunded actuarial accrued liabilities (UAAL) and acts as a hedge against unforeseen volatility in Normal Cost and UAAL pension contribution requirements. As the name implies, this is a "secondary" pension trust, with the CCCERA-administered plan being the primary trust. Any contributions to the Secondary Pension Trust do not result in GASB accounting basis reductions to the District's funded plan status, despite there being other important benefits as described previously. The District also maintains a trust for the accumulation of assets for Other Post-Employment Benefits, known as the OPEB Trust. Pension Funding: A Guide for Elected Officials, issued by eleven national groups including the U.S. Conference of Mayors, the International City/County Management Association, and the Government Finance Officers Association, established the following five general policy objectives for a pension funding policy: • Actuarially Determined Contributions. A pension funding plan should be based upon an actuarially determined contribution (ADC) that incorporates both the cost of benefits in the current year and the amortization of the plan's UAAL. • Funding Discipline. A commitment to make timely, actuarially determined contributions to the retirement system is needed to ensure that sufficient assets are available for all current and future retirees. • Intergenerational equity. Annual contributions should be reasonably related to the expected and actual cost of each year of service so that the cost of employee benefits is paid by the generation of taxpayers who receives services from those employees. • Contributions as a stable percentage of payroll. Contributions should be managed so that employer costs remain relatively consistent as a percentage of payroll over time. • Accountability and transparency. Clear reporting of pension funding should include an assessment of whether, how, and when the plan sponsor will ensure sufficient assets are available for all current and future retirees. September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 58 of 105 Page 9 of 15 Number: BP 041 PENSION FUNDING Page 3 of 5 POLICY This policy is based on the five general principals noted above, as well as the following principles: • It is both appropriate and responsible to pay the cost of current utility operations in the period such costs are incurred, rather than defer those costs to future periods. • Annual contributions toward defined contribution benefit plans should be made to ensure that the funded ratio is targeted at and maintained as close to 100% as is reasonably practicable. • When defined benefit plan funded ratios are below 100%, efforts should be taken to ensure the funded ratios are restored to 100% as soon as is practicable given other reasonable rate making constraints. The amount of funding to be provided to meet the fully-funded pension goal as noted above is based on two components: A. Actuarially Determined Contributions (ADC) CCCERA actuaries will determine Central San's ADC to CCCERA based on annual actuarial valuations. The ADC will include the normal cost for current service and amortization of any under-funded amount, in accordance with CCCERA's UAAL amortization policies (currently allocated over 18 years). The normal cost will be calculated using the entry age normal cost method using economic and non-economic assumptions approved by the CCCERA Board. Central San will review the CCCERA annual actuarial valuations to validate the completeness and accuracy of the member census data and the reasonableness of the actuarial assumptions. B. Additional Discretionary Payment (ADP) Contributions Central San will consider making ADP contributions with either budgeted or other one-time resources, with the objectives of increasing the plan's funded status, by reducing the UAAL, and reducing ongoing pension costs through two potential funding sources: • Normal Budgeted Contributions - A budgeted contribution, above the required amount of the ADC, may be made, in an amount guided by the Table below. An additional budgeted contribution toward either pension or OPEB obligations has been included in the Central San annual budget for several years. The additional budgeted contribution can be specified in the budget process as earmarked for either pension or OPEB obligations, or to be determined by the Board of Directors during the fiscal year. September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 59 of 105 Page 10 of 15 Number: BP 041 PENSION FUNDING Page 4 of 5 • Budgetary Surplus or Nonrecurring Revenues - The second component is a potential contribution of one-time monies that may or may not be available at each year end. The actual dollar amount of available one-time funds will be presented to the Board of Directors with a recommendation as to how much shall be contributed to either CCCERA or the Pension Prefunding Trust. This recommendation will be based on the dollars available, other competing priorities, and input from the Board of Directors. With respect to operation of the ADP contributions, the following guidance shall apply, where the bracketed number refers to the columns in the table that follows: In the context of the CCCERA amortization of new annual UAAL layers over 18 years, while the pension is f 1 1 funded, the District f 2 1 through f 3 1, target bringing the funded ratio to 100% over not less than a f 4 1-year period, through contributions to f 5 1. (1) (� (3) (4) (5) Pension Funding Funding Funding Source Time to Restore to Contributions Ratio(CCCERA and Language 100%in Years to Trust) Less than 80% Shall budgeted (100% - Funded CCCERA contributions and ratio)/2 funding from (and not to available year- exceed 15 end variances years). Between 80-90% Shall budgeted (100% -Funded CCCERA or contributions and ratio)/2 Trust funding from available year- end variances Between 90-95% Shall budgeted (100% -Funded Trust contributions and ratio)/2 funding from available year- end variances r Between 95- May available funding (100% -Funded Trust 100% from year-end ratio)/2 variances i Greater than May available funding N/A Trust 100% from year-end variances For purposes of this policy, the term "funded ratio" refers to the level of the pension plan assets, at actuarial value, in proportion to the pension plan's accrued liability. This is an annual point-in-time measurement, as of the valuation date. Concurrently with the September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 60 of 105 Page 11 of 15 Number: BP 041 PENSION FUNDING Page 5 of 5 calculation of the recommended ADP contribution as informed by the above table, Central San will also calculate an alternative plan to close the funding gap in potentially a shorter period of time, by looking at the market value of plan assets in lieu of the actuarial value. As to the timing of any additional contributions toward CCCERA and the Pension Prefunding Trust as specified in the table above, a recommendation shall be provided by staff as to whether the contribution should be made in a single contribution or allocated over a reasonable period, such as the balance of the fiscal year. TRANSPARENCY AND REPORTING Funding and funded status of Central San's pension plan should be transparent to interested parties, including plan participants, annuitants, the Board of Directors, and the District's customers. In order to achieve this transparency, the following information shall be available: • Copies of the annual actuarial valuations for Central San's pension plan shall be made available to the Board of Directors. • Central San's independently audited Comprehensive Annual Financial Report shall be published on its website. This report includes information on the District's annual contributions to CCCERA and the Pension Prefunding Trust and OPEB Trust and the funded status of the pension plan. • Central San's annual operating budget shall include the District's required contributions to CCCERA, and any additional budgeted contributions available to be made toward the Pension Prefunding Trust or OPEB Trust. • Central San shall periodically, but no less than annually, report to the Board of Directors on the long-term UAAL trend showing progress toward fully-funded status. REVIEW OF POLICY Central San will monitor changes to and expansions of pension funding best practices, as well as any additional guidance provided by the Government Finance Officers Association that relate to the funding of defined benefit pension plans. Additionally, funding a defined benefit pension plan requires a long-term horizon. In light of these factors, the Board of Directors will review this policy at least every two years to determine if changes are needed to ensure adequate resources are being accumulated. [Original Retained by the Secretary of the District] September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 61 of 105 Page 12 of 15 ATTACHMENT 2 Number: BP 042 D RAF" Authority: Board of Directors Adopted: _- Revised: Reviewed: CENTRALSAN Initiating Dept./Div.: Administration/Finance BOARD POLICY OTHER POST-EMPLOYMENT BENEFITS (OPEB) FUNDING OBJECTIVE Central San's primary financial objective is to maintain long-term fiscal stability. Properly monitoring, managing, and funding the District's Other Post-Employment Benefits (OPEB) obligations, commonly known as retiree medical benefits, is important to achieving this objective. PURPOSE The purpose of this policy is to establish practices that promote transparency, ensure appropriate funding, and communicate the investment philosophy for managing Central San's OPEB defined benefit plan. Nothing in this policy shall constitute an irrevocable obligation of the District, or an implied contract. The Board of Directors may revoke or amend this policy in the best interests of the District. Funding of the OPEB Trust does not change the District's intent to fully pay annual medical costs for retirees. BACKGROUND Central San has provided a retiree health benefit to its employees for many years. Over time, this benefit was modified through the establishment of benefit Tiers, which are specified in Memoranda of Understanding with each relevant bargaining unit. In an effort to address the long-term costs of this expense, a trust was created to begin funding this benefit in 2009 (OPEB Trust). The practice in place prior to adoption of this policy was to fund all actual retiree OPEB premium expenses incurred in the current year on a pay-as-you-go basis and make additional contributions to the trust fund to the extent pay-as-you-go retiree OPEB premium costs fall short of the Actuarially Determined Contribution ("ADC"). The ADC, calculated by an independent actuary, is comprised of two cost components as follows: • Normal Cost- Central San incurs an annual OPEB retirement cost for current employees. The ongoing service cost for retiree medical benefits earned by current employees during the current year is referred to as the "Normal Cost." In September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 62 of 105 Page 13 of 15 Number: BP 042 OPEB FUNDING Page 2 of 4 order to keep the District's OPEB obligations current, the Normal Cost for service will be paid for on an annual basis and included as part of the overall District budget. Payment of these funds will be made to the OPEB Trust. The Normal Cost will be calculated using the entry age normal cost method using appropriate economic and non-economic assumptions approved by the District. • Unfunded Actuarial Accrued Liability(URAL) - The actuarial valuation calculates a UAAL as of the valuation date. The UAAL represents the difference between OPEB assets available in the trust fund and the OPEB liability related to prior employment service for former and existing employees. The UAAL (or funding shortfall) is amortized as a level dollar amount over a closed period (16 years as of July 1, 2019), and is also paid annually along with the normal cost into the OPEB Trust. The UAAL can be adversely (or positively) impacted when assumptions used in the actuarial valuations vary from actual results. Significant assumptions used in the latest actuarial report dated July 1, 2018 include: o Discount rate (or assumed annual investment earnings rate) - 5.75% o General Inflation - 2.75% annually o Health care cost increases - Ranging from 7.5% (6.5% for Medicare plans) in FY 2019-20 to 4.0% in FY 2075-76 POLICY A. Actuary Central San will engage a qualified and independent OPEB actuary to determine the District's ADC based on biennial actuarial valuations. This is referred to as the "Funding Actuarial Report", which determines the amount of funding necessary based on approved actuarial assumptions (i.e. discount rate, inflation, wages, etc.), amortization periods, plan benefits, and the OPEB Trust's target yield. The ADC will include both the Normal Cost for current service as well as amortization of the UAAL. In contrast, the "GASB 75 Reporting Actuarial Report," required by generally accepted accounting principles, provides the amount of net OPEB liability (or asset) to be reported in the District's Comprehensive Annual Financial Report (CAFR), which may differ from the Funding Actuarial Report due to methodology and timing differences. Central San will review the actuarial valuations to validate the completeness and accuracy of the employee census data and the reasonableness of the actuarial assumptions. Actuarial valuations involve estimates and assumptions about the probability of occurrence of events far into the future. Actuarially determined amounts are subject to continual revision as actual results are compared to past expectations and new estimates are made about the future. September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 63 of 105 Page 14 of 15 Number: BP 042 OPEB FUNDING Page 3 of 4 B. Funding Level Target and Contribution Amounts Central San intends to achieve full funding (100% funded level) of its OPEB plan by making increasing contributions to the OPEB Trust, to the extent feasible, in the context of other competing demands, including the District's financial plans, rate stability, aging infrastructure and various inflationary cost pressures. Each fiscal year, between the cost of retiree OPEB premiums and additional contributions to the Trust, Central San shall contribute no less than the ADC as determined by an independent actuary and reported in the Funding Actuarial Report. Additional contributions beyond the ADC shall be made to the extent resources are available in the District's operating budget and/or from unexpected non-recurring monies from year-end favorable budgetary variances. Accordingly, the following summarizes the funding sources: • Operating budget appropriations equal to the ADC, including the cost of OPEB plan premiums, as well as additional contributions to the trust. • Additional contributions to the Trust included in Central San's Operations and Maintenance (O&M) budget. • Additional contributions to the Trust from year-end favorable budget variances or other non-recurring revenue sources. The actual dollar amount of available one-time funds from year-end favorable budget variances or other non-recurring revenue sources will be presented to Board of Directors with a recommendation as to how much is being recommended for contribution to the OPEB Trust. This recommendation will be based on the dollars available, other competing priorities, and input from the Board of Directors. C. Reimbursements from the Trust Central San plans to continue to fund the full cost of retiree medical benefits from its O&M budget until such a time as those expenses exceed the District's ADC. At that time, the District is eligible to reimburse the excess payments through withdrawals from the OPEB Trust, as the minimum ADC contribution was met. For budgetary reporting, any OPEB costs, whether in the form of contributions to the Trust or retiree OPEB premium payments, in excess of the ADC that are not reimbursed shall be reported as "additional contributions" toward any outstanding UAAL. Accordingly, as these additional contributions help in achieving the District's objective of full funding, OPEB costs in excess of the ADC shall not be reimbursed until the District has achieved a funding rate of at least 90%. September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 64 of 105 Page 15 of 15 Number: BP 042 OPEB FUNDING Page 4 of 4 D. Timing of Contributions The amount of any additional contributions to the OPEB Trust beyond the cost of retiree OPEB plan premiums approved by the Board of Directors shall be considered, with a recommendation by staff as to whether the contribution should be made on a lump-sum basis or allocated over a reasonable period such as the balance of the fiscal year. TRANSPARENCY AND REPORTING Funding of Central San's OPEB defined benefit plan should be transparent to interested parties, including plan participants, annuitants, the Board of Directors, and the District's customers. In order to achieve this transparency, the following information shall be available: • Copies of the biennial actuarial valuations for the District's OPEB plan shall be made available to the Board of Directors. • Central San's independently audited CAFR shall be published on its website. This report includes information on the District's annual contributions to the OPEB Trust and the funded status of the OPEB plan. • Central San's annual operating budget shall include the OPEB plan ADC as well as any additional budgeted contributions available to be made toward the Pension Prefunding Trust or OPEB Trust at the discretion of the Board of Directors. • Central San shall periodically, but no less than biennially, report to the Board of Directors on the long-term UAAL trend showing progress toward fully-funded status. REVIEW OF POLICY Funding a defined benefit OPEB plan requires a long-term horizon. As such, the Board of Directors will review this policy at least every two years to determine if changes are needed to ensure adequate resources are being accumulated. [Original Retained by the Secretary of the District] September 8, 2020 Special ADMIN Committee Meeting Agenda Packet- Page 65 of 105