HomeMy WebLinkAbout03.c. Conduct biennial review of Board Policy BP 041 - Pension FundingPage 1 of 6
Item 3.c.
F__1_448�411C_S0
September 3, 2024
TO: ADMINISTRATION COMMITTEE
FROM: KATIE YOUNG, SECRETARYOF THE DISTRICT
REVIEWED BY: PHILIPLEIBER, DEPUTYGM -ADMINISTRATION
ROGER S. BAILEY, GENERAL MANAGER
SUBJECT: CONDUCT BIENNIAL REVIEW OF BOARD POLICY BP 041 - PENSION
FUNDING
This policy is up for its biennial review and staff would like to propose revisions to update the language in
the policy.
No substantive changes were made. Attachment 1 is staff's proposed, red -lined revisions.
Strategic Plan re -In
GOAL FOUR: Governance and Fiscal Responsibility
Strategy 1 - Promote and uphold ethical behavior, openness, and accessibility, Strategy 3 - Maintain financial stability
and sustainability
GOAL FIVE: Safety and Security
Strategy 2 - Protect personnel and assets from threats and emergencies
ATTACHMENTS:
1. BP 041 Pension Funding (Proposed Revisions)
September 3, 2024 Regular ADMIN Committee Meeting Agenda Packet - Page 27 of 50
Page 2 of 6
Number: BP 041
Authority: Board of Directors
Adopted: September 18, 2020 mild -
Revised: ju'y21, 2-022September 19, 2024
Reviewed: July F�2September 3, 2024 ICENTRALSAN
Initiating Dept./Div.: Administration/Finance
BOARD POLICY
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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.
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.
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
September 3, 2024 Regular ADMIN Committee Meeting Agenda Packet - Page 28 of 50
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Number: BP 041
PENSION FUNDING
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sustainable, the plan should accumulate adequate resources in a systematic and
disciplined manner over the active service life of "egbenefiting 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 plan. 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.
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 reGeivesreceive 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.
POLICY
This policy is based on the five general principals noted above, as well as the following
principles:
September 3, 2024 Regular ADMIN Committee Meeting Agenda Packet - Page 29 of 50
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Number: BP 041
PENSION FUNDING
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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 f„lly f„Rdeefully 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. The additional budgeted contribution can be specified in
the budget process as dedicated for pension obligations, or more
generally for employee related obligations that will be further specified by
the Board of Directors during the fiscal year.
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.
September 3, 2024 Regular ADMIN Committee Meeting Agenda Packet - Page 30 of 50
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PENSION FUNDING
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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)
(2)
(3)
(4)
(5)
Pension Funding
Funding
Funding Source
Time to Restore to
I 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
Between 95- May
available funding
(100% -Funded
Trust
100%
from year-end
ratio) / 2
variances
i
Trust
Greater than May available funding
N/A
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
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
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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 %nnual Comprehensive ARuaLFinancial
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 Trusts.
• 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.
While debt related to the 2021 pension UAAL paydown transaction is
outstanding, Central San shall provide a report showing the estimated interest
savings from that paydown, based on the most recently available CCCERA
pension valuation report.
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 3, 2024 Regular ADMIN Committee Meeting Agenda Packet - Page 32 of 50