Presented by: Director of Finance, Joseph Lillio February 5, 2019 CalPERS Overview Presented by: Director of Finance, Joseph Lillio February 5, 2019

Overview What is PEPRA? City of El Segundo PERS Benefits The Costs – Past, Present, and Future What the City has done to address the PERS liabilities

What is PEPRA? Public Employee Pension Reform Act (PEPRA)

Public Employee Pension Reform Act (PEPRA) What is PEPRA? Approved by Legislature in 2012 (AB 340 and AB 197) Took effect on January 1, 2013 Mostly affects new members (i.e. became members on or after 1/1/13) The Law applies to all public retirement systems in California except for those established by a charter city or charter county

Public Employee Pension Reform Act (PEPRA) Changes for New Members Only Lower Benefit Formulas (2% at 62 for non-safety, 2.7% at 57 for safety) There were several options available under PEPRA & these are the options chosen by the City Limit on total pensionable compensation (currently $140,424 for non-social security members & $128,000 for positions under social security benefits) Required to pay 50% of “Normal Cost” Currently 12.75% for Safety, 6.25% for Miscellaneous Employer Paid Member Contributions (EPMC) are prohibited Uniform allowances are not counted toward pensionable compensation Changes for Classic Members Only Beginning January 1, 2018, City can require classic members to pay up to 50% of normal cost, capped at 8% for Miscellaneous & 12% for Safety: POA & FFA began paying 12% in December 2018 Can be imposed only after good faith bargaining, impasse, and fact finding

Public Employee Pension Reform Act (PEPRA) Changes for All Members No enhancements to “better” formulas Classic formulas are closed out for new contracts (i.e. cannot upgrade to 3% at 60) No new supplemental defined benefit plans (i.e. PARS) Cannot go from average of three highest years to single highest year No retroactive benefit enhancements If any benefit enhancements were available, they would only apply to future service, not past service (for example, when we went to 2.7% at 55 and 3% at 50) Working After Retirement 180-day waiting period No more than 960 hours per fiscal year New Purchases of Additional Retirement Service Credit (“air time”) are prohibited Public employees who leave the System for 6 months or more will be considered new members

City of El Segundo PERS Benefits

City of El Segundo Benefits Current Benefits Safety (Sworn) Classic Members (members prior to 1/1/13): 3% at 50 PEPRA Members (members on or after 1/1/13): 2.7% at 57 Miscellaneous (Non-sworn) Classic Members: 2.0% at 55 (tier I members on or before 1/1/13) and 2.0% at 60 (tier II classic members {already in the CalPERS system prior to 1/1/2013} hired into the City on or after 1/1/13) Both of the above classic plans are the single highest consecutive twelve months PEPRA Members: 2% at 62 (new members into the CalPERS system on or after 1/1/13) The average of the three highest consecutive years Up to 2% annual COLA for both Classic & PEPRA Disability Benefits (Industrial & Non-industrial) Death Benefits Level 3: $350/$700/$840 Level 4: $950/$1,900/$2,280 Indexed: $686/$1,373/$2,059 (increases 2% per year) – will reach Level 4 in 17 years Provides additional monthly allowance to eligible survivors of members who died before retirement Costs: Level 3: $2.00 EE / $0.00 ER Level 4: FY 2016-17: $2.00 EE / $4.30 ER FY 2015-16: $2.00 EE / $3.50 ER FY 2014-15: $2.00 EE / $5.00 ER Indexed: FY 2016-17: $2.75 each FY 2015-16: $2.40 each FY 2014-15: $3.35 each

City of El Segundo Benefits 2.0% at 55 Classic Base Compensation: Highest consecutive 12-months of “PERSable” earnings PEPRA Base Compensation: Annual average of highest consecutive 36-months of “PERSable” earnings % each year of service is worth Age the % becomes available Safety Plans Misc. Plans Safety Plans Misc. Plans Age 3% at 50 2.7% at 57 2.0% at 55 2.0% at 62 50 3% 2% 1.43% N/A 51 2.1% 1.52% 52 2.2% 1.63% 1% 53 2.3% 1.74% 1.1% 54 2.4% 1.87% 1.2% 55 2.5% 2.0% 1.3% 56 2.6% 2.05% 1.4% 57 2.7% 2.10% 1.5% 58 2.16% 1.6% Age 3% at 50 2.7% at 57 2.0% at 55 2% at 62 59 3% 2.7% 2.21% 1.7% 60 2.26% 1.8% 61 2.31% 1.9% 62 2.37% 2% 63 2.42% 2.1% 64 2.2% 65 2.3% 66 2.4% 67+ 2.5% 42

City of El Segundo Benefits Example of PERS Benefit Calculations Employee Retiring at Age 55 30 Years of Service Classic Member: Highest 12-month Pensionable Compensation = $105,000 PEPRA Member: Annual Avg. Highest 36 months = ($100,000 + $102,500 + $105,000) / 3 = $102,500 Classic Safety = 3% x 30 years = 90% x $105,000 = $94,500/year ($7,875/month) PEPRA Safety = 2.5% x 30 years = 75% x $102,500 = $76,875/year ($6,406/month) Classic Misc. = 2.0% x 30 years = 60% x $105,000 = $63,000/year ($5,250/month) PEPRA Misc. = 1.3% x 30 years = 39% x $102,500 = $39,975/year ($3,331/month) ½ at 55: 1.31% x 28 = 36.7% x $105,000 = $38,514 2% at 50: 2.28% x 28 = 63.8% x $105,000 = $67,032 1/70 Formula: 0.6% x 28 = 16.8% x $105,000 = $17,640 1/60 Formula: 0.71% x 28 = 19.7% x $105,000 = $20,685 2% at 60: 1.156% x 28 = 43.7% x $105,000 = $45,864 2% at 55: 1.522% x 28 = 42.6% x $105,000 = $44,747 PEPRA Misc. at 62 = 2% x 38 = 76% x $125,501 = $95,381

The Costs – Past, Present, and Future

How is PERS Paid for? GLOSSARY OF TERMS Discount Rate – expected annual rate of return on investments. Actuarial Accrued Liability (AAL) – The total amount of money needed right now in order to pay benefits in the future. In other words, the value of the pension that each employee has earned up to this point in time. Market Value of Assets (MVA) – the value of all assets held by CalPERS as of the current time. Unfunded Actuarial Accrued Liability (UAAL) – the difference between the AAL and MVA. Amortization – a schedule of payments to pay off a debt (for example, like on a 30-year home mortgage). Smoothing– softens the impact of gains and losses on assets. For 30-year amortization bases, the amount is ramped up for 5 years, steady for 20 years, then ramped down 5 years.

Cost of PERS benefits Value of Benefits Salary Growth Inflation Demographics Investment Returns Inflation Benefit Formula These are the factors that go into determining the value of pension benefits Discount Rate

CalPERS Income by Source

Change in Market Conditions 7.5% 7.1% Assumed rate of return

History of the CalPERS Discount Rate? Year Discount Rate 1990 8.75% 1993 8.50% 1996 8.25% 2002 7.75% 2012 7.50% 2018 7.375% 2019 7.25% 2020 7.00% Discount Rate (assumed nominal annual rate of return on investments) Actuarial Accrued Liability (a.k.a. Accumulated assets needed right now) Discount Rate – expected annual rate of return on investments This has TWO effects on how much we repay, as you will see in the following slides

How is PERS Paid for? In theory, pensions are earned while working Normal Cost = cost of what is earned in current year Expressed as a % of pay Cost is paid by both employee and City Put another way, this is the amount of money we need to set aside for the current year of service to pay for the anticipated benefit in the future What happens when contributions & interest fall short? – Unfunded Liability Employer (City) must make up the difference Present Value of Pension Benefits Market Value of Accumulated Assets Unfunded Liability

How is PERS Paid for? The Unfunded Liability is really the sum of many smaller liability bases. Below is the smaller bases from the Police 1st Tier Classic report:

The Cost of PERS Estimated Normal Cost Payments – Next 5 Years City Unfunded Liability Payments – Next 5 Years Fiscal Year Safety Misc. Total 2018-19 $3,024,000 $1,115,000 $4,139,000 2019-20 $3,013,000 $1,200,000 $4,213,000 2020-21 $3,241,000 $1,290,000 $4,531,000 2021-22 $3,393,000 $1,368,000 $4,761,000 2022-23 $3,497,000 $1,426,000 $4,923,000 Fiscal Year Safety Misc. Total 2018-19 $6,045,824 $2,014,997 $8,060,821 2019-20 $6,976,000 $2,421,000 $9,397,000 2020-21 $7,485,000 $2,472,000 $9,957,000 2021-22 $8,332,000 $2,607,000 $10,939,000 2022-23 $9,240,000 $2,830,000 $12,070,000

The Cost of PERS Estimated Total City PERS Costs – This Year and Next 5 Years Contribution Rate as a % of Pay Fiscal Year Safety Misc. Total % of General Fund 2018-19 $9,069,824 $3,129,997 $12,199,821 16.1% 2019-20 $9,989,000 $3,621,000 $13,610,000 17.6% 2020-21 $10,726,000 $3,762,000 $14,488,000 18.5% 2021-22 $11,725,000 $3,975,000 $15,700,000 19.6% 2022-23 $12,737,000 $4,256,000 $16,993,000 20.6% 2023-24 $13,467,000 $4,500,000 $17,967,000 21.5% Safety Misc. 62.5% 23.2% 71.4% 26.7% 74.8% 27.1% 79.6% 27.8% 84.2% 29.0% 86.6% 29.9% Equivalent % of Payroll Rates: FY 16-17: FY 17-18

Estimated Total City PERS Costs Years 6 - 10 The Cost of PERS Estimated Total City PERS Costs Years 6 - 10 Fiscal Year Safety Misc. Total % of General Fund 2024-25 $14,189,000 $4,737,000 $18,926,000 22.9% 2025-26 $14,888,000 $4,943,000 $19,832,000 24.1% 2026-27 $15,562,000 $5,185,000 $20,747,000 25.3% 2027-28 $16,366,000 $5,422,000 $21,788,000 26.4% 2028-29 $17,084,000 $5,664,000 $22,747,000 27.1% 2029-30 $18,199,000 $5,991,000 $24,190,000 28% Equivalent % of Payroll Rates: FY 16-17: FY 17-18

What the City of El Segundo has done to address the PERS liabilities

Pension Strategies That Have Been Implemented Total cost savings of $6,153,000 implemented over the past two years through being proactive & strategic at addressing the rising pension costs: $5.6M in long-term savings & $548k in immediate savings Additional Payment towards Unfunded Pension Liabilities in FY 2017-18 in the amount of $1,901,141 (direct reduction of principal) resulting in a savings of $2,587,000 in interest payments to CalPERS over the next 30 years Additional Payment towards Unfunded Pension Liabilities in FY 2018-19 in the amount of $1,500,000 (direct reduction of principal) resulting in a savings of $1,158,000 in interest payments to CalPERS over the next 25 years Complete Fresh Start (Refinance) In December 2017 City Council approved staff recommendations to refinance the Miscellaneous Plan (refinanced from 30 years to 22 years), PD 2nd Tier Plan (refinanced to 10 years), and PD PEPRA Plan (refinanced to 10 years). The City saved $1.86 million in interest payments to CalPERS over the next 30 years These proactive strategic measures by City Council have saved the City a total of $6.1 million; $5.6 million in long-term savings and $548k in immediate savings. If you annualized the long-term savings of $5.6M, this results in about $187k/year in pension reduction costs.

Pension Strategies continued Pre-payment of the Annual Unfunded Liability (UAL) Prepaid the UAL for FY 2017-18, saving $258k (immediate savings) Prepaid the UAL for FY 2018-19, saving $290k (immediate savings) Set-up IRS Section 115 Pension Trust – Pension Stabilization Fund with PARS Initial deposit of $1,000,000 made in April 2018 Additional $1,000,000 deposit made in October 2018 $2,000,000 principal plus interest at an annual rate of ~5%-6% All Miscellaneous (non-sworn) employees are paying the full employee share of 7% as of January 1, 2018 All Public Safety employees (except police management) are paying the full employee share of 9% as of June 1, 2017 All Public Safety employees (except police management) are paying the full employee share of 9% + an additional 3% (total of 12%) as of December 1, 2018

5-year Forecast

Where Do We Go From Here? Finance staff will continue to monitor the market conditions of CalPERS investment returns and how these results (whether they meet the 7% discount rate or underperform) will impact the unfunded liabilities. Staff will continue to monitor legislative, judicial, and administrative CalPERS policy changes and how these policies and legal decisions will impact pension costs to the City. Staff will continue to strategically recommend additional payments towards the PERS unfunded liabilities during the annual budget process, as well as recommend any discretionary funds identified during the mid-year budget presentation to be applied towards the unfunded liabilities. This is an effort that will require the City to continue to remain proactively engaged in until the unfunded liabilities are no longer considered a fiscal risk to the financial health of the City. Under current conditions this will be through 2035-2040