HomeMy WebLinkAboutItem 8.3 PRES Side-Fund Pre-Payment
CITY CLERK
File # D[Z][Zl[(2]-~~
AGENDA STATEMENT
CITY COUNCIL MEETING DATE: June 28, 2007
SUBJECT:
Pre-payment of Public Employee Retirement System (PERS) Side-Fund
Report Prepared by Paul S. Rankin, Administrative Services Dir. ff:/I..-r
ATTACHMENTS:
RECOMMENDATION. Authorize the use of General Fund Reserves to pre-pay CalPERS in
the amount of$3,569,754 for the City of Dublin Retirement Side Fund Obligation. Staff recommends that
the City Council direct Staff to make internal contributions beginning with the 2007/2008 Budget year, at
the rate of 4.319% of CalPERS eligible payroll, to replenish the General Fund reserves until the amount
advanced for the prepayment has been fully restored.
FINANCIAL STATEMENT: Pre-payment to CalPERS will result in a projected savings of not
less than $2,684,001 over a 17 year period, after accounting for replenishing the reserves and lost interest
not realized on the reserves.
DESCRIPTION: Prior to July 1, 2005 the California Public Employees Retirement System
(CalPERS) rates were based on actuarial studies specific to the City of Dublin. Effective July 1,2005 all
CalPERS retirement plans with less than 100 active members were transferred to risk sharing pools.
The initiation of risk sharing pools resulted in 1,500 PERS Member Agencies with less than 100
members, being placed into one of9 risk sharing pools based on their plan benefits (i.e. 2% @ 55; 2.7%
@55 ; etc.). Once assigned to a pool the agency will always be in a pool even if the number of employees
exceed the threshold of 100. The City of Dublin was among those agencies assigned to a risk sharing
pool. Risk pooling is the process of combining assets and liabilities across employers to produce large
risk sharing pools. The intent of using a risk sharing pool is to help reduce or eliminate the large
fluctuations in the employer's contribution rate caused by unexpected demographic events.
Establishment of Side Funds For Pooled A2:encies
With the creation of risk sharing pools the PERS system needed to create an equitable starting point
depending on whether an agency had a surplus or a liability based on the unpooled / individual rating
methodology. When each plan became covered under the risk pool, a side fund was created to reflect the
excess assets or unfunded liabilities present at the time of joining the pool.
COPY TO:
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ITEM NO. <6. 3
H:\Budget\Agenda Statements\Other Non Budget Ag Stmts\agenda stnmt PERSSideFund_6_28_07.doc
The City of Dublin has a negative side fund of $3,569,754. The obligation is scheduled to be fully repaid
in 17 years. CalPERS increases the balance owed annually by 7.75%, which is CalPERS assumed interest
rate. The payments are collected by PERS based on their projection of a level percentage of payroll
assuming salaries are increasing by an average of 3.25% per year.
Due to a lag in actuarial reporting, CalPERS actuarial assumptions typically underestimate the amount
contributed as shown in the following table. The City does not benefit directly from any excess
contribution. All excess contributions made by the City go into the general pool. As shown below over a
three year period the City is expected to contribute in excess of the PERS calculated contribution each of
the three years beginning in Fiscal Year 2005/2006.
ANALYSIS OF CITY OF DUBLIN PERS SIDE FUND CONTRIBUTIONS 2005 - 2008
Ex
ution
2005/2006
2006/2007
2.555%
4.672%
2007/2008
4.319%
$321,633
Pro .ected
$848,521
$150,452
$290,591
$300,035
$26,270
$59,575
$21,598
TOTAL 3 Years
$741,078
$107,443
The CalPERS side fund functions as a fixed obligation for the City. This is unlike the pooled portion of
the PERS system, where investment gains and losses result in changes in the calculated liability. PERS
has calculated and fixed the "Side Fund" liability and it accrues interest at the rate of7.75%. Although
CalPERS has earned 10.65% per year for the 5 year period ending March 31, 2007, excess earnings are
not applied to reducing the side fund obligation. Each agency is responsible for the payment of their side
fund, either over the amortization schedule, or through a pre-payment. In March of2007 the City Council
funded the prepayment of the Dougherty Regional Fire Authority Miscellaneous Plan side fund. In that
case the side fund was only $72,335 and Dublin's share was $40,800. Prepayment created a cost savings
for the City.
Reasons To Consider Per-Payment Of The CalPERS Side Fund Obli2:ation
Many agencies have examined this obligation and some have even issued debt to lower their costs and/or
to modify the payment terms. Some of the reasons for pre-funding the obligation include:
. CalPERS structure has economic disincentives since payments are based on a percentage of
payroll, which typically result in excess contributions that do not reduce the obligation.
. The CalPERS obligation accrues an interest charge of7.75% which is higher than the 4.45%
earned by the City portfolio for the 10 year period ending June 30, 2006.
. Pre-payment reduces the Employer contribution rate. This allows additional flexibility in
appropriating the funds that would other wise be paid as PERS rates over a 17 year period.
. Reducing known long term obligations is representative of prudent fiscal management.
Financial Impact of Pre-Payment
The payment towards the side-fund is just one component of the City of Dublin Employer Rate paid to
CaIPERS. If the City pre-pays the side fund the employer rate will be reduced by 4.319% in Fiscal Year
2007-2008. In order for PERS to reduce the rate the City would need to fund the prepayment of the
$3,569,754 prior to June 30,2007. The following Table identifies key differences between 1) Pre-
Funding (assuming the City Replenishes its reserves) and; 2) Making amortized payments to CaIPERS.
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1) Pre-Payment 4.319% of Payroll
Assumes City Internal payment Approx 10 yrs to $3,569,754 Pd 6/29/2007
Replenishes 3.25% to replenish Replenish Reserves from reserves. Therefore
Reserves General Fund the funds are unavailable
Reserves. for investment or other
uses.
2) Amortized 4.319% of Payroll 17 years to fully $7,149,051
Pmts To 3.25% Paid to CalPERS eliminate side fund Paid over 17 years at a
CalPERS as part of obligation level percentage of payroll.
Em loyer Rate.
PERS Payments Cumulative PERS
DIFFERENCE continue on for an payments exceed pre-
additional 7 rs fundin b $3,579,297
In order to fairly compare the options, the difference in total payments should be adjusted for lost interest
earnings. As noted above, if the City were to use reserves for this purpose, those funds would not be
available for investment or other uses. Contributing to a replenishment fund at the same rate as the City
would have been required to pay CalPERS requires a 10 year period to fully restore the reserves. Staff
estimate that the decrease in General Fund interest earnings over this period would be $895,296. For this
comparison it was assumed the City would earn approximately 4.5% which approximates the City
portfolio earnings for the past 10 year period.
Therefore the net estimated savings from the proposed pre-payment over the 17 year period is
approximately $2,684,001 ($3,579,297 less reduced interest from reserves of<$895,296>) assuming that
the City fully replenishes the reserve funds over time.
200712008 City Bud2:et
The proposed 2007/2008 Budget includes the required 4.319% contribution to CalPERS toward the side
fund payment. Staff would recommend that if a pre-payment is made from General Fund reserves, that
the City record a Long Term Advance for this purpose. It is then recommended that the City contribute
4.319% of payroll towards reducing the advance and replenishing the reserves. As noted earlier the
reserves are projected to be fully replenished in approximately 10 years.
Recommendation
Staff recommends that the City Council authorize the City Manager to use General Fund Reserves totaling
$3,579,297 to pre-pay the City of Dublin's PERS side-fund obligation prior to June 30, 2007.
Staff further recommends that the City Council authorize the establishment of a long term advance on the
City financial records and authorize a contribution of 4.319% of payroll to the City General Fund
Reserves, for the purpose of repaying the City General Fund.
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