HomeMy WebLinkAbout06.a. Receive update and impact analysis on the most recently completed Actuarial Valuations for Contra Costa County Employees' Retirement Association, Central San's defined benefit pension plan administrator, and the anticipated savings from the 2021 uPage 1 of 9
Item 6.a.
F__1_448�411C_S0
October 25, 2022
TO: FINANCE COMMITTEE
FROM: KEVIN MIZUNO, FINANCE MANAGER
REVIEWED BY: PHILIPLEIBER, DIRECTOR OF FINANCE AND ADMINISTRATION
ROGER S. BAILEY, GENERAL MANAGER
SUBJECT: RECEIVE UPDATE AND IMPACTANALYSIS ON THE MOST RECENTLY
COMPLETED ACTUARIAL VALUATIONS FOR CONTRA COSTA COUNTY
EMPLOYEES' RETIREMENT ASSOCIATION, CENTRAL SAN'S DEFINED
BENEFIT PENSION PLAN ADMINISTRATOR, AND THE ANTICIPATED
SAVINGS FROM THE 2021 UNFUNDED ACTUARIAL ACCRUED LIABILITY
PAYDOWN TRANSACTION
On August 10, 2022, the Board of Retirement for the Contra Costa County Employees' Retirement
Association (CCCERA) received the system's Actuarial Valuation as of December 31, 2021. The
valuation, commonly referred to as the "funding valuation," analyzes that year's actual experience and then
uses that data to establish required contribution rates for the upcoming fiscal year, which in this case is
Fiscal Year (FY) 2023-24. On September 28, 2022, the CCCERA Board also received the
Governmental Accounting Standards Board Statement No. 68 (GASB 68) Valuation report as of June 30,
2022, commonly referred to as the "GASB 68" or "financial reporting valuation". The financial reporting
valuation will be used for reporting Central San's net pension liability in the annual comprehensive financial
report (ACFR) for the year ended June 30, 2022, expected to be delivered to the Board in November or
December 2022. These actuarial reports are quite lengthy, and while not included in this memo, they are
made publicly -available on CCCERA's website at www.cccera.org.
CCCERA Plan Highlights
The overall investment return for CCCERA for calendar year 2021 was 13.99% on a market value basis,
and 8.24% on a valuation value basis, compared to 9.57% and 6.62% in calendar year 2020 respectively.
The latter return results in a small actuarial gain when measured against the assumed long-term rate of
return of 7.0%, which decreased the average employer contribution rate by 0.90% of pay. The system's
overall funded status increased from 91.8% to 92.4% on a "valuation value" basis (with application of the
actuarial assumptions such as smoothing, etc.), and the funded status increased from 95.6% to 101.3% on
a "market value" basis. In terms of dollars, the unfunded actuarial accrued liability (UAAL) of the total plan
decreased from $859 million to $855 million on a valuation value basis. This decrease in the funding
valuation UAAL is primarily due to contributions paying down a portion of the UAAL, helped to some
degree by an investment return (after asset smoothing) in excess than the 7.0% assumed rate. The net
impact of these changes, along with changes in actuarial assumptions, individual salary increases greater
than expected, and COLA increases exceeding expectations, results in the average employer contribution
rate increasing slightly from 33.87% (FY 2022-23) of payroll to 35.55% (FY 2023-24), and the average
employee rate increasing from 11.85% (FY 2022-23) to 12.17% (FY 2023-24).
October 25, 2022 Regular FINANCE Committee Meeting Agenda Packet - Page 93 of 105
Page 2 of 9
Funding Valuation Basis Impact to Central San
Ultimately, the actuarial smoothed funding valuation is more relevant than the financial reporting valuation as
it has direct and immediate budgetary impacts. From FY 2022-23 to FY 2023-24, following the pay-off of
Central San's UAAL, the funding valuation reported a drop in Central San's UAAL from $63.7 million to an
actuarial surplus of $5.8 million. CCCERA's actuarial valuations do not publish a funded percentage that
is specific to Central San, or any participating employer for that matter. However, the funded percentage
can be derived based on the Central San specific Actuarial Value of Assets (AVA) and UAAL figures
which are included in the report. Using information available in CCCERA's report, Central San staff has
internally calculated a funded rate of 101.21 % as of December 31, 2021 compared to a funded rate of
88.4% on December 31, 2020 (using assets in the pension prefunding trust at that time prior to the UAAL
payoff in June 2021). Historically, CCCERA's actuarial valuations do not take into account restricted
assets held by participating employers in Section 115 trusts as employers have discretion over when and
how to use the trust assets for pension plan contributions, impacting actuarial assumptions. Following the
UAAL payoff in June 2021, Central San had a minimal residual balance of $48.3 thousand in its Section
115 Prefunding Pension Trust as of December 31, 2021.
As described previously, Central San made a large prepayment in the amount of $70.76 million toward its
UAAL related to the issuance of $58.0 million in low -interest rate Certificates of Participation used for
capital projects in June 2021. This effectively eliminated Central San's UAAL on July 1, 2021, which was
not reflected in last year's actuarial report dated December 31, 2020. Reflecting this payoff, Central San's
FY 2023-24 contribution rates for the Legacy and PEPRA tiers are 17.51 % and 11.67% respectively,
compared to 17.09% and 11.46% in FY 2022-23.
Financial Reporting Valuation Basis Impact to Central San
The financial reporting valuation (GASB 68) publishes Central San's Net Pension Liability (NPL)
necessary for financial reporting in Central San's FY 2021-22 ACFR. This report uses data from the
preceding valuations and projects it forward using the plans economic and demographic assumptions.
Importantly, it also removes the five-year smoothing method used in the funding valuation. The elimination
of this "smoothing effect" makes the reporting valuation similar to stating Central San's UAAL on a market
value basis thereby exposing the year-to-year funded position to significantly increased market volatility
risk. To demonstrate this volatility, the following are the past five year's NPLs on a market value reporting
basis:
• FY 2017-18 - $63.8 million
• FY 2018-19 - $90.4 million
• FY 2019-20 - $64.1 million
• FY 2020-21 - $48.9 million
• FY 2021-22 - ($53.5 million)
As a consequence of the GASB 68 reporting valuation purposefully excluding actuarial smoothing, the
extraordinary investment return reported in calendar year 2021 disproportionately impacted the plan's net
pension liability, so much so that the liabilities for most CCCERA participating agencies (including Central
San's) have converted to net pension "assets." Accordingly, while it is economically informative to see the
immediate impact market volatility has on a governmental agency's pension obligation, it is not entirely
relevant as it does not have immediate budgetary ramifications. The amounts Central San is required to
contribute to CCCERA for it's pension obligations are based on the actuarial funding valuations, which
apply a more long-term outlook involving actuarial smoothing, and for good reason. The reporting valuation
is necessary for compliance with GASB accounting pronouncements and ACFR reporting purposes only,
and has no direct impact on Central San's required contribution rate for the upcoming fiscal year.
Update on Status of Pension UAAL Payoff
In June 2021, Central San issued bonds to fund a portion of the capital program for FY 2020-21 and FY
2021-22. Sewer Service charges revenue that would have otherwise funded the capital program, in
October 25, 2022 Regular FINANCE Committee Meeting Agenda Packet - Page 94 of 105
Page 3 of 9
addition to funds in the pension pre -funding trust, were then used to pay off the $70.76 million UAAL that
existed as of 6/30/2021.
Leading up to this transaction, staff presented an analysis on the likelihood of success of the transaction,
specifically, whether the transaction would save Central San money in the long run. This analysis looked at
whether the savings on interest assessed by CCCERA on the UAAL (at a rate of 7%) would exceed the
carrying costs of the bonds (0.38% annually) plus returns that the funds would earn while invested at
CCCERA. While the first two components are known, the last component is not, and accordingly, there
will not be certainty about the success of the transaction until FY 2028-2029 (which is when the UAAL was
scheduled to be paid off).
To assess the potential outcomes of this uncertainty, Central San's financial advisor PFM developed a
financial model that modeled thousands of investment outcomes through 2029, randomly drawing on
CCCERA's annual historical returns since the year 2000. This "Monte Carlo" simulation as of June 3,
2021 found that there was an 87% chance of overall cost savings ("a positive outcome"), with most likely
(modal) savings of $15 million, and a 90% range of potential savings from -$8 million to $42 million. These
results are shown in the 6/3/21 column in the table below.
6/3/21
:• • Closing
Year End
FYE
Position Paper
July 2021
12/31/2021
6/30/2022
Value /
$15MM
$16MM
$13MM
$3MM
Most Likely Outcome
Probability of Positive
87%
89%
91 %
72%
Outcome
—90% of Range of Outcomes
-$8MM to
-$9MM to
+$OMM to
-$7MM to
+$42MM
+$41 MM
+$40MM
+$23MM
New CCCERA Investment
13.9%
-6.7%
Return for Period Used in
(2021)
(FY22)
1
Model
Updated results are shown in subsequent columns. As of July 2021, the model was updated to include the
actual interest rate on the completed bond transaction, rather than the forecasted interest rate used in planning
the bond transaction, which increased the expected savings and likelihood of success.
The last two columns in the table reflect the availability of CCCERA investment performance results since
the transaction closing.
At 12/31 /2021, CCCERA's investment returns for calendar year 2021 were a very favorable at
13.9%, nearly twice the assumed return of 7%. This changed the probability of success to 91 %, and
enhanced the 90% range of outcomes to $0 million to $40 million in savings. This is reflective of the
known value of having favorable CCCERA investment returns early in the transaction's 8-year
maturity.
As of 6/30/2022, CCCERA's investment returns for the fiscal year then ended were unfavorable at -
6.7%, compared to the assumed return of 7%. This reduced the probability of success to 72% and
enhanced the 90% range of outcomes to -$7 million to $23 million in savings. The significant swing
again relates to the larger impact of returns (significantly positive OR negative) early in the
transaction's 8-year maturity. With the sizable negative return, the most likely (modal) savings drops
to $3 million.
Appendix 1 contains histogram charts providing more detail of the information summarized in this table, for
each of the four points in time noted below.
October 25, 2022 Regular FINANCE Committee Meeting Agenda Packet - Page 95 of 105
Page 4 of 9
Some important considerations from this are as follows:
• CCCERA recalculates and publishes impacts to the pension UAAL and employer contribution rates
on an annual basis using calendar year data that is actuarially smoothed. The 1 st year of actuarial
information following the transaction used 2021 calendar year-end data. As such Central San cannot
perform a true 2nd year probability of success calculation until those results are published using
calendar year 2022 information, which would not be expected from CCCERA until August 2023.
While year-to-date market losses as of June 2022 have no direct impact on future obligations owed
to CCCERA, in an attempt to provide more timely/useful information to the Board, Central San staff
have performed this "interim calculation" using the latest information available.
• As was known prior to the transaction, a significant negative return early in the transaction has a
substantial impact on the potential savings. But, future period returns still have the ability to change
the results until the bonds' final maturity on 9/1 /2028 when the final results will be "locked in".
• This is only a "check -in"; actual savings will not be known with certainty until 2028, once the debt has
been fully repaid. The savings estimates will fluctuate until then, but will begin to center on a
particular number, while the 90% range of outcomes will narrow until that point estimate (final savings
number) is reached. Per appendix 1, the histogram data will be less spread out as time elapses.
• The recent negative CCCERA returns experienced though mid-2022 are unfortunate, but mayor
may not be indicative of a longer downturn. Investment return histories show that some downturns
are short-lived, while others persist significantly longer. A recent news article indicated that looking at
the bear markets since 1950 (about 10), it took an average of 27 months for stock indices to
recover.
• Even with this early negative return, the transaction still has a 72% likelihood of producing at least
some savings (>$0).
Staff will continue to report back as investment returns become available, and in conjunction with PFM,
produce updated savings analyses for presentation and discussion with the Board.
Strategic Plan Tie -In
GOAL FOUR: Governance and Fiscal Responsibility
Strategy 1 - Promote and uphold ethical behavior, openness, and accessibility, Strategy 3 - Maintain financial stability
and sustainability
ATTACHMENTS:
1. Appendix 1-UAALPaydownAnalysis
October 25, 2022 Regular FINANCE Committee Meeting Agenda Packet - Page 96 of 105
Page 5 of 9
Appendix 1
UAAL Pay-off Savings Estimates Through Time
6/3/21
:.. Closing
Year End
HE
Position •..-
Expected Value /
$15MM
$16MM
$13MM
$3MM
Most Likely Outcome
Probability of Positive
Outcome
87%
89/
91/
°
72/0
—90% of Range of Outcomes
-$8MM to
-$9MM to
+$OMM to
-$7MM to
+$42MM
+$41MM
+$40MM
+$23MM
New CCCERA Investment
-6.7%
Return for Period Used in
021
(2021)
(FY22)
Model
The following slides provide more information about each of the 4 columns/snapshots above.
October 25, 2022 Regular FINANCE Committee Meeting Agenda Packet - Page 97 of 105
Appendix 1
Discussion of Results
(1) Prior to the bond transaction execution in June 2021, the expected value of savings was about $15 million, with a probability of saving
at least $1 or more at 87%. However, there is a wide range of possible outcomes, with approximately 90% of the possible outcomes
falling between -$8 million and $42 million, reflecting the range of potential outcomes based on future actual returns. This was based on
expected interest rates and transaction costs of the 2021 Bonds.
83.6%
Status Qua
Bond Scetwo
Bond Paymeni
Target
Target
2
2
3
3
4
4
5
5
6
6
7
7
8
8
9
9
10
6 30 29 UAAL Avg. Bonds Ben ` C�"8-=0B 87% Probability of Success
$14.673.196 Return ch'Er 2im4=2 604a Probability of Achieviug at Least 7% Avtm ge Return
$2.646.610 7.0°! 515,650,991 es- Statue 86% Prohabilih• of achieving at Least $1,000,000
Quo? 2% ProhabiUhy of Being Overfunded vs. Status Quo at End of 1lessureuieut Period
So 15% Probability of Overfuading vs. Status Quo in Any Year
$0 7.0% S15.650.991 FALSE
{589.081.079}
(597.547.427) 9.8% S27.665.241 FALSE
[S243.329 2321
(S272 284.3-06) 13.0% S42.657,102 FALSE
(563.964.578)
0453.o33.901) 9.2% S15.300.384 FALSE
($18.430.700)
(516,890,521) 8.4% $14.740.781 FALSE
S5A22.032
$5.945.790 7.2% S14.677.469 FALSE
$ 8.615_fi 1S
S11.063J)S 73% $11.369.221 FALSE
IS66.690.904)
{566.178.750) 9.1% S]5.744.857 FALSE
($176.996,267)
{S191.332.660i 11.6% $35.553.374 FALSE
$169.146.259
S174.912.786 3.9% SM53.215 FALSE
(537.623.540)
FALSE TRUE TRUE
FALSE JAM
FALSE 25% 2.4.051, 23.6%
m
FALSE 00 zoas
FALSE 15°%
a
FALSE o 104s
P.
FALSE
5%
FALSE
use
FALSE I-$31, -$211 1 521, -511) R-SII -S11 ]$1, S9]
TRUE
0.1% 0.0%
(S% S19) {$19,$291 {SV% S391 {$39,$491 ($49.559] ($59.$69] 1$69,$791 1$79,$891
Kange of BenefFts {S Miftns}
October 25, 2022 Regular FINANCE Committee Meeting Agenda Packet - Page 98 of 105
Appendix 1
(2) As of July 2021, plugging the actual bond rates into the model, the expected value of savings was about $16 million, with a probability of
saving at least $1 or more at 89%. Approximately 90% of the outcomes fell between -$9 million and $41 million.
$j.6SL
Status Qua
Bond Scenario
Bond Payment
Target
Target
1
1
3
3
4
4
5
5
6
5
7
7
S
S
9
9
10
6 W29VAAL Avg. Bonds$ene(xt Causes 99% Probabilih or5nceess
$14.135.818 Return Ovef{wtdatg g87%
% Probability orAcbiet�ing at Least 7% Average Returu
3.2,$58.701 7.0% 516674, 68? vs. Status Probabilih of Achlevimg at Least 51,000,4100
Quo'% Probability ofBeiug Overfunded vs. Status Quo at End of )feasureotent Period
so 4 Prabahllity of 0verfunding s-s. Status Quo in Any Year
30 _7.0% $16,674.683 FALSE.
(5174.997346)
(5178.152.834} 10.3% $19.397.967 FALSE FALSE TRUE FALSE
($149,906,103)
($159.710-312) 10.9% 532.400.378 FALSE FALSE 30%
(Sk19.951.117}
(S116.44_.595} 8.6% S8.682.487 FALSE FALSE 25% sa-a%
$99.594.547
m
S104,255.592 4,9% S10.782.463 FALSE FALSE 21196
(S90.737.993} a
(595.625.6s1} 9.2% S22.886.734 FALSE FALSE _r 15%
$45.tx10.278 a
$57.951,586 4-2% (33,193.357) FALSE FALSE o 10%
S229,514.315 a
S243.927.201 0.1% (S4.685.505) FALSE FALSE
(S 171, 219-179) 51A
FALSE
($191,662-574} 11-8% $38.074.526 FALSE FALSE o.a% 0-2% ❑-15s p,096
S 149.851909
5156.415.687 3.7% $8.790.089 FALSE FALSE 1-528.-$181 (-Sig, -Sal (-58,$21 ($2,5121 ($12,S221 {$22,532] ($32.$421 (Sa2,S521 (552.$621 ($62,$721 1572.5821 ($82,$921
(S 36.706, 401 1 Range of Benefits is Millions)
October 25, 2022 Regular FINANCE Committee Meeting Agenda Packet - Page 99 of 105
Appendix 1
(3) Using available CCCERA investment returns for the period through 12/31/2021 of 13.9%, the expected value of savings was about $13
million, with a probability of saving at least $1 or more at 91%. Approximately 90% of the outcomes fell between $0 and $40 million.
"A*A
Status Quo
Baud Scemno
Bond Payinvu
Target
1
1
2
3
3
4
4
5
5
fi
6
7
7
8
S
9
9
10
6.30129 UAAL A%. Bon& Benefit Causes 91% Probability of Saceess
($3.V.M2) Retum Ot'erf using We Probability of Achit%lug at Least 7%b Average Returu
S851.821 7.0% S13,163,268 vs. Status 90% Probability of Achiel•ing at Least S1.000.000
Quo? 04e Probability of Being Overfunded -m Status Quo at End of Lfeasvreruent Periad
30 10%. Probability of Overfunding ss. Status Quo in Amy Year
r 30 7.0% $13,163,968 FALSE
S2.307.999 --
r (S683.589) 7.8% S18.151.807 FALSE
{S239.742.8331
r{5-'43-177.9S5} 1i.69'a S24.016.367 FALSE
3302.640.047
rS308.152.679 0.9% S7.878,08S FALSE
{S207.79 L.3U=1
'($2 .6G0.<Il) W51% $13.788.368 FALSE
$31.542.962
r 544.382.559 5.3%, FALSE
S�ofi.afia.s91
r S7'3.972.93J 0.5%6- FALSE
15215.266.9�t
15-26.545.338; 11.M. S28.695.766 FALSE
(5117.354A64)
r(S115.050.386) 8.7%, 39.:04.895 FALSE
$169.650,U3
�S174.379.977 3A% $6.637.595 FALSE
(S10i-043.975)
FALSE
FALSE 40%
35%
FALSE
30%
FALSE rc sssc
FALSE a
FALSE x5%
a`
FALSE 10%
5%
FALSE
0%
FALSE
FALSE
FALSE
37.4%
FALSE
i-S19,-591 1-59' $14 (S1, $11] ($11• 521] 1S213311 (531. S411 1$41.5511
11a nge of Benefits (S M1111 s)
0.0%
1$51, $fi1j
October 25, 2022 Regular FINANCE Committee Meeting Agenda Packet - Page 100 of 105
Appendix 1
(4) Using available CCCERA investment returns for the fiscal year ending 6/30/2022 of -6.7%, the expected value of savings was about $3
million, with a probability of saving at least $1 or more at 72%. Approximately 90% of the of outcomes fell between -$7 million and $23
million; this range will continue to become narrower as we move forward in time and closer to the final actual result.
36.4%
Statm Quo
Baud Scenario
Bond Papncnt
Target
Target
1
1
3
3
4
4
5
5
6
6
7
7
S
9
9
10
6 30 29 UAAL Avg. Bonds Benefit Caltses 45%
Probability of Success
($357.962) Rerun OcetfintdntgProbability of Achirtiing at Least 7% Average Return
5861.821 7,0% Si U63,268 vs. StatusProbability ofAchio ing at Least 51,000,000
Qua?Proba411ity of Being Overfunded vs, Status Quo at End of 1leasurement Period
$-47.725.636 Pmbabdity oforerfundiog vs. Status Quo in An} Year
r 153AMA05 5.3°!a 52.908.067 a FALSE
SMM. 668
S83.464-674 4.9% $1.991.791 FALSE
($72.833.375)
V (571.017.505) S.2% $9.376.681 FALSE
.($359.046.314)
F{5364-785-617} jb,Z% $18,631,262 1 FALSE
S251A47.858
�S259.168A13 1.2% f336.040 FALSE
555.816.429
r S58.907.453 8.0% $7.709.437 FALSE
(SI77.022.76.1
'{5179.618,24-, 10A% SL&753.353 FALSE
r (811.173.547) 7.1% S5.206.483 FALSE
($131.870.0971
'{S131-704-3flil 9A% $11.412.670 FALSE
{5203.603.6181
P{S=10.545.9811 1LAI $20,828,504 FALSE
S159.404-6931
r
FALSE
FALSE
FALSE
FALSE
FALSE
FALSE
FALSE
FALSE
FALSE
50%
4556
40%
m 35%
A
a 3096
r 25%
a 20%
0
toss
556
096
FALSE
FALSE
FALSE
1427. -S17] (-517, -57) -S7. S3] (9313] 1513, S231 1$23, $311
Range of Benefits Is M1111 orsI
DIM
(533. 5431
October 25, 2022 Regular FINANCE Committee Meeting Agenda Packet - Page 101 of 105