HomeMy WebLinkAbout06. Adopt two new Board Policies: BP 041 - Pension Funding, and BP 042 - OPEB Funding Page 1 of 20
Item 6.
CENTRAL SAN BOARD OF DIRECTORS
POSITION PAPER
MEETING DATE: SEPTEMBER 18, 2020
SUBJECT: ADOPT TWO NEW BOARD POLICIES (BP)AS FOLLOWS:
• BP 041 - PENSION FUNDING; AND
• BP 042 - OTHER POST-EMPLOYMENT BENEFITS (OPEB) FUNDING
SUBMITTED BY: INITIATING DEPARTMENT:
KEVIN MIZUNO, FINANCE MANAGER ADMINISTRATION-FINANCE
PHILIP LEIBER, DIRECTOR OF FINANCE AND
ADMINISTRATION
REVIEWED BY: ROGER BAILEY, GENERAL MANAGER
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.
I n 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.
September 18, 2020 Special Board Meeting Agenda Packet- Page 70 of 154
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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(URAL)for pension has been
reduced from $142.5 million (56.4% funded)to $74.0 million (82.1%funded) as of the most recent
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 84.6%
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
Maintain intergenerational each annual UAAL layer is recovered over an 18-year
equity so 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
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.
September 18, 2020 Special Board Meeting Agenda Packet- Page 71 of 154
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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
4 Contribute as a stable funding levels and changes in assumptions.
percentage of payroll.
The additional contributions which are recommended
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
belowwhich 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.
September 18, 2020 Special Board Meeting Agenda Packet- Page 72 of 154
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The following extract of the matrix illustrates the change. As the rightmost column indicates, the targeted
time is close to what was shown before. I n 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.
(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% t _L
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);
September 18, 2020 Special Board Meeting Agenda Packet- Page 73 of 154
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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
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. I nstead, 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 Board approval.
RECOMMENDED BOARD ACTION
Adopt new Board Policy Nos. BP 040 - Pension Funding and BP 041 - Other Post-Employment
Benefits (OPEB) Funding, effective immediately.
September 18, 2020 Special Board Meeting Agenda Packet- Page 74 of 154
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Strategic Plan re-In
GOAL THREE: Fiscal Responsibility
Strategy 1—Maintain financial stability and sustainability, Strategy 2—Ensure integrity and transparency in financial
management
ATTACHMENTS:
1. Proposed BP 041 - Pension Funding
2. Proposed BP 042 - OPEB Funding
3. Presentation
September 18, 2020 Special Board Meeting Agenda Packet- Page 75 of 154
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ATTACHMENT 1
Number: BP 041
DRAFT
Authority: Board of Directors
Adopted: mzl4k
Revised: ' CENTRALSAN
Reviewed:
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 18, 2020 Special Board Meeting Agenda Packet- Page 76 of 154
Page 8 of 20
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 18, 2020 Special Board Meeting Agenda Packet- Page 77 of 154
Page 9 of 20
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°/x, 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 18, 2020 Special Board Meeting Agenda Packet- Page 78 of 154
Page 10 of 20
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 ] through f 3 1, target bringing the funded
ratio to 100% over not less than a f 4 -year period, through
contributions to f 5 1.
(1) (2) (3) 1(4) (5)
Pension Funding Funding Funding SourceTime to Restore to Contributions
Ratio(CCCERA and Language 00%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
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 18, 2020 Special Board Meeting Agenda Packet- Page 79 of 154
Page 11 of 20
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]
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ATTACHMENT 2
Number: BP 042
DRAFT
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
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Page 13 of 20
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(UAAL) - 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 18, 2020 Special Board Meeting Agenda Packet- Page 82 of 154
Page 14 of 20
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 18, 2020 Special Board Meeting Agenda Packet- Page 83 of 154
Page 15 of 20
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 18, 2020 Special Board Meeting Agenda Packet- Page 84 of 154
Page 16 of 20
ATTACHMENT 3
ADOPT PENSION AND OPEB
FUNDING POLICIES BP 041 , BP 042
3 PHILIP R. LUBER
DIRECTOR OF FINANCE&ADMINISTRATION
SEPTEMBER 18,2020
1
BACKGROUND:
PENSION AND OPEB LIABILITY AND FUNDING STATUS
Pension OPEB
Million Million
$160 100% $90 100%
$140 90% $80 90%
$120
80% $70 80%
' /
70% $60 70%
$100 60% $50
$80 50% $30 60%
50%
$40 —
$60 40%3 40%
30%0%
0%0%
$40 2 $20 2
$20 $10 2' 20 10%
$Q $0 1 2013 2014 2015 2016 201] 018 0%
2012 2013 2014 2015 2016 0%201) 2018 2019 1
UAAL 2082 )5.8 )02 68 55.8 54 48.8 13.7 119
UPAL 142 121 Ol .285%]3.9
�F-d— 56% 63% ]0% 85% 8.5 4.1
22%8% el% 82% nEeE% 32% 3]% 56% 9096
iiiiiiUAAL —Funded% iiiiiiiUAAL —Funded%
Notes:
* Pension:2018 figure is based on CCCERA valuation presented 10/9/2019 to CCCERA Board.2019 Valuation available fall 2020.
*`Pension funded percentage excludes Section 115 Trust Assets(established in FV 2017-18).$10.3 million of Trust assets as of 6/30/20.
* OPEB UAAL:Total OPEB Liability less Fiduciary Net Position=Net OPEB Liability.
*lune 2020 OPEB Funded%is based on 6/30/2020 value of assets divided by 6/30/2019 Total OPEB liability,pending availability of 6/30/20 Liability.
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September 18, 2020 Special Board Meeting Agenda Packet- Page 85 of 154
Page 17 of 20
CONSIDERATIONS IN POLICY DEVELOPMENT
1 . Principle: Employee related liabilities
should be "Fully Funded"
But details are important
a. How quickly should any gap be closed?
Faster than CCCERA requires?
b. Practice of "additional contributions."
What should govern these?
Funding Matrix based on
Funded Ratio of Pension Plan
What else should be covered in policy?
= 12
3
POLICY DEVELOPMENT INVOLVED:
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.
A review of pension funding policies at other
agencies. Added language regarding
terminology, goals, transparency and reporting.
Input provided by Central San's pension and
OPEB consultants, including: PARS/HighMark
Capital Management and Bartel Associates
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September 18, 2020 Special Board Meeting Agenda Packet- Page 86 of 154
Page 18 of 20
OVERVIEW OF PROPOSED BP 041 , 042
Pension Funding Policy F OPEB Funding Policy
1. Objective/Purpose 1. Objective/Purpose
2. Background 2. Background
a.CCCERA,Trust a. OPEB Trust
b. Five general objectives: b.ADC Consists of Normal Cost
•Actuarially Determined Contributions. and UAAL Payments
Funding Discipline. 3. Funding Policy:
•Intergenerational equity. a.Actuarially Determined
•Contributions as%ofpayroll. Contributions(ADC): Normal cost
•Accountability and transparency and UAAL
3. Funding Policy: b.Additional Discretionary
a.Actuarially Determined Payments
Contributions(ADC): Normal c. Reimbursements from Trust
cost and UAAL (when full cost of retiree benefits
>ADC)
b.Additional Discretionary d.Timing(lump sum or spread)
Payments. Matrix.
r. Transparency and Reporting 4. Transparency and Reporting
zy I4
% =Now5
PENSION FUNDING POLICY-MATRIX CHANGES
'�.MM
Pension Funding Time to Restore to Targetedtimefor
Ratio(CCCERA and 0000Proposal
[PREVIOUS
MATRIX] [AS REVISED] Ratio
Less than 80% (100%-Funded ratio)/ 60%:15 years
10 years 2 70%:15 years
75%:12.5 years
(not to exceed 15) 80%:10 years
Between 80-90% (100%-Funded ratio) 80%:10 years
7 years /2 85%:7.5 years
90%:5 years
Between 90-95% (100%-Funded ratio) 90%:5 years
4 years /2 92%:4 years
95%:2.5 years
Between 95-100% 2 years (100%-Funded ratio) 95%:2.5 years
/2 98%:1 year
Greater than N/A N/A N/A
h 100%
s.:
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September 18, 2020 Special Board Meeting Agenda Packet- Page 87 of 154
Page 19 of 20
ANALYSIS OF THE PENSION
FUNDING MATRIX
• Analysis by Bartel Associates considered various
future pension return scenarios:
• "Expected" scenario (CCCERA returns of 7%), the policy
would not result in additional UAAL payments above the
CCCERA required amortization over 18 years.
• "Poor investment return" scenario (historic returns less
2%): the matrix would indicate that additional contributions
should be made to close the funding gap in less than 18
years.
• The matrix offers a reasonably targeted approach
towards closing the pension funding gap in a more
rapid manner than would be required by CCCERA in
circumstances where it may be appropriate.
TESTING THE MATRIX
• Pension Funded Ratios: Alone Cumulative
• CCCERA 82.1% 82.1%
• Existing Assets in Pension Trust 2.5% 84.6%
• Funding Gap to be Closed in (100%-84.6%)/2 years = 7.7 years
• Projected Funding Gap will be closed by FY 2024-25* = 4 years
• Conclusion: Progress towards closing gap is ahead of
S
chedule/consistent with BP 041
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September 18, 2020 Special Board Meeting Agenda Packet- Page 88 of 154
Page 20 of 20
RECOMMENDATION
Adopt BP 041 , Pension Funding Policy
Adopt BP 042, OPEB Funding Policy
QUESTIONS?
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September 18, 2020 Special Board Meeting Agenda Packet- Page 89 of 154