HomeMy WebLinkAbout04.a. Receive update and impact analysis on the most recent acturial valuations for Contra Costa County Employees' Retirement Association (CCCERA), and the anticpated savings from the 2021 unfunded actuarial accrued liability paydown transcationPage 1 of 9
Item 4.a.
F__1_448�411C_S0
October 29, 2024
TO: FINANCE COMMITTEE
FROM: KEVIN MIZUNO, FINANCE MANAGER
REVIEWED BY: PHILIPLEIBER, DEPUTYGM -ADMINISTRATION
ROGER S. BAILEY, GENERAL MANAGER
SUBJECT: RECEIVE UPDATE AND IMPACTANALYSIS ON THE MOST RECENT
ACTUARIAL VALUATIONS FOR CONTRA COSTA COUNTY EMPLOYEES'
RETIREMENTASSOCIATION (CCCERA), AND THE ANTICIPATED
SAVINGS FROM THE 2021 UNFUNDED ACTUARIAL ACCRUED LIABILITY
PAYDOWN TRANSACTION
On September 11, 2024, Contra Costa County Employees' Retirement Association (CCCERA) received
the system's actuarial valuation as of December 31, 2023. 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. That day,
the CCCERA Board also received the Governmental Accounting Standards Board Statement No. 68
(GASB 68) Valuation report as of June 30, 2024, 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, 2024, expected
to be delivered to the Board in December 2024. These actuarial reports are lengthy, and while not
included in this memo, they are publicly available on CCCERA's website at www.cccera.org/actuarial-
reports
CCCERA Plan Highlights
CCCERA's overall investment yield for calendar year 2023 was 8.69 percent on a market value basis, and
5.31 percent on a valuation value basis, compared to -11.25 percent and 5.25 percent in calendar year
2022 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, which increased the average employer contribution
rate by 1.03 percent of pay. The system's overall funded status decreased from 91.2 percent to 91.0
percent on a "valuation value" basis (with application of the actuarial assumptions such as smoothing, etc.),
and the funded status increased from 84.3 percent to 86.8 percent on a "market value" basis. I n terms of
dollars, the unfunded actuarial accrued liability (UAAL) of the total plan increased from $1.05 billion to
$1.12 billion on a valuation value basis. The average employer contribution rate decreases from 30.01
percent (FY 2024-25) of payroll to 28.55 percent (FY 2025-26). The average employee contributed rate
decreased from 12.18 percent (FY 2024-25) to 12.13 percent (FY 2025-26).
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,
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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 97.41 percent as of December 31, 2023,
compared to a funded rate of 99.01 percent on December 31, 2022. 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
prefunding trust was largely liquidated to facilitate the payoff of the pension UAAL in June 2021, the Board
directed an additional $1 million to be contributed to the trust during FY 2023-24 on a dollar cost average
basis commencing November 2024. When including $174,702 of assets in its pension prefunding trust as
of December 31, 2023, the derived funded position of Central San's pension plan increases slightly to
97.45%.
As described previously, Central San made a large prepayment in the amount of $70.76 million toward its
UAAL related to the issuance of $50.57 million in low -interest rate Certificates of Participation (COPs)
used for capital projects in June 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. 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. This trend continued in calendar year 2023, resulting in
Central San's UAAL contribution rate increasing to 2.60% for FY 2025-26. Central San's normal cost
contribution rates, in contrast to the UAAL rate, remain largely unchanged for the Legacy and PEP RA tiers
which are 17.37 percent and 11.52 percent respectively in FY 2025-26, compared to 17.45 percent and
11.60 percent in FY 2024-25.
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 2023-24 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 seven 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
• FY 2023-24: $36.6 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" in FY 2021-22. Following market losses reported by the plan in
calendar year 2022, the plan's net pension position reverted back to a net pension liability in FY 2022-23 of
$37.8 million. This has remained relatively steady, decreasing slightly to a net pension liability of $36.6
million in FY 2023-24 following more favorable investment returns in 2023. Given the volatility involved with
this figure, while it is informative to see the immediate impact market returns have on a governmental
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agency's pension obligation, it is not entirely relevant as it does not have immediate budgetary
ramifications (i.e., pension contribution rates/amounts).
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 GAS B 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 the table
below.
12/31 /2023
6/3/2021
(Latest
6/30/2024
Position
Bond Closing
Actuarial
(Preliminary
Paper
July 2021
Results)
Returns)
Expected Value/
$15 million
$16 million
$2 million
$3 million
Most Likely Outcome
Probability of
Positive Outcome
87 percent
89 percent
68 percent
78 percent
—90 percent of Range
-$8 million to
-$9 million to
-$8 million to
-$5 million to
of Outcomes
+$42 million
+$41 million
+$11 million
+$8 million
New CCCERA
8.63 percent
Investment Return
n/a
n/a
8.69 percent
(FY 2023-24
for Period Used in
(2023 Return)
Preliminary
Model
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.
The last two columns in the table reflect the availability of the latest CCCERA investment performance
results since the transaction closing.
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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 at that time.
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.
For calendar 2023, CCCERA produced a favorable investment return of +8.69 percent, decently above
the 6.75 percent assumed discount rate. This marginally increased the probability of success to 68
percent. The 90 percent range of outcomes were between -$8 million and +$11 million in savings, with the
most likely savings outcome at +$2 million.
As of June 30, 2024, CCCERA's preliminary investment return for the fiscal year then ended was
favorable at +8.63 percent, compared to the assumed return of 6.75 percent. This increased the
probability of success to 78 percent, while the 90 percent range of outcomes narrowed to between -
$5 million and +$8 million in savings. The most likely savings outcome increased to +$3 million.
Attachment 1 contains histogram charts providing more detail on each of the four points in time noted covered in
the previous table. 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 2024 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. However, 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.
• Even with an early negative return following the UAAL payoff, the transaction still has a 78 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.
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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
ATTACHMENTS:
1. UAAL Paydown Analysis Supporting I nfo-Charts
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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.
Bonds Benefit 874b Probabilit► of Success
60U Probability of Achieving at Least 7% Average Return
51.i,650,991 86% Probability of Achieving at Least S1,000.000
!% Probability of Being Overfunded vs. Status Quo at End of Mensurement Period
15% Probabiilii • of Overfunding vs. Status no in Any Year
010
25%
w
20%
or
6
15%
i3
v 10% 8.6%
5%
2.6%
0.3% -
0%
i-531, -$21] (•521, •511] [-511, -51]
24.0% 23.6%
0A% 0,0%
(59, 5191 ($19, 529] ($29, 539] (539, 5491 {S49, 5591 {559, 569] (569, 5791 (579, 5891
Range of Benefits (5 MiIIiores)
11Page
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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.
Bonds Benefit 89% Probability of Success
61% Probability of?lchiei-ing at Least 7% Average Return
SI6y674,683 87% Probability of?lchieiing at Least S1.000.000
2% Probability of Being Overfunded vs. Status Quo at End of Measurement Period
15% Probability of Overfunding vs. Status uo in Any Year
30%
25%
596
096
24.4%
[-528,-$181 (-S18,-S81 (-58, 521 (S2, $121 (S12, S221
0.2% 0.1% 0.0%
(S22, 5321 (532, 5421 (S42, $52] (552, 5621 (S62, 5721 (572, 5821 (582, 5921
Range of Benefits IS Millions)
2 1 P a g e
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3. 12/31/23 (Latest Actuarial Results) Column - Using available CCCERA investment returns for the period through 12/31/2023 of +8.69%, the
expected value of savings was about $2 million, with a probability of producing at least some savings (>$0) at 67%. Approximately 90% of the
outcomes fell between -$8 and +$11 million.
Bonds Benefit 68% Probability of Success
379,b Probability of Achieving at Least 6.75" Average Return
S1,924,628 621D/u Probability of Achieving at Least S1,000,000
0% Probability of Being Overfunded vs. Status Quo at End of Measurement period
3010 I ProbabWt_y of Overfunding vs. Status Quo in Any Year
30%
25%
9G — 27.1%
[-$20, -$16) (-$16, -$12] (-S12, -$s) i-$s. -Sal (-$4. Sol ($0. S4)
Range of Benefits ($ Millions)
(S4, S81 (S8, S12] ($12, $16) i$16, $21)
3 1 P a g e
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4. 6/30/24 (Preliminary Returns) Column - Using available CCCERA preliminary investment returns for the fiscal year ending 6/30/2024 of
+8.63%, the expected value of savings was approximately $3 million, with a probability of producing at least some savings (>$0) at 78%.
Approximately 90% of the outcomes narrowed to between -$5 million and +$8 million; this range will continue to narrow as we move forward
in time and closer to the final actual result.
Bonds Benefit 78% Probability of Success
38% Probability of Achieving at Least 6.75% Average Return
52,604,193 71% Probability of Achieving at Least S1,000,000
011/6 Probability of Being Overfunded vs. Status Quo at End of Measurement Period
1% Probability of Overfunding vs. Status Quo in Any Year
309F
25%
m 20%
a
0
Z' IS%
m
a
0
a 10%
5%
0%
28.59-
[-$12, 4101 ($10, -$71 I-ST -541 (-$4, -521 (-$2, $11 ($1, $41 ($4, $61 c56, $91 ($9. 5121 (512, $1a1
Range of Benefits (5 Millions)
41Page
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