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AC 12-13-2021 Presentation
Audit Committee Regular Meeting December 13, 2021 OPEB & Pension Investment Policy and Discount Rate Analysis 1. Background 2. CalPERS Update 3. Pension Funding Strategies 4. Discount Rate Sensitivity Analysis 5. Recommendation Topics Background Section 115 Trust OPEB Trust Established FY 2010 $38.0M in assets 8.16% return Pension Trust Established FY 2018 $18.5M in assets 15.45% return State and CalPERS Control Pension Funding Challenges Underfunded Pension System Volatility Risk Gives City Local Control of Pension Assets Solution: Section 115 Trust Prefunds Future Pension Costs Stabilizes Volatility in Pension Costs Diversifies Pension Assets from CalPERS Impact of Investment Returns Retirement BenefitsContributionsInvestment Earnings If the investment return is lower than expected … … the City’s required contributions will increase to cover the shortfall Impact of Discount Rate Discount Rate Contributions Probability of meeting investment return Risk CalPERS Update Investment Returns 21.3% FY 2020-21 6.9% 20-Year -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% 21.3% -30% -20% -10% 0% 10% 20% 30% 2000-01 2005-06 2010-11 2015-16 2020-21 CalPERS Historical Investment Returns Annual Investment Return 7% Discount Rate CalPERS approves 6.8% discount rate 7.0% 6.8% Risk Mitigation Policy (RMP) Asset Liability Management (ALM) Process 6.8% Impact on Contributions: FY 2027-28 Impact on Contributions annual costs decrease by $1.3M $5.9M $7.1M $5.3M $5.3M $3.4M $5.8M $4.0M $0.0M $1.0M $2.0M $3.0M $4.0M $5.0M $6.0M $7.0M $8.0M $9.0M 2020-21 2025-26 2030-31 2035-36 CalPERS Annual Required Contribution 7% Discount Rate 7% Discount Rate + FY 2021 Investment Gain 6.8% Discount Rate + FY 2021 Investment Gain Pension Funding Strategies 80%funded status within 20 years 6.25%discount rate What is our pension funding goal? How do we get there? $42M ●Assets ●20 Year ●Time Horizon $14.0M Contributions $18.5M Market Value Are we on track? $43.9M $51.8M $8.0M $18.5M $0.0M $10.0M $20.0M $30.0M $40.0M $50.0M $60.0M 2017-18 2022-23 2027-28 2032-33 Progress Towards Pension Funding Goal 5% Investment Return 6.25% Investment Return Actual Market Value Discount Rate Sensitivity Analysis Pension Costs If the discount rate goes down 1% annual costs increase by $2.9M $5.9M $5.3M $3.4M $8.1M $6.3M $0.0M $2.0M $4.0M $6.0M $8.0M $10.0M $12.0M 2020‐2021 2025‐2026 2030‐2031 2035‐2036 CalPERS Annual Contribution 7.00% Discount Rate 6.00% Discount Rate OPEB Costs If the discount rate goes down 1% annual costs increase by $0.7M $1.4M $2.4M $1.9M $3.0M $0.0M $0.5M $1.0M $1.5M $2.0M $2.5M $3.0M $3.5M 2020‐21 2025‐26 2030‐31 2035‐36 OPEB Annual Contribution 7.00% Discount Rate 6.00% Discount Rate Recommendation Investment Policy Recommendation ●OPEB Trust ●6.50% ●Target Rate of Return ●Pension Trust ●6.25% ●Target Rate of Return Questions? Thank you!