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

2. 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

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

4. 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

5. 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

6. 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

7. City of El Segundo PERS Benefits

8. 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 : $2.00 EE / $4.30 ER
FY : $2.00 EE / $3.50 ER
FY : $2.00 EE / $5.00 ER
Indexed:
FY : $2.75 each
FY : $2.40 each
FY : $3.35 each

9. 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

10. 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

11. The Costs – Past, Present, and Future

12. 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.

13. 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

14. CalPERS Income by Source

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

16. 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

17. 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

18. 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:

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

20. 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
$9,069,824
$3,129,997
$12,199,821
16.1%
$9,989,000
$3,621,000
$13,610,000
17.6%
$10,726,000
$3,762,000
$14,488,000
18.5%
$11,725,000
$3,975,000
$15,700,000
19.6%
$12,737,000
$4,256,000
$16,993,000
20.6%
$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

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

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

23. 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 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 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.

24. Pension Strategies continued
Pre-payment of the Annual Unfunded Liability (UAL)
Prepaid the UAL for FY , saving $258k (immediate savings)
Prepaid the UAL for FY , 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

25. 5-year Forecast

26. 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