CalPERS Actuarial Valuation Reports (as of June 30, 2019)

Proprietary and Confidential © 2021 GovInvest Inc.

Pension Funding Tahoe City Public Utility District, CA

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Building Blocks of Pension Funding

Educate

Your agency is updated on the annual CalPERS investment return

Analyze

Quantify impact of final discount rate decision

Present

Develop funding policy

Adopt

Formally adopt and implement funding policy

Administer

Monitor funding policy to ensure fiscal stability and growth

Evaluate

Revisit funding policy

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Understanding Pension Funding

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Pension Basics Hurdles and Other Considerations

Next Steps How is your agency doing relative to your funding targets?

Presenter

Presentation Notes

In this presentation we will talk about the four goals on this slide.


Pension Basics

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Pension Jargon Glossary

• Assumption = Target, Goals or Expected Results • Experience = Actual Results

• Normal Cost = Initial savings rate (Employee and Employer contributions)• Present Value of Projected Benefit (PVPB) = Savings goal at desired retirement age

• Accrued Liability (AL) = Target funding progress at a given point of time• Unfunded Accrued Liability (UAL) = Amount actual savings falls short of funding goal

• Amortization of UAL = Annual amount needed to get back on track

• Annual Required Contribution = Normal Cost + Amortization of UAL• Discount Rate = Long-term assumed Investment Rate of Return

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Presenter

Presentation Notes

As with many complicated subjects, the public pension world is littered with Jargon. I won’t read the definitions to you but I’ll pause here to se if you have any immediate questions.


What Is the Discount Rate?

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Interest rate fixed by the CalPERS Board for the purposes determining the value of future promised benefits (liabilities)

Synonymous with long-term, assumed investment rate of return

Used to calculate or “discount”value of future expected future-

benefit payments.

It helps determine how much do we need in the bank today to grow

to our desired savings goal.

Informed by Capital Market Assumptionsand selected by the Board from a range

of actuarially sound options


Assumptions Set Future Cost & Funding Expectations

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Economic• Inflation• Investment Return• Salary Growth

Demographic• Retirement• Disability• Death• Termination

Major Driver of Plan Cost and Affordability


Public Employer Reform Act (PEPRA) of 2012Lower Prospective Benefits Effective Jan 1, 2013

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• In 2012, the California legislature passed the Public Employees’ Pension Reform Act (PEPRA), championed by former Gov. Jerry Brown. PEPRA took effect January 1, 2013 and places limits on the level of pension benefits.

• While this reform is significant, due to a provision in the California constitution often referred to as the “California Rule,” the PEPRA limitation only applies to employees hired after January 1, 2013 AND are either new to the pension system or had a break in service in excess of 6 months.

• Therefore, the impact of PEPRA will not provide employers significant relief for decades to come.

Presenter

Presentation Notes

Two Plan – Misc & Safety Plans, Two Tiers of Benefits


-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55

EE & ER Contributions (Normal Cost Only) Actual Investment Earnings Unfunded Liability Target Balance (Accrued Liability)

Accrued Liability(Target funding progress at a static point in time)

Investment Earnings +

Normal CostContributions

Present Value of Projected Benefit(Funding target at desired retirement age)

Retirement Plans Are Sensitive to Investment Earnings

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-

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55

EE & ER Contributions (Normal Cost Only) Actual Investment Earnings Unfunded Liability Target Balance (Accrued Liability)

Accrued Liability(Target funding progress at a static point in time)

Investment Earnings +

Normal CostContributions

Present Value of Projected Benefit(Funding target at desired retirement age)

Retirement Plans Are Sensitive to Investment Earnings

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UAL(Amount of Assets Short of Funding Target)


Illustration of Mortality Risk for an Individual Employee

$(1,000,000)

$(800,000)

$(600,000)

$(400,000)

$(200,000)

$-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

25 30 35 40 45 50 55 60 65 70 75 80 85

Retirement ContributionRetirement PaymentsEmployer retains risk of employee outliving original life expectancy

Expected Service Life Expected Retirement Life

Present Value of Projected Benefit (Savings Goal)

Accrued Liability(Target funding progress

at a point in time)

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Presenter

Presentation Notes

I find easier to visualize the life of one employee rather than all the plan participants at once The Present Value of Projected future Benefit is the savings goal the employer should try to accumulate by the employee reitres The Accrued Liability is the target funding progress at any point in time.


Historical Factors Impacting Funded Status

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Source: CalPERS

Challenge Yourself to Look Beyond What You See Today

Presenter

Presentation Notes

Case in point: When Benefit enhancements were adopted in the late 90”s, Stock Prices seemed to know no limits, real estate was booming and there was no end in sight to the good times. Challenge yourself to think beyond what you see toda.


Hurdles & Considerations

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CalPERS Investment Return: 21.3%

(Preliminary Estimate)

Investment Return Triggers Lower Discount Rate Provision of Funding Risk Mitigation Policy

New Discount Rate 6.8% Heading into ALM Deliberations Final Decisions Expected November 2021

https://www.calpers.ca.gov/docs/funding-risk-mitigation-policy.pdf

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Presenter

Presentation Notes

Everyone should know by now that CalPERS earned a 21.3% The board adopted a Funding Risk Mitigation Policy adopted in 2015, it was amended and suspended to FY 2020-21 so it is back in play again



Funding Risk Mitigation Policy - Still in Place*6.8% Discount Rate Heading Into ALM Deliberations Nov 21

* While the CalPERS Board may elect to implement something different, the current policy suggests that the board should reduce the discount rate 20 bps to 6.8%. https://www.calpers.ca.gov/docs/funding-risk-mitigation-policy.pdf

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Presenter

Presentation Notes

The policy sets out earnings triggers that will automatically reduce the discount rate unless the board intervenes.


Proprietary and Confidential © 2021 GovInvest Inc. 16

Stay Tuned, Stay Informed, Stay Engaged

Presenter

Presentation Notes

But the fun doesn’t end there. The ALM Study and review of forward-looking earning assumptions commonly referred to as capital market assumptions or CMAs which will very likely proposed even lower discount rates


CalPERS Historic Investment Returns

-3.1%

35.4%

24.6%

13.8%

3.9%

15.7%

9.7%6.5%

12.5%14.5%

2.0%

16.3%15.3%

20.1%19.5%

12.5%10.5%

-7.2% -6.1%

3.7%

16.6%12.3%

11.8%

19.1%

-5.1%

-24.0%

13.3%

21.7%

0.1%

13.2% 18.4%

2.4%

0.6%

11.2%

8.6%6.7%

4.7%

21.30%

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%19

84

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

Plan Year Ending June 30

Actual Discount Rate

Dot Com Crash

Great Recession

20-Year Annualized Rate of Return 6.9%

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Presenter

Presentation Notes

The Dot Com Crash was the first time PERS underperformed its expected rate of return 3 consecutive years in a row Market losses during the great recession were almost inconceivable. When statisticians measure expected results they refer to variance as standard deviations from the mean. Events that are beyond 2 standard deviations are expected to occur only 2.5% of the time. An event that is a little over 7 standard deviations is expected to occur once every 13.7 billion years (roughly the age of the universe). But during the 2008 fiscal crisis some banks incurred losses 25 standard deviations below the mean, several days in a row. As bad as the losses were CalPERS could have done a lot worse but the investment


What is Happening When?• CalPERS Board Expected to Adopt New Discount Rate November 2021• Assets and Liabilities Adjusted in 2021 Valuation (Next Fiscal Year for Most Plans)• Net Positive Impact to Funded Status Under Almost Every Conceivable Scenario• Contribution Rate Impact Begins FY 22-23 Schools & State, FY 23-24 Local Agencies

All subject to CalPERS Board Decisions

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How is Your Agency Doing?

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Historical Plan Funded

Status(Millions)

FUNDING PROGRESSFiscal Year Ended

(FYE) 2016 2017 2018 2019 2020Accrued Liability

(AL) $35,578,684 $37,474,539 $40,942,676 $42,919,587 $45,018,448Market Value of

Assets (MVA) $25,095,014 $27,005,461 $28,961,275 $30,357,096 $31,426,015

Unfunded Accrued Liability (UAL) 10,483,670 10,469,078 11,981,401 12,562,491 13,592,433 Funded Status 70.53% 72.06% 70.74% 70.73% 69.81%

INVESTMENT RETURNAssumption 7.39% 7.25% 7.00% 7.00% 7.00%

Actual Experience 0.6% 11.2% 8.6% 6.7% 4.7%Experience

Gain/Loss -6.79% 3.95% 1.60% -0.30% -2.30%


2021-21 Plan Funded Status Projections(Millions)

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6/30/2020 6/30/2021Scenarios Status Quo A B C D E

Investment Return 7% 7% 21.3% 21.3% 21.3% 21.3% 21.3%Discount Rate 7% 7% 7% 6.8% 6.5% 6.25% 6%

Mark Value of Assets (MVA) $31 $32 $36 $36 $36 $36 $36Accrued Liability (AL) $45 $45 $45 $46 $48 $50 $51Unfunded Liability (UAL) $13 $13 $9 $10 $12 $13 $15

Funded Status (FS) 70% 71% 80% 78% 75% 72% 71%

Scenario Notes:

A Favorable investment return increases MVA $4 Million and increases funded status 9% from status quo.B Baseline: 6.8% discount rate increases AL $1 million and reduces funded status 2% from scenario A (Favorable Investment Return).C 6.5% discount rate increases AL $3 million and reduces funded status 5% from scenario A (Favorable Investment Return).D 6.25% discount rate increases AL $5 million and reduces funded status 8% from scenario A (Favorable Investment Return).E 6.0% discount rate increases AL $6 million and reduces funded status 9% from scenario A (Favorable Investment Return).


Total Required Employer – Before Favorable Investment Return and Lower Discount Rate Change

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Cost Impact on Annual Employer ContributionBaseline Assumption 6.8% Discount Rate Baseline Assumption 6.8% Discount Rate

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Cost Impact on Annual Employer ContributionBaseline Assumption 6.5% Discount Rate

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Cost Impact on Annual Employer ContributionBaseline Assumption 6.25% Discount Rate

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Next Steps

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An Over-Abundance of Uncertainty

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Proceed Cautiously

The corona crisis has been a prompt for change. How will these changes impact your agency’s finances?


GFOA’s Triple-A Approach to Uncertainty

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• Accept• Uncertainty is inevitable

• Assess• Find potential impact, using reference

cases – historical or analogues• Augment

• Uncertainty will usually be underestimated!

Source: GFOA

Presenter

Presentation Notes

I think we can all agree that we are surrounded by uncertainty today. GFOA’s Triple A approach to uncertainty The accomplished forecasting scientist, Spyros Makridakis, has suggested a “triple-A” approach for dealing with uncertainty. Accept. First, we must accept that we are subject to uncertainty, including events that we haven’t even imagined. The term “black swan” derives from a belief held in England before 1697 that all swans were white – in fact, the term “black swan” was a common metaphor for an impossibility. Black swans were discovered in Australia in 1697 demonstrating the limits of human knowledge about the world. •Assess. Next, we must assess the potential impact of the uncertainty. Historical reference cases are a useful baseline. •Augment. The range of uncertainty we really face will almost always be greater than we assess it to be, so we should augment that range. Historical reference cases provide a baseline, but that baseline may not be adequate to account for all future possibilities.


Known Threats

• More Pandemic Waves• Geopolitical Risks• Political Gridlock on Further Stimulus• Low Fixed Income Yields• Inflation• Low Fixed Income Yields• Significant Market Correction or slow reversion to the

mean• Unknown, unknowns but we know you are out there


Why are Funding Policies Important• Pension obligations are expensive and can become a serious financial threat to

agencies without regular and appropriate attention;• Pensions require long-term management therefore it is important to develop

pension management strategies memorialize practices;• Provides guidance in making annual budget decisions;• Demonstrates prudent financial management practices;• Reassures bond rating agencies; and• Shows employees and the public how pensions will be funded


Building Blocks of Pension Funding

Educate

Your agency is updated on the annual CalPERS investment return

Analyze

Quantify impact of final discount rate decision

Present

Develop funding policy

Adopt

Formally adopt and implement funding policy

Administer

Monitor funding policy to ensure fiscal stability and growth

Evaluate

Revisit funding policy

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Questions

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CalPERS Actuarial Valuation Reports (as of June 30, 2019)

Documents

Transcript of CalPERS Actuarial Valuation Reports (as of June 30, 2019)