Annually, the California Public Employees’ Retirement System (CalPERS) provides the City with an actuarial valuation report of its pension plan. The report outlines employer annual required contribution as a percentage of the employer payroll. The rate usually is a combined rate that include the normal cost rate and an amortization rate for the UAL. Effective for the actuarial valuation period ended June 30, 2015, and thereafter, CalPERS would instead bill and collect the UAL contribution portion as a calculated amount based on outstanding UAL balance. See attachments 2 and 3 for the Miscellaneous and Safety Plans Valuation reports dated August 2016.

Over the past several years, the CalPERS board has considered adjustments to the discount rate as part of the risk mitigation response to the recent lower CalPERS portfolio earnings, and escalating unfunded liability amounts in participants’ plans. CalPERS board last lowered the discount rate, from 7.75 percent to 7.5 percent, in 2012. On January 10, 2017, the CalPERS board adopted a plan to further reduce the discount rate from 7.5 percent to 7.0 percent over the next three years. The rates would be phased down to 7.375 percent for Fiscal Year 2017-2018 valuation, 7.25 percent for Fiscal Year 2018-2019 valuation, and 7.00 percent for Fiscal Year 2019-2020 valuation.

CalPERS UAL Billing and Collection: CalPERS determined that the prior method of funding the unfunded liability as a percentage of payroll could lead to the underfunding of the plans, as payroll may decline or active employees are reduced. Therefore, beginning with Fiscal Year 2017-2018, CalPERS changed to calculate and collect employer contributions toward the plan’s unfunded liability as a dollar amount.  The normal cost contribution will continue to be billed and collected as a percentage of payroll.  The schedule below extracted from the most recent actuarial report dated August 2016 shows the change. The employer normal cost is as usual a rate that will be applied to total annual payroll.  However, the UAL is a dollar amount that is the required employer contribution/payment for the Fiscal Years 2017-18 and 2018-19 for both the Safety Plan and the Miscellaneous Plan. This is a change with respect to the method of funding the plan’s UAL going forward; however, it would not result in any significant increases in the City of Garden Grove UAL contribution amounts given the City's payroll trajectory.

CalPERS Lower Discount Rate Plan: The CalPERS board plan incrementally lowers the discount rate from 7.375 percent to 7.0 percent over the next three years. This phased approach according to CalPERS would give employers and members’ time to plan their budget responsibly given the expected increased contribution amounts.  Reportedly, the change will result in contribution rate increase of 3 percent of normal cost as a percentage of payroll for a typical miscellaneous plan, and a 5 percent increase for a typical safety plan. The impact will be even more pronounced for the unfunded liability element of the plan payments. CalPERS reported that “many employers will see a 30 to 40 percent increase in their current unfunded accrued liability payments.” The unfunded liabilities would be amortized over 20 years resulting in the increased annual UAL payments designed to bring the fund to a fully funded status over the long term. The discount rate is the single most impactful element in the calculation of the retirement contribution amounts. The reported unfunded accrued liability as of June 30, 2016, for the safety Plan is $147.07 million, and $80.30 million for the Miscellaneous Plan.  Assuming a 30 percent increase in currently unfunded accrued liability payments as indicated by CalPERS based on a 20 year amortization schedule, the impact for Garden Grove could be additional UAL contribution of $3.67 million in Fiscal Year 2017-2018.

Given the published actuarial valuation as of June 30, 2015, the City of Garden Grove (employer) combined contribution toward the Safety and Miscellaneous CalPERS plans was expected to increase by approximately $2.4 million in Fiscal Year 2017-2018, $2.9 million in Fiscal Year 2018-2019 and another $3.1 million in Fiscal Year 2019-2020. These increases are based on the currently applicable discount rate of 7.5 percent. The CalPERS adopted risk mitigation policy of incrementally lowering the discount rate to 7 percent over the next three years is projected to further increase the City’s UAL component of the required annual contribution. The Financial Impact By Fiscal Year attached (attachment 1) shows the projected City’s combined annual UAL contribution (employer portion) assuming the 30 percent adjustment.  This discount rate change could potentially increase the City budgets by $3.70 million in FY2017-18, $6.1 million in FY2018-19, and about $10.0 million in FY2019-20.  Employee contribution rates are assumed to remain at its current levels.

This is for City Council information and it is recommended that the City Council:

• Receive and file this report.