HomeMy WebLinkAbout04.b. Receive Update/Impact Analysis on actuarial valuations for Contra Costa County Employees' Retirement Association (CCCERA), Central San's Defined Benefit Pension Plan Administrator & Anticipated Savings 2021 Unfunded Actuarial Accrued LiabilityPage 1 of 9
Item 4.b.
F__1_448�411C_S0
October 27, 2023
TO: FINANCE COMMITTEE
FROM: KEVIN MIZUNO, FINANCE MANAGER
REVIEWED BY: PHILIP LEIBER, DEPUTYGENERAL MANAGER -ADMINISTRATION
ROGER S. BAILEY, GENERAL MANAGER
SUBJECT: RECEIVE UPDATE AND IMPACTANALYSIS ON THE MOST RECENTLY
COMPLETED ACTUARIAL VALUATIONS FOR CONTRA COSTA COUNTY
EMPLOYEES' RETIREMENTASSOCIATION (CCCERA), CENTRAL SAN'S
DEFINED BENEFIT PENSION PLAN ADMINISTRATOR, AND THE
ANTICIPATED SAVINGS FROM THE 2021 UNFUNDED ACTUARIAL
ACCRUED LIABILITY PAYDOWN TRANSACTION
On July27, 2023, Contra Costa County Employees' Retirement Association (CCCERA) received the
system's actuarial valuation as of December 31, 2022. 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) 2024-25. On
September 19, 2023 the CCCERA Board also received the Governmental Accounting Standards Board
Statement No. 68 (GASB 68) Valuation report as of June 30, 2023, 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, 2023, expected to be delivered to the Board in December 2023. 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/actuarial-reports
CCCERA Plan Highlights
CCCERA's overall investment yield for calendar year 2022 was -11.25 percent on a market value basis,
and 5.25 percent on a valuation value basis, compared to 13.99 percent and 8.24 percent in calendar year
2021 respectively. The valuation value basis return results in a small actuarial loss when measured against
the assumed long-term rate of return of 6.75 percent (reduced from 7.0 percent in the 2021 valuation),
which increased the average employer contribution rate by 1.11 percent of pay. The system's overall
funded status decreased from 92.4 percent to 91.2 percent on a "valuation value" basis (with application of
the actuarial assumptions such as smoothing, etc.), and the funded status decreased from 101.3 percent
to 84.3 percent on a "market value" basis. I n terms of dollars, the unfunded actuarial accrued liability
(UAAL) of the total plan increased from $0.86 billion to $1.05 billion on a valuation value basis. The
average employer contribution rate decreases from 35.55 percent (FY 2023-24) of payroll to 30.01
percent (FY 2024-25), due to various factors including the end of amortization of costs that had started in
2007, changes in actuarial assumptions, offset by unfavorable factors including individual salary increases
greater than expected, and COLA increases exceeding expectations. The average employee contributed
rate increases from 12.17 percent (FY 2023-24) to 12.18 percent (FY 2024-25).
October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 125 of 135
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 implications. 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 99.01 percent as of December 31, 2022,
compared to a funded rate of 101.21 percent on December 31, 2021. CCCERA's actuarial valuations
also 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. However, contributions can be directed to the pension pre -funding trust
by Central San's Board which can, and have, helped address any growth in the UAAL. While the pension
pre -funding trust remains active, the balance is relatively insignificant following the UAAL payoff transaction
authorized by the Board in June 2021. The trust was reporting a minimal residual balance of $43.7
thousand as of August 2023.
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 (COPs) used
for capital projects in J une 2021. This effectively eliminated Central San's UAAL at that time, which was
reflected in the actuarial report ending December 31, 2021. Following this payoff, Central San's UAAL
contribution was essentially eliminated in FY 2021-22 through FY 2023-24, with a minor 0.15 percent
contribution requirement for administrative cost recovery purposes. Unfortunately, given investment losses
reported calendar year 2022, Central San's UAAL did resurface slightly, resulting in a UAAL contribution
rate of 1.06 percent effective in FY 2024-25. Central San's normal cost contribution rates, in contrast to
the UAAL rate, remain largely unchanged for the Legacy and PEPRA tiers which are 17.45 percent and
11.60 percent respectively in FY 2024-25, compared to 17.36 percent and 11.52 percent in FY 2023-24.
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 2022-23 ACFR. This report uses data from the
preceding valuations and projects it forward using the plan's 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 six 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)
• FY 2022-23 - $37.8 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) converted into net pension "assets." Following market losses reported by the plan in calendar year
2022, the plan's net pension asset reported in the prior year has now reverted back to a net pension liability
of $37.8 million. Accordingly, while it is 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 (i.e., pension contribution rates/amounts).
October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 126 of 135
Page 3 of 9
The amounts Central San is required to contribute to CCCERA for its 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 this has no direct impact on Central San's
required contribution rate for the upcoming fiscal year.
Update on Status of Pension UAAL Payoff
As noted previously, in June 2021 Central San issued COPs 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 addition to funds in the pension pre -funding trust, were then used to pay off the $70.76
million UAAL that existed as of June 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 an assumed rate of return of 7
percent) would exceed the carrying costs of the COPs (0.38 percent annual true interest cost), taking into
account actual future 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 2028-29 (which is when the UAAL was originally scheduled to be paid
off).
To assess the potential outcomes of this uncertainty, Central San's financial advisor PFM Financial
Advisors LLC developed a financial model that models thousands of investment outcomes through FY
2028-29, 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 percent chance of overall cost savings ("a
positive outcome"), with most likely (modal) savings of $15 million, and a 90 percent range of potential
savings from -$8 million to $42 million. These results are shown in the June 3, 2021, column in Table 1
below.
Table 1
Expected Value /
Most Likely
Outcome
Probability of
Positive
Outcome
—90 percent of
Range of
Outcomes
New CCCERA
I nvestment
Return for
Period Used in
Model
$15 million $16 million $3 million $2 million
87 percent 89 percent 70 percent 66 percent
-$8MM to -$9MM to -$9MM to -$8MM to
+$42MM +$41 MM +$12MM +$11 MM
5.5 percent
-10.6 percent (FY 2022-23
(2022 Return) Preliminary
Return)
As of July 2021, the model was updated to include the actual interest rate on the completed COPs
transaction, rather than the forecasted interest rate used in planning the COPs transaction, which increased
the expected savings and likelihood of success.
October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 127 of 135
Page 4 of 9
The last two columns in the table reflect the availability of the latest CCCERA investment performance
results since the transaction closing.
Following a very favorable CCCERA investment return in calendar 2021 of +13.9 percent, increases
in borrowing rates and an inflationary environment led to a significant investment loss in calendar year
2022 of -10.6 percent (or -11.25 percent when measured as a rate of return on the Market Value of
Assets). This reduced the probability of success to 70 percent and altered the 90 percent range of
outcomes to between -$9 million of loss, and +$12 million in savings. This significant swing relates
to the larger impact of returns (significantly positive or negative) early in the transaction's eight -year
maturity, when investment returns have an outsized influence on the success of the transaction. With
this sizable negative return, the most likely (modal) savings dropped to $3 million.
On April 13, 2022, CCCERA lowered their assumed return from 7 percent to 6.75 percent for future
years. This 6.75 percent rate is now used in the preparation of the actuarial valuation reports,
beginning with the December 31, 2021, report. Because this CCCERA assumption change does
not affect the range of future returns used by the model (which are drawn from actual historical
returns), it does not have a significant effect on the model's probability of success results.
As of June 30, 2023, CCCERA's preliminary investment return for the fiscal year then ended was
slightly unfavorable at 5.5 percent, compared to the assumed return of 6.75 percent. This slightly
reduced the probability of success to 66 percent, with a 90 percent range of outcomes between -$8
million and +$11 million in savings. The most likely savings outcome dropped to $2 million.
Attachment 1 contains histogram charts providing more detail of the information summarized in Table 1, for each
of the four points in time noted previously. 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. While year-to-date market
losses as of June 2023 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 September 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 percent range of outcomes will narrow until that point estimate (final
savings number) is reached. Per Attachment 1, the histogram data will be less spread out as time
elapses.
The recent negative CCCERA returns experienced though December 2022 are unfortunate, but
may or may not be indicative of a longer downturn. As noted in the latest CCCERA actuarial report,
much of the -11.25 percent loss in the Market Value of Assets was attributable to the first half of the
year which reported a market loss of -10.81 percent, with the second half of the year reporting a
market loss of -0.46 percent. CCCERA has since reported quarterly returns for the first two quarters
of 2023 of +2.6 percent and +2.4 percent, respectively. I nvestment 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.
October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 128 of 135
Page 5 of 9
• Even with this early negative return, the transaction still has a 66 percent likelihood of producing at
least some savings (>$0).
Staff will continue to report back at least annually as investment returns become available, and in
conjunction with PFM, produce updated savings analyses for presentation and discussion with the Board
and/or Finance Committee as needed.
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. UAAL Paydown Analysis Supporting I nfo-Charts
October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 129 of 135
Attachment 1
UAAL Paydown Analysis Supporting Info -Charts
The following provides additional context about each of the 4 columns presented in Table 1 of the Position Paper.
1. 6/3/21 Position Paper Column - Prior to the COPS 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 COPS,
83.64E
+L30"29UAAL
A%j,
Bond&Bbtefit
Csu6e6
Prababuin ofsorom
SkhmQoa
$14.671 196
R ctwn
05_ef.0
Pro6abWty ofAcLlesiu8 ui L.ra i 7%Arera=e Rem
Rop4 S9cutriv
S406,610
7.0%
E13,OX991
%' - statct
lS
Pmbability ofA4biming at Leant $1.440,004i10nd
Frjnxut
QW
Prabab111ri nj$eln$ chwfur.jed %-, S4]LYC Quo al LFd ofllon;am atnt Prr{nd
T-1-4
So
Probablitly a1rOretiva41nSm Raw Quoin An! Year
_TxiB�
-
S0
7.0%
S15,650,991
FALSE
1
{3 P481.074}
1
1S97.547,427i
0.8%
327.665.241
FALSE
FALSE TRUE TRl-L-
2
3272.284.30t,
13.0%
$42,657.142
FALSE
FALSE 34l4
3
iS6?9t4.i't.
3
($63.033.4U13
8.2%
$15,300.384
FALSE
FALSE 1A 24.ux x7 Esc
4
AIF,.430.7M
4
(S16.890.5211
8.4%
$14,740.781
FALSE
FALSE Tor,
$
$5.022.032
Sr tx
1
5
$5.945.790
7.2%
$14,677,469
FALSE
FALSE lsx
6
S8.615.618
3
6
S11.063.7"
7J%
$U,369_221
FALSE
FALSE fog a,6x
7
1S66.690.9041
q
9.1°/.
$0,144.057
FALSE
FALSE
8
St76.996.2FTr
sit 26x
8
1 St1)1.i32.6os,,
11,6%
535,553.374
FALSE
FALSE 6sx
9
5169.1-16.2412
ax
9
5174.91:.786
3,9%
59.553115
FALSE
FADE [ Sjl,$2l,-SELL I SIi,1, 591 iS9. S191 IS19.5291
Tel E
ab6 MD%
O A (5334, S491 {5491Ss9I 0691$891 001$791 W%W1
14 1S37-623.546� w q{a al ernnfi`s{S rnW�sj
1 1 P a g e
October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 130 of 135
Attachment 1
2. Bond Closing July 2021 Column -As of July 2021, plugging the actual COPs 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.
83.6ea
Statua QM
Batts Scenario
Boud Payutad
TKi-
Tax�d
1
1
3
4
5
S
6
6
7
i
8
8
9
9
14
6 30 _4 UAAL A%
BMAS B03etit
tauxs
S4�i
Prohabilily� o[ SMrrr5%
S14.185.818 Reran
Q'.erfiui 3
dF•:
Prababilih o[AcI inin4 at Less] 7% Aivmge Retain
$2.559.701 7.0%
516.074.65;
VStants
871,
LeAi15I.W0,M
Quo^
Za:
ProbabiHiv of BriuR iherrunded ss. Staaas Qua at End of ►ieasurruaen[ Perio3
SO
ISK
]hnhabil3h aCDrerfundinE Ya Siahs Qao Sn Aay' Ye:r
90 7. N
$16,674.633
_
FALSE
(S174.991.3.445)
{Si78.I$1104} 10.3%
Si9.397,967
FALSE
FAL5F TRUE FALSE
I$I.49,106.103)
(j159_71031:y 10^ S32,400.378 FALSE
(SI19,9SI..17)
�S116.a41 tg!] 8.0% S8.682.487 FALSE
$99, S R4,547
$104._55592 4.9% 510,782,463 FALSE
t%.73?
IS95,G:s.8iIt 9.2% S22.886,734 FALSE
$41.000 179
$57.93I586 4.2% ($3.193357) FALSE
5229.514.11E
S243.927.2u1 WO.1% {S4.66L-10 FALSE
{SI77.:I9.I79}
IS191,6624-ji 11.8% 5,38.674.526 FALSE
S149.S51.909
S]56.415.637 3.7% $8.790.089 FALSE
W6.106. 11 ] 1
FALSE 30%
FALSE 25%
FALSE 7ta%
a
FALSE z ss%
FALSE E FpM
FALSE sst
FALSE
FALSE
1-524-51al I-S14-Sat] 1,%$21 ISi,$121
2d,A%
E .A1.SF
O.l% 04%
1332,S221 (522, 5321 iS 2 Sad IW, Wl t55,2.5521 IW, 572) 1S72, $921 JM $92$
Rarypev48ww ts{SM0a"j
2 1 P a g e
October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 131 of 135
Attachment 1
3. 12/31/22 (Latest Actuarial Results) Column - Using available CCCERA investment returns for the period through 12/31/2022 of-10.6%, the
expected value of savings was about $3 million, with a probability of producing at least some savings (>$0) at 70%. Approximately 90% of the
outcomes fell between -$9 and +$12 million.
86.4%
630'291:A.AL A«.
Status Quo
$ (1, 111738) Return
Bond S—mio
$ 798,978 6.75%
Bond Pa�meni
Target
$46.194.927
Bonds Benefit Causes ?0%IPCobablllt� of Success
Overfunding 37% Probability of Achieving at Least 6.75% Average Return
512,461,33.5 vs. Status 64% ProbRbilit} of achieving at Least S1,000,000
Quo.' 0°�o ProbRbility of Being Overfunded vs. Status Quo at End of _Measurement Period
AProbability of Overfunding vs. Status Quo in Any Year
7 arget
$52,110,091 5.1%
S2,519,828
F.3VSE
1
($t17,786,502)
30%
1
($117,698,571a 8.9%
$10,125,231
FALSE
2
($121,569,755)
($118,996,919). 8.7% $7,197,105
$200,404,495
$213,797,906 ($1,019,910)
$434,871,050
FALSE
FALSE
25%
u 20%
2
3
3
4
4
$446,936213
($4,482,852)
FALSE
5
($66,988,058)
F 15%
3
($61,642,635) 7.4%
$3,275,071
FALSE
6
($83,931,731}
4
($78,673,865) 8.1%
$3,671,090
FALSE
10%
7
$132,574,474
$137,836,858 3.5%
$81,453,928
$92,596,651 371%
($163,102,632)
{$162,195,565)�Y
$26,117,126
$3,450,443
(34,261,600)
$9,055,056
FALSE
FALSE
FALSE
5%
0%
7
8
8
9
9
10
10
135374.894 5.11/.
f$1.773.3751
FALSE
Ism -5161 I-$16, -$121 1-512, $al 1-SB,-541 [ A $01 [S%$41 ($4� $al ($9, 5121 ($12, $I6] (516, 5201
Range of Benefits ($ Millions)
3 1 P a g e
October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 132 of 135
Attachment 1
4. 6/30/23 (Preliminary Returns) Column -Using available CCCERA preliminary investment returns for the fiscal year ending 6/30/2023 of 5.5%,
the expected value of savings was approximately $2 million, with a probability of producing at least some savings (>$0) at 66%. Approximately
90% of the outcomes fell between -$8 million and +$11 million; this range will continue to narrow as we move forward in time and closer to
the final actual result.
86.4%
6'3029 UAAL
Ac¢_ Bonds Benefit
Causes
661
Probability of Surreys
Status Quo
$ (1,122,738}
Re[um
Oeerfimdme
36%
Probability of Achieving at Least 6.75% Average Return
Bond Scenario
$ 798,978
6 75% S12,461,33.5
vs StatusP
%
Probability of Achieving at Least S1,000,000
Bond?--t
Quo°
%
Probability of Being Overfunded vs. Status Quo at End of _Measurement Period
Tazeet
$50,413,61 l
%
Probability of Overfunding vs. Status Quo in Any Year
Target
$56,712557
W/.F__S1,924,628il28_
FALSE
1
1
$372155.102
$382,553,450
($192,487,708)
($192,394,851)
$111393263
$224,323,509
($196,936,489 )
($196,531,775j
($56,217,566}
($4%971,495)
($121999,701)
$56510195
$59,103,714
$32,746290
$3%546,181
$57,518,551
$64,492,835
($211,a84,a7a1
($206,085,033)
-3.8%
10.0%
21%
LA0%
6.9%
8.6%
419/.
531/.
5.1%
9.8%
($5,954,890)
$10,112,153
$6,577,919
$9,688�01
($3,571.508)
$6,567,192
($6,721,197)
$1,203,595
$1,055,762
$3,857,113
FALSE
FALSE
FALSE
FALSE
FALSE
FALSE
FALSE
FALSE
FALSE
FALSE
30k
25%
0 20%
` 109&
5%
0% 01s
1-$20,-$161
2
2
3
3
4
4
5
5
6
7
7
8
8
9
9
10
10
25"
1-$16, -5121 1-512, Sal { Sa. S4] I-$0. -$11 I-$1, $31 ($3, $71 1$7, $111 ($11, $151 (M $191
Range of Benefits ($ Millions)
4 1 P a g e
October 27, 2023 Special FINANCE Committee Meeting Agenda Packet - Page 133 of 135