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Home My WebLink AboutSupplemental Communication - Study Session #1 - CalPERS Cont 1 Huntington Beach City Council — May 1 , 2017 CaIPERS Contributions : Where They are Going — And What You Can Do About it? Kerry Worgan , Senior Pension Actuary CaIPERS ACaIPERS Agenda • Where are Employer Contributions heading? • Recent News • What is Coming up? • What Can Agencies do? . CaIPERS 2 Where Are Employer Contributions Heading ? Annual Valuations • June 30, 2015 valuation reports released last summer • June 30, 2016 reports distributed in July/August • Schedule was accelerated to accommodate GASB 68 report production A CAPERS 4 Dollar Billing • Required contributions for Public Agencies are now provided in two pieces: 1. Normal Cost — provided as a percentage of payroll 2. Unfunded Liability Payment — provided as a monthly dollar amount • UL Payment can be prepaid as a single lump sum in July or paid monthly • Total required contribution as a percentage of pay is provided in the footnotes . CaIPERS 5 Amortization Policy • Adopted by the Ca1PERS Board in April 2013 • Designed to pay down unfunded liability faster • 5 year direct rate smoothing - 30 year closed amortization of experience gains/losses - 20 year closed amortization of assumption changes - Five year ramp up/down A. CaIPERS s s Where can I see my future contributions? • Page 5 of your annual actuarial report at 6/30/15 Miscellaneous Required Projected Future Employer Contributions Plan Contribution Fiscal Year 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 Normal Cost 9.004% 9.0% 9.0% 9.0% 9.0% 9.0% % UAL $ 9,377,454 11,153,465 13,027,595 14,134,046 15,412,445 16,374,124 Safety Plan Required Projected Future Employer Contributions contribution Fiscal Year 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 Normal Cost 18.919% 18.9% 18.9% 18.9% 18.9% 18.9% % UAL $ 12,697,981 14,947,442 17,320,441 18,804,879 20,352,634 21,561,238 . CaI PE,RS Accelerated Funding • Multiple ways to do it - Fresh start over a reduced period - Additional Discretionary Payment (ADP) on an ad hoc basis • Ad hoc basis — Employer Option - Short-term Savings : Apply to Shortest Base - Long-term Savings : Apply to Longest Base - Flexible A Ca1PERS 8 s Accelerated Funding • Fresh Start - Must pay off bases faster than existing schedule - Creates new higher Minimum UAL payment - Significant long-term savings - Inflexible A, CaIPERS 9 Accelerated Funding • Discuss with your CalPERS Actuary - they will explain options and show financial impacts • Help us Understand your Goals • CalPERS will prepare paperwork and payment instructions - need Payment Amount & Payment Date • New Amortization schedules show up in next valuation report A_ Ca1PERS io 10 Recent News . CaIPERS 11 Investment Return ( IR) Assumption • Currently 7.50% for 6/30/15 valuation • Board adopted 7.375% for 6/30/16 valuation - 7.25% for 6/30/17 valuation - 7.00% for 6/30/18 valuation • Based on asset allocation and capital market assumptions A: CaIPLRS 12 Investment Return ( IR) Assumption • A lower IR assumption means: - Higher normal cost Ws - Higher accrued liabilities - Decreases to required payments toward existing unfunded liability - Overall increase to total employer contributions A Ca1PERS 13 Back to the future . . . • Page 5 of your annual actuarial report at 6/30/15 Miscellaneous Required Plan Contribution Projected Future Employer Contributions Fiscal Year 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 Normal Cost 9.004% 9.0% 9.0% 9.0% 9.0% 9.0% % UAL$ 9,377,454 11,153,465 13,027,595 14,134,046 15,412,445 16,374,124 Safety Plan Required Projected Future Employer Contributions Contribution Fiscal Year 2017-18 2018-19 2019-20 2020-21 2021-22 2022-23 Normal Cost 18.919% 18.9% 18.9% 18.9% 18.9% 18.9% % UAL $ 12,697,981 14,947,442 17,320,441 18,804,879 20,352,634 21,561,238 A. Ca I PEES 14 How To Determine your Revised Contributions? • Circular Letter 200-004-17 dated January 19, 2017 Normal Cost UAL Payments Valuation Fiscal Year Misc. Safety Misc Safety Date Impact Plans Plans Plans Plans 6/30/2016 2018-19 0.25%-0.75% 0.5%- 1.25% 2%-3% 2%-3% 6/30/2017 2019-20 0.5%- 1.5% 1.0%-2.5% 4%-6% 4%-6% 6/30/2018 2020-21 1.0%-3.0% 2.0%-5.0% 10%- 15% 10%- 15% 6/30/2019 2021-22 1.0%-3.0% 2.0%-5.0% 15%-20% 15%- 20% 6/30/2020 2022-23 1.0%-3.0% 2.0%-5.0% 20%-25% 20%-25% 6/30/2021 2023-24 1.0%-3.0% 2.0%-5.0% 25%-30% 25%- 30% 6/30/2022 2024-25 1.0%-3.0% 2.0%-5.0% 30%-40% 30%-40% CaIPERS 15 How to Determine Projected Contributions? • Using Page 5 of your actuarial report at 6/30/15 Current Discount Rafe-7.50% 2017-19 2019-19 2M9-20 202621 2021-22 2022-23 NC Rate 10.500% 10.5% 10.5% 10.5% 10.5% 10.5% NC $ 693,000 $ 703,000 $ 724,000 $ 746,000 $ 768,000 $ 791,000 UAL 5 1,366,000 $ 1,669,000 $ 1,988,000 $ 2,182,000 $ 2,390,000 $ 2,548,000 TOTAL S 2,049,M0 $ 2,372,000 $ 2,712,000 $ 2,928,000 $ 3,158,000 S 3,339,000 Projected Payroll $ 6,500,000 $ 6,695,000 $ 6,8%,000 $ 7,103,000 $ 7,316,000 $ 7,535,000 • With the Circular create the following table Revised Discount Rates 7.37596 7.25% 7.00% 7.00% 7 2017-18 2018-19 2M9-20 2010-21 2021-22 2022-23 NC Rate 10.500% 11.0% 11.5% 12.5% 12.5% 12.5% NC-New $ 683,000 $ 736,000 $ 793,000 $ 888,000 $ 915,000 $ 942,000 UAL factor 1.000 1.025 1.050 1.125 1.275 2.225 UAL-New $ 1,366,000 $ 1,711,000 $ 2,087,000 $ 2,455,000 $ 2,808,000 $ 3,121,000 TOTAL-New $ 2,049,0M $ 2,447,000 $ 2,990,000 $ 3,343,000 $ 3,723,000 $ 4,063,000 Increase in cost 3.2% 6.2% 14.2% 17.9% 21.7% • Full projections will be available in 6/30/16 report A Ca1PERS 16 How to Determine Projected Contributions? Total Projected Contributions at June 30, 2015 Current Discount Rate-7.50% 2017-19 201&19 2019.20 20213-21 2021-22 2022-23 NC-2015 $13,317,000 $13,716,0D0 $14,128,000 $14,552,000 $14,989,000 $15,437,000 UAL-2015 $22,075,435 $26,100,907 $30,348,036 $32,938,925 $35,765,079 $37,935,362 TOTAL-2015 $35,392,435 $39,816,9D7 $44,476,036 $47,490,925 $50,754,079 $53,372,362 $17,979,927 Total Estimated Contributions based on Circular Revised Discount Rates 7.375% 7.259A 7.00% 7.OD% 7. 2017-18 201&19 2019.20 202D-21 2021-22 2022-23 NC $13,317,000 $14,453,000 $15,646,000 $17,679,000 $18,209,000 $18,756,000 UAL $22,075,000 $26,678,0D0 $31,692,0D0 $36,586,000 $41,516,000 $45,931,000 TOTAL $35,392,000 $41,131,000 $47,338,00D $54,265,000 $59,725,DD0 $64,687,000 Increase 0.0% 3.3% 6.4% 14.3% 17.7% 21.2% $29,295,000 Total Projected Contributions at June 30,2016 Revised Discount Rates 7.375% 7.25% 7.001A 7A0% 7. 2017-18 2D18-19 2019-20 202D-21 2021.22 2022-23 NC-2016 $13,317,0D0 $13,825,000 $14,902,000 $16,712,000 $17,213,000 $17,730,000 UAL-2016 $22,075,435 $25,833,974 $30,152,781 $33,291,080 $37,415,968 $41,009,692 TOTAL-2016 $35,392,435 $39,658,974 $45,054,781 $50,003,080 $54,628,968 $58,739,692 Increase 0.0% -0.4% 1.3% 5.3% 7.6% 10.1% $23,347,257 A Ca1PERS 17 17 Projections from 6/30/15 Valuation Misc. Plan - Projected Costs at June 30, 2015 $25,000,000 - C $20,000,000 - $15,000,000 510,00010W $5,=,000 $- M7-18 201&19 2019-20 2020.21 2MI-22 2022-23 tNC -*-UAL �TOTAL Ca1PERS 18 18 With Discount Rate Changes Misc. Plan - Projected Costs at June 30, 2016 $25Ao0A00 $20Ao0A00 JmI $1s 000im $10,000,000 u.00 ,000 -� $- 2012-18 101919 201920 2020-21 2021-22 2022-23 tNC DUAL —TOTAL tNC-New tUAL-New tTUTAL-New Ca1PERS 19 19 Projections from 6/30/15 Valuation Safety Plan - Projected Costs at June 30, 2015 $40,000,000 $35,000,000 $30,000,000 $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000,000 2017-18 201&19 2019-20 2020-21 2021-22 2022-23 ANC 2015 - UAL 2015 -i TOTAL 2015 Ca1PERS 20 20 With Discount Rate Changes Safety Plan - Projected Costs at June 30, 2016 $40,000,000 $35,000,000 - ---- $30,000,000 $25,000,000 $20,000,000 $1510001000 $10,000,000 ■ ■ $5,0001000 S 2017-18 2018-19 2019-20 202621 2021-22 2022-23 tNC 2015 --*-UAL 2015 -TOTAL 2015 ANC-2016 tUAL-2016 TOTAL-2016 . CaIPERS 21 With Discount Rate Changes 50.0% City of Huntington Beach- Misc. Plan 45.0% 40.0% 35.0% 30.0% 25.0% Mime Er 20.0% 15.0% 10.0% 5.0% 0.0% 4$114e a a a tValuatlon2016 --*—Valuation 2017 fValuatlon2018 CaIPERS 22 22 With Discount Rate Changes $750,OW,OW Misc. Plan - UAL Projection $2W,00Q000 . $150,000,000 - - $100,000,000 $50 000 000 $o � as � � a • aaa � aa � x � � � st � � tax � � � t� � asev -$50,000,000 — t UAL 2016 DUAL 2017 fUAL 2018 CAPERS 23 23 With Discount Rate _LChanges 70.(=% — -- — ��-of HuntingWn Beath--8teW Plan 60.000% 50.00a% 40.000% 30.000% 20.00096 10.000% 0.000% qq pp pp gg yy R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R aaaa � aaaaaaaaaa � aaaaaaa � aaaaaaaaaaa � a > a � aaaaaaaaaa � aaaa � � a � a � � aaa � aaaa Valuation 2016 --*—Valuation 2017 tValuation 2018 CAPERS 24 24 With Discount Rate Changes S350"OW'M Safety Plan - UAL Projection $30o,00Q000 $250,000,000 $200,000,000 $150,000,000 - S100,000,000 $5010001000 50 q S R °� R ry R A 8 q R A R R R m Ft FI R 18 R % 8 W 6 7 7 R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R R a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a a aaaaaa � aaaaaaa � aa � aa � � � a � aa � aa � � � > � -$50,000,000 *—UAL 2016 tUAL 2017 tUAL 2018 Ca1PERS 25 25 What Is Coming Up? Balancing the Fund Investment Returns Benefits Contributions A CaIPERS � 27 Asset Liability Management Framework • An integrated approach that considers assets, liability, and risk to ensure the sustainable funding of the system. AssumptionsAsset Allocation Actuarial (Economic and Demographic tRisk Assumptions and Assumptions,and Review Capital Market Assumptions) of Current Discount Rate) Currently revievied every three years Currently revimed every four years per Board policy perBoardpolicy Aim Fiduciary duty Constitutional authority Statutory requirement Professional standards . OWERS 28 Asset Allocation (ALM Study) • Review of investment allocations: - Capital Market Assumptions - Portfolio Volatility • Asset Liability Management workshop in November, 2017 • Create 7-8 Alternative Portfolios • Impact on Accrued Liabilities and Normal Cost • Decision on future Discount Rates • Board adoption December, 2017 A. CaIPERS 29 Experience Study • Review of all actuarial assumptions: - Mortality, move to new improvement scale MP2016 - Inflation, capital markets trending lower than 2.75% - Salary growth, tied to inflation - Retirement ,Termination and Disability Rates • Analysis of past plan experience and trends • Recommendations for future experience • Impact on Accrued Liabilities and Normal Cost • Board first reading December, 2017, adoption February, 2018 Ca1PERS 30 What is Funding Risk Mitigation? • Funding Risk Mitigation seeks to reduce funding risk over time • Reducing funding risk should mitigate the impact of investment volatility on employer contribution rates and funding levels over time A.. CaIPERS 31 How Will Funding Risk Mitigation Work? • Ultimately Risk Mitigation may reduce investment return assumption by around 100 basis points (1 %) - E.g., 7.50% to 6.50% • Will result in higher contributions from employers and members • Financial impact expected to be very gradual • Board approved temporary suspension due to discount rate changes . CaIPPRS 32 s. What Can Agencies Do? CaIPERS Communications with Board • Finance & Administration Committee (FAC) • Richard Costigan — FAC Chair • Trade-off between volatility and cost • Is lower volatility the most important factor? • Make your views known Ca I P1:R-S 34 34 One final takeaway. . . 1.7 Actual vs. Expected PERF Returns since 6 30 11 I 1.6 1.5 1A 13 12 IL 1.1 1 09 �, °'A '9 1d'► d'� '� °'e v°'S '9 6 d'e 'eiO tio�~� � o� tia tic's a Z�~� tis tid~� ti�� ry tio�~\ tip$ �Actual —Exp na d Ca1PERS 35 Questions & Comments . Ca1PERS 36