California Public Employees’ Retirement System (CalPERS) City of Livingston California Public Employees’ Retirement System (CalPERS) Discount Rate Change

Who Is CalPERS ? The California Public Employees' Retirement System (CalPERS), established in 1932, is an agency in the California executive branch that manages pension and health benefits for public employees, retirees, and their families. As of 6/30/2016 $301.98 Billion in assets – In the top ten in the U.S. As of 6/30/2015 3,007 contracted agencies and 1.8 million employees

Why Is City of Livingston Involved With CalPERS ? City contracted in October 1975 with California State Employees’ Retirement System – now California Public Employees’ Retirement System (CalPERS) - to manage funds and administer retirement benefits

CalPERS Funding Model – 6/30/2016

The Problem More cash is going out than coming in Actual Investment Returns Have Not Matched Projected (Discount Rate) Estimated return over the next ten years is 5.8% to 6.2%

The Problem - Continued Fixed income returns have declined – investments shifted to equities and real estate – more volatility and risk Overall funded status of plan is 73% ( As of June 30, 2015) Funded status at 6/30/2007 was 101% ( Market asset value – benefits earned by employees) Actual rate of return and discount rate should match in order to reach 100% funded status

What Did The CalPERS Board Do? On December 21, 2016 CalPERS board voted to lower the discount rate from 7.5% to 7% over the next three years. This incremental lowering of the discount rate will give employers more time to prepare the changes in the employer contribution costs.

What Is A Discount Rate ? The assumed rate of future investment returns used to calculate future benefit liabilities and current contribution levels Higher assumed discount rate - lower future liabilities and contributions Lower assumed discount rate - higher future liabilities and contributions

Why Is This Issue Important ? It affects cost of retirement benefits Core cost of the City’s budget It is a key component of negotiated salary and benefit packages

CalPERS Actual and Discount Rates Actual Investment Returns 6/30/2016 1-Year Return 3 – Year Return 5 – Year Return 10 – Year Return 0.6% 6.9% 6.8% 5.1% Discount Rate (Assumed Investment Return) 6/30/2012 6/30/2010 6/30/2002 7.50% Net 7.75% Net 8.25% Net

Fiscal Year for Required Contribution CalPERS Solution Lower the assumed rate of return in 2018/19 – which increases contributions – and amortize increase over 20 years Fiscal Year for Required Contribution Discount Rate 2016/17 7.50% 2017/18 2018-19 7.375% 2019-20 7.25% 2020-21 7.00%

Phase-In Schedule Year Impact Year % of Ultimate Payment 1 2018-19 20% 2019-20 40% 3 2020-21 60% 4 2021-22 80% 5 - 16 2022-23 thru 2033-34 100% 17 2034-35 18 2035-36 19 2037-38 20 2038-39

Impact On City Of Livingston Discount Rate Unfunded Liability Funded Ratio Amortiz-ation Period Public Safety Miscellan-eous Total 7.50% $1.34 M $2.78 M $4.12 M 78.2% - 82.2% 8 – 30 Years 7.00% $1.91 M $3.72 M $5.63 M 72.9% - 76.4% Increase $ .57 M $ .94 M $1.51 M 5.4% to 5.8% 20 Years

Impact On City of Livingston Fiscal Year Citywide Cost General Fund Cost 2017/18 - Current $595,000 $352,000 2018/19 – First Year Low High $676,500 $693,000 $401,000 $411,100 2022/23 – Full Phase-In $1,002,500 $1,082,000 $596,500 $645,200 % Increase 17/18 to 22/23 68% 82% 69% 83%

Impact on General Fund In 2018/19 CalPERS cost will require about a 1% increase in General Fund revenue In 2022/23 CalPERS cost will require about a 5% increase in General Fund revenue Average increase in General Fund revenue over last five years is 6%

Does This Solve The Problem ? CalPERS staff have stated this will help lessen the gap but not close it CalPERS and their outside experts estimate a 5.8% - 6.2% average return over the coming decade This issue will be revisited in a year and CalPERS has indicated the discount rate will probably need to go lower

Questions