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Home My WebLink About19-City Administrator CITY OF SAN BERNARDINO CITY ADMINISTRATOR'S OFFICE INTEROFFICE MEMORANDUM TO: SUBJECT: Mayor and jin;mon Council Fred WilslfRJty Administrator PERS Actuarial Information FROM: DATE: October 29, 2002 At the Ways and Means Committee meeting on October 23, 2002, Mr. John Bartel of Aon Consulting made a presentation to the Committee regarding the PERS Actuarial Reports for both the Safety Unit and the Miscellaneous Unit. Mr. Bartel was retained for the purpose of analyzing CalPERS actuarial information and explaining the City's current position for both Safety and Miscellaneous groups. Additionally, he projected where the City's future rates are likely to go. Attached are the handouts Mr. Bartel prepared titled "CalPERS Actuarial Issues - 6/30/00 Valuation" for the Safety Unit (Attachment "A"), and "CaIPERS Actuarial Issues - 6/30/00 Valuation" for the Miscellaneous Unit (Attachment "B"). At the request of the Way and Means Committee, a transcript of the presentation was completed and is provided as an attachment (Attachment "C"). The bottom line is that the City can anticipate substantially increased PERS rates over the next five years (see "Contribution Projections" chart 36 of both the Miscellaneous and Safety attachments). The Director of Finance is developing a budget forecast for future years incorporating the information provided by Mr. Bartel and will present this at an upcoming Ways and Means Committee meeting. No. ,q III Ll/Oa- 110 CITY OF SAN BERNARDINO MISCELLANEOUS PLAN CalPERS Actuarial Issues - 6/30/00 Valuation JOHN E. BARTEL, Aon Cornu/ring October 23, 2002 ~------ Miscellaneous Topic Definitions Plan Funded Status Demogtaphic Information Plan Assets Actuarial Obligations Contribution Rates Super Funded Status Estimated 2.5% @ 55 Estimated 2.7% @ 55 3.0% @ 60 Contribution Projections k1N Attachment "A" ~ I 4 7 11 15 17 19 21 25 29 35 \\US$ANNWFSI1Ht\VOl.IIDEP1\aETlJlENEN1'4:UENTK;'1 uts...s...,.q;I'M>'CoIPEIlS\6.)O- IWl\....., 8,.... M"" 1I1.)1l.2'l.<10< k1N k1N Definitions Present Value of Benefits June 30, 2000 Future Nor-mal Costs Actuarial Liability Definitions Plan Assets June 30, 2000 Actuarial Liability 2 Current Normal COSt Future Normal CoS[s . :;f{;) . ~~~~~~ 1- ---- ! Definitions P,...nt v..... of BeMflls PnMfltV..... ofe.n.f.. June 30. 2000 - . Contribution = . Normal Cost . . Surplus Asset Amortization or . + Unfunded Liability Amortization IJDN 3 Plan Funded Status Miscellaneous PI_A..... J..ne W, 1'.19\1 PI_A_. J..ne ~o. 2000 June lOr 1999 $ 23,500,000 44,700,000 173,200,000 241,400,000 Tune lO 2000 $ 30,900,000 46,100,000 185,300,000 262,300,000 Super Excess Future Normal Cosrs Actuarial Liability Plan Assets IJDN 4 I I . . I I Plan Funded Status Miscellaneous . What happened between 6/30/99 and 6/30/00? . '" 7.1 million Asset gain: . '" 1.4 million Actuarial gain: . '" (2.6) million PPPA: o 75% -t 80% o Each plan stands on its' own kJII . 5 i#~~ ~;-:6~ Plan Funded Status Miscellaneous . Future events that might cause rate fluctuations: . Actuarial Assumption changes: o Experience study likely within next 1-2 years . Asset Gains/Losses: o Somewhat mitigated because of smoothing technique . Experience Gains/Losses: o Salaries o Retirements . Pooling . Benefit Improvements: o 2.5% @ 55 o 2.7% @ 55 o 3% @ 60 kJII . 6 Members Included in Valuation Miscellaneous 1,IHJO 900 800 - 700 6{){l j{){l 400 . 3()() 200 100 06/30/95 06/30f96 o Active 994 985 ffilTransfers 261 254 ---"-----+----~~ .. ElVested Terminations l ,___~~._____ 231 _ IIReceivi~~aymeflts I__ 67!___~~_____ 06/30f98 0613'."~_ 06130100 I 962 955 291 297 167 -- 186 i --i_-'l2.:.:j_ ~L~ 06l30f97 980 927 248 256 ---- 198 231 705 754 -,,--~- kJN 7 ;:~<.:.;:, ,~,; ~':~~~:~ Average Age/Service Miscellaneous 50.00 45.00 40.00 35.00 ~ I 30.00 25.00 20.00 - 15.00 10.00 j.{){l c--. -----.-..f--~ 06f30/~~____ _____061. 30 -/96.:~_~._ _ 0613~~;--.J_'~~_~J3.0I?~_+...-- ~~!~~b.-r! --061-~~~~-~.. [0 Average Age 43.94 44.30: 44.69 i 44.89 ! 4').10 , 45.30 i L~~~rageSe~~ce _~~~_ ____J~.~~__ _LJ.9.6~__J _1~.74_~_;,-___lO.9L__L_~__ i kJN 8 . -_.) , I II I i I I Average Pay Miscellaneous 38,000 1 ~ I ' I )i-~-- 37,000 V l I i 36,()(){) -~----"-'-~.__..- ) 35,000 34,000 - 33,000 32,000 -- 31,000 ~~;;p,;f~U:t~;5-=L~O:i~;,;~--E~::.~I~:i=~:~:8-_t-'~~:~_j-_O;,~~~~O k1II 9 . I I f), :~~;;;~ l-~;;.,; Total Annual Covered Payroll Miscellaneous 5,000,000 40,000,000 3'5,000,000 30,000,000 25.000,000 20,000,000 15,000,000 10,000,000 o '-'-- -----=r~--T' ------'-~---- ~ _.____ _ 061~OI95 C~_3~1~__ _ _ 061~!2?___t-~~!!?f~--...!----~~O/99 TC>6I3_0~ ~"~I Co",<<I ..J 34.900.000 , ;2.700.000 i 33.>00,000 i ".(,~).(~O ! 34.400,000 fl"00,000 ~~uj. C~~~l'!L_L_3_~..1_0?_,_O~~_____ }7,300,OOO _2~~_'~~_~_ 36.400,()()O___: 38.400,000__; 39.600,000 k1II 10 . :---- , i ,',u____ , , , Actuarial Investment Return Miscellaneous 20.00% 18.00% 16.00% 12,00% 10.00% 8.00% 6.00% 2.00% 0.00% _ 06130100 J 11,26% _! IJDN 11 Actuarial Investment Return Miscellaneous . Above assumes contributions, payments, ete. received evenly thtoughout year. . 6/30/01: . Market Value return '" (7.23)% . Actuarial Value return '" 4.7% . 6/30/02: . Market Value rerum'" (5.97)% . Acruarial Value return '" (3.6)% . 6/30/03: . Market Value return '" (3.5)% through 8/31/02 IJDN 12 . . [__ _______ _____.____n_ I I I [ 300,000,000 - 250,000,000 ' 200,000,000 150,000,000 - 100,000,000 50,000,000 DAnu;l.rial ElMark~t kJN 1----- , I Asset Values Miscellaneous o 06130195 138,700,000 147,500,000 06130/% 06130197 15S,300,OOO 179.40Q,QOo-l 166,700,O()(} ---'- 199,300~~.J 06/30/<)8 -r--o~~~~ 209,900.000 241,400,000 233,200,000 lH,300,OOO ----- 06/30100 I 262'300'OO~ 276,500,000 I 13 -) . 6;~.~ ----"< ~'''~1;' Asset Values Miscellaneous . Actuarial Value historically < Market_ . 6/30/00 Actuarial Value'" 95% Market . 6/30/01 Actuarial Value will '" 107% Market . 6/30/02 Actuarial Value will likely be 110% kJN 14 . r-------- I-- I I I I t I I 1 Actuarial Obligations Miscellaneous 150,000,000 IOO,OOO,()()() 50,000,000 ~__ _ 06/30/95 1_06130/% IOACfuarial liabIlity 136,20l1,OUO I 145,000,000 jBAnuarial A~_~~L_~~?!)(~'_~_J___ 155,3~(~ _~~8 r-- 06I30199l_~l6/301001 156.1(1),000 173,l0l1,IX)()J 1R5.300P001 _ 209,900,0I11)__J 241.!~II!,OOO __2~,300,OOO ! 06130/97 146,400,000 179,4(1),000 IJDN [I] 15 Actuarial Obligations Miscellaneous . 6/30/97 actuarial assumption changes: . Interesr rare 6/~0/96 6/~0/97 o General inflation 4.50% 3.50% o Real rare of return 4.00 4.75 o Total 8.50 8.25 . Payroll growth 4.50% 3.75% . 6/30/00: . PPPA 75% ~ 80% and each plan stands on its' own . Small actuarial gain . Investment losses - Impact on funded sratus: . 6/30/01 [-7.23% compared ro +8.25%) -15.5% . 6/30/02 [-5.97% compared to +8.25%) -14.25% . Actuarial asset "reserve" ~% . Total estimated % loss -24.75% . Total estimated $ loss $ 64.9 million [24.75% x $262.3) IJDN II 16 Contribution Rates Miscellaneous 81l' 61l' 4% 2% O%~ .2% -4% -6% -8% IONormal Cost mUAL Amort iEJToral 06130195 06130196 6.9% 7.4% -3.9% -7.4% ~~~O.O% 06130197 5.6% -5~61l' 0.0% kIN i-----n , i 17 06130/98 5.7% -5.7% 0.0% Contribution Rates Miscellaneous . Normal Cost . Amorrization bases: . Fresh Start 6/30/99 . Fresh Start 6/30/00 Sub-total . Total: . Amortization period . 6/30/01: . Significant asset loss . Actuarial gains? kIN 18 6/30/99 2001/2002 7.4% -7.4% llJl26. ~ 0.0% Indefinite 06130199 I 7.4% -J -7.4%__ J 0.0%. ) 06130100 7~6% -7.6% 0.0% . .::~,:{; ~'.-.i"""" ..... ~.~. .. 6/30/00 2002/2003 7.6% 0.0% ~ ~ 0.0% Indefinite . I~ ------- ~ --- ~-~----- 30G,OOO,OOO - 2S0,OOD,ODO - 2nD,OOO,OOO 150,000,000 100,000,000 50,OOO,aoo Super Funded Status (50,000,000) 'OPVB,", 11:~::~~~o~=11::~:~:~ I-~- -2:~6~~0~:oT-2:16~~~:: =1 ~;:'~';:~~:'~,::' I 1 ;~;~~~~:~~-~r :~:,;)~:~(;~.) _ -. .:. ~::,;:~).~.:= ::~,.':~:'~~)~ .. Marker ~lue of Assets ~__1_99,300,(}()~_~__~,200~~~ __ ~... ~!?!300.000 . _. L_~~~~~O,~~._" J IJtJN 19 . Super Funded Status . Supet Funded if Actuarial Value Assets> Ptesent Value of Benefits . Super Funded Means: . Supet Surplus may be used to pay employee contributions . 6/30/00 valuation ---) contributions during 2002/03 fiscal year . Plan will likely remain Super Funded for 6/30/01 valuation (2003/04), absent benefit improvements . Plan will likely not remain Super Funded for 6/30/02 valuation (2004/05) IJtJN 20 . Estimated 2.5% @ 55 Pft..n,VoI...of&ner... Bor<>reH'lf-li'~' Before 2 S% @ SS $ (30,900,000) 77 ,000,000 185,300,000 231,400,000 ""'..n. v..... "fo....fi.. Afn.rl_'i'lfliS'l ............... (Super Excess) Excess Assets Actuarial Liability PVB Aftp.r 2 '5% @ ,'5 $ (9,200,000) 61,400,000 200,900,000 253,100,000 IJtJN Estimated 2.5% @ 55 IJtJN 21 " j . ..,.i'" ~i!' '" $21.7 million '" $15.6 million ",0.0% 1.0% 22 . . Present Value of Benefits Increase . Actuarial Liability Increase . Employer contribution rate increase (without A V A increase) . Normal Cost '" 1.2% . Prior Cost '" 3.7% . Asset Method '" (0.0)% . Fresh Starr '" (4,9)% . Employee contribution rate increase ,------~--------------------------- I Estimated 2.5% @ 55 . Consider amendment as 4 separate pieces: . Inctease in Future Normal Costs (Normal Cost Rate) o rrpermanent" current & future service increase . Increase in Actuarial Liability: o 20 year amortization for past service increase . Increase in Actuatial Value of Assets: OVaries based on Alternative Chosen o Higher AVA: o Harder to meet assumed actuarial investment return of8.25% o Likely more contribution volatility - lower contributions now, higher later . Fresh Start: (4.9)% 1.2% 3.7% o Excess assets amortized over a 37 -year period after amendment kJN 23 . I I ! . PVB Estimared 2.5% @ 55 Alternative 1 2 3 $ 21.8 $21.8 $ 21.8 15.6 15.6 15.6 0.0 (14.2) (41.9) . . Actuarial Liability Actuarial Asset Value . Employer Rate: . Before Change . Change Due to: o Normal Cost 1.2 o Prior Cost 3.7 o Asset Value 0.0 o Fresh Starr (:l2} o Sub-total l1.Q . After Change 0.0 Note: Alternatives 2 & 3 not available after 6/30/02 0.0% 0.0% 0.0% 1.2 1.2 3.7 3.7 (3.2) (9.4) i.L1.l 1,2 l1.Q 0.0 0.0 0.0 . kJN 24 Estimated 2.7% @ 55 ~..n,V"","of"""'Jj", &(,,",n'1i~H p,..,.."'v.......rB-or... ,U...-UW.<lSS 1'."-10<1"''' Before 2 7% @l S., $ (30,900,000) (Super Excess)! Unfunded PVB Excess Assets Actuarial Liability PVB 77 ,000,000 185,300,000 231,400,000 k1N 25 1----- Estimated 2.7% @ 55 . Present Value of Benefits Increase . Actuarial Liability Increase . Employer contribution rate increase (without A V A increase) . Normal Cost '" 2.4% . Prior Cost '" 6.3% . Asset Method '" (0.0)% . Fresh Start '" (8.4)% . Employee contribution rate increase k1N 26 After 2 7% @ SS $ 4,200,000 50,700,000 211,600,000 266,600,000 II ""':~1' ..':'~.. or-.;:;.::: '" $35.2 million '" $26.3 million "'0.3% 1.0% II Estimated 2.7% @ 55 . Consider amendment as 4 separate pieces: . Increase in Future Normal Costs (Normal Cost Rate) o "Permanent" current & future service increase . Increase in Actuarial Liability: o 20 year amortization for past service inctease . Increase in Actuarial Value of Assets: OVaries based on Alternative Chosen o Higher AVA: o Harder to meet assumed actuarial investment return of 8.25% o Likely more contribution volatility - lower contributions now, higher later . Fresh Starr: (8.4)% 2.4% 6.3% o Excess assets amortized over a 20-year period after amendment. kJN 27 Estimated 2.7% @ 55 . . . I $ 35.2 26.3 0.0 PVB Actuarial Liability Actuarial Asset Value . Employer Rate: . Before Change . Change Due to: o Normal Cost 2.4 o Prior Cost 6.3 o Asset Value 0.0 o Fresh Start iliA) o Sub-total Q3. . After Change 0.3 Note: Alternatives 2 & 3 not available after 6/30/02 0.0% kJN 28 . Alternative 2 $ 35.2 26.3 (14.2) 0.0% 2.4 6.3 (3.2) L2...2.l M 0.0 3 $ 35.2 26.3 (41.9) 0.0% 2.4 6.3 (9.4) !U J!Jl 0.0 . 1't~_"V""'Q(a......fi" &f."..l'.fltW Before ~% @l 60 $ (30,900,000) 77 ,000,000 185,300,000 231,400,000 .J1cN I-----~---- i i I 3.0% @ 60 ""'..n, V..... ,,(&ndi.. Af,...~~.lil.W l'nr.-loJ....,. (Super Excess)! Unfunded PVB Excess Assets Actuarial Liability PVB 29 3.0% @ 60 . Present Value of Benefits Increase . Actuatial Liability Inctease . Employer contribution rate increase (without A V A increase) . Normal Cost '" 3.4% . Prior Cost '" 7.6% . Asset Method '" (0.0)% . Fresh Start "'(11.0)% . Employee contribution rate inctease .J1cN 30 A f'er ~% @J 60 $ 1l,1O0,000 45,300,000 217,000,000 273,400,000 '" $42.0 million '" $31.7 million "'0.0% 1.0% . ";'::)' "'-:..:'":~: ..:-~,.~', '.:~..'" . I 3.0% @ 60 . Consider amendment as 4 separate pieces: . Increase in Future Normal Costs (Normal Cost Rate) o "Permanent" current & future service increase . Increase in Actuarial Liability: o 20 year amortization for past service increase . Increase in Actuarial Value of Assets: OVaries based on Alternative Chosen o Higher AVA: o Harder to meet assumed actuarial investment return of 8.25% 3.4% 7.6% o Likely more contribution volatility -lower contributions now, higher later . Fresh Start: (11.0)% o Excess assets amortized over a 14-year period after amendment. .kJN . 31 3.0% @ 60 Alternative 1 2 3 . PVB $ 42.0 $ 42.0 $ 42.0 . Actuarial Liability 31.7 31.7 31.7 . Actuarial Asset Value 0.0 (14.2) (41.9) . Employer Rate: . Before Change . Change Due to: o Normal Cost 3.4 o Prior Cost 7.6 o Asset Value 0.0 o Fresh Start li.Lill o Sub-total QJ! . After Change 0.0 Note: Alternatives 2 & 3 not available after 6/30/02 0.0% 0.0% 0.0% 3.4 7.6 (3.2) (LID QJ! 0.0 3.4 7.6 (9.4) l.L.Qi J1.Q 0.0 .kJN . 32 :-----_...__.._.._~-- .....-..-.--- .- .-....-----.- I Actuarial Asset Values -'\ 95% 100% 110% I 6/30/2000: Market Value 100 100 100 Actuarial Value 95 100 110 6/30/200 I: -7.2% -7.2% -7.2% Market Value 92.8 92.8 92.8 Actuarial Value Project @ 8.25% 102.8 108.3 119.1 Adjust (l/3(MV-A V)) 99.5 103.1 110.3 Limited by corridor 99.5 102.1 102.1 Actuarial Rate of Return 4.791 2.191 -7.291 Ratio of Actuarial Value to Market Value 107.291 110.091 1l0.09f IJDN . 33 I~ I I I , I , I , I I I I I I I I ",~'\ '{:!JI Actuarial Asset Values . Actuarial Asset Method . Project Acruarial Value forward from prior year using 8.25% . Adjust Acruarial Value by 1/3 difference between MV & AV . Actuarial Value must fall wirhin corridor of: o 90% of Marker Value and o 1l0% of Market Value Recent Board Action: 95% incenrive replaced by oprions. Acruarial Value may (ar agency oprion) increase $2 for every $1 increase in Presenr Value increase, subjecr ro cap (again ar agency oprion) of: . No AVA change . AVA ser ro 100% MVA . AVA set to 1l0% MVA Expired at 6/30/00 . IJDN . 34 Contribution Projections 20-year Fresh Start . Market Value Investment Rerum: . June 30, 2001 . June 30, 2002 . Expected June 30, 2003 and subsequent -7.23% -5.97% 8.25% . Ftesh Starts: . All projections use 20-year Fresh Statt . CalPERS 3% @ 60 Contract Amendment Cost Analysis used 14-year Fresh Starr . No Orher: . Gains or Losses . Method or Assumption Changes . Benefit Improvements IJDN 35 . Contribution Projections 20-year Fresh Start 18.0% J 16.0% I 14.0% ~ 12.0% i 10.0% 1 8.0% 6.0% 4.0% 1 2.0% 1'-'~----' 0.0% ....D....D..... o o o o " . " " " " " " A) ".-- ~-~- --. --.-0 o o d , 0:::::-- .c. Jj"'.'"_n._"". ~_ ,~1 00/01 01102 02/03 I 0 3% @ 60~ 0.0% 00% 2.6% i'-;; 2 7% @55 0.0% --00% 0 3% 1-: _~~: ~:5L~: _L~~;_l~~: 03/04 5.2% 2.9% 0.0% 0.0% 04/05 13.2% 10.8% 7.0% 2.1% 05/06-' 06107-T o7/0i1 -t'iBE 14.8%. 15.7%_-!-_~6.1% 12.5% 13.4% i 13.7% _.- ----:--~ I '-j:~:~l~:~;~+~O;:j IJDN 36 . ,- I I Contribution Projections 14-year Fresh Start . Market Value Investment Return: . June 30, 2001 . June 30, 2002 . Expected June 30, 2003 and subsequent . Fresh Starts: . All projections use 14-year Fresh Srart . No Other: . Gains or Losses . Method or Assumption Changes . Benefit Improvements J1DN 37 Contribution Projections 14-year Fresh Start 16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% o .._~,L~ c 2.0% . o 0.0% ..G..... ..... ......... "''''9 ! 0 3%@60 I , ~2.7% @55 I 0 2.5% @ 55 I ~ 2% @ 55 00/01 0.0% 0.0% 0.0% 0.0% 01102 02/03 03/04 04/05 0.0% 0.0%! 2.6% 10.6% 0.0% I 0.0%. i 0.1% 8.1% 0.0% I 0.0% T (iil';'l 3.7% 0.0%..L o.o~.Lo~~l 0.0% J1DN 38 -7.23% -5.97% 8.25% o A o o--~< .. ....0.. . 'fj<'~ ;:;~,'" ~'-'_..' '-:."" -,-. --, o o A A c o~ ------~--_.. " 05/06 12.3% 9.8.% 5.6% 0.0% 06/07 ..i- 07/08 i I 13.1% I' 13.5% l 10.6% 11.0% I +~-+._-----j 6.6% : 7.1% I , 0.6%_____ 1.7% ~ . CITY OF SAN BERNARDINO SAFETY PLAN CalPERS Actuarial Issues - 6/30/00 Valuation JOHN E. BARTEL. Aon Consulting October 23. 2002 Tqpic Definitions Plan Funded Status Demographic Information Plan Assets Actuarial Obligations Contribution Rates Super Funded Status 3% @ 50 3% @ 50 Police Only 3% @ 50 Fire Only Contribution Projecrions kJN Safety Attachment "B" fut 1 4 7 11 15 17 19 21 25 29 35 O,'<:UENT.N::", of:'iot1 Iltl'll".l;...n::.JP(R.No-~).(HJISon 80m Soft<y OZ.IU_H_'1u< 1---- I-- I I Definitions Present Value of Benefits June 30,2000 Future Normal Costs Actuarial Liability JftJN ) Cucrent Normal Cost Definitions Present Value of Benefits June 30, 2000 Unfunded PVB Acmarial liability JftJN 2 . c,~.. ..-.-~,-~ '.~:?:."{ . Definitions P....... V.w. 01 Benefits P,...nt V"". of Benefits Jww30,2OIIO .- . Contribution = . Normal Cost . - Surplus Asset Amortization or . + Unfunded Liability Amortization kJN I kJN 3 Plan Funded Status Safety P~",Yol"",~fB....r... Ju...W.I'./'J') P......n'V..~"r""nJ". J.....W.lOlIO June ~O. 1999 $ 35,500,000 22,500,000 234,700,000 292,700,000 June ~O. 2000 $ 58,500,000 7,000,000 272,700,000 338,100,000 Unfunded PVB Excess Assets Actuarial Liability PVB 4 . . Plan Funded Status Safety . What happened between 6/30/99 and 6/30/00? . Asset gain: '" 7.3 million . Actuatial (loss): '" (5.7) million o Average Salary 60,200? 66,300 . 3% @ 55: '" (13.9) million 0 Actuarial Liabili ty ",(13.9) 0 Actuarial Assets '" 0.0 PPPA: '" (5.1) million 0 75% ? 80% 0 Each plan stands on its' own . ADN '} . . ::\ '{f~~ Plan Funded Status Safety . Future events that might cause rate fluctuations: . Actuarial Assumption changes: o Experience study likely within next 1-2 years . Asset Gains/Losses: o Somewhat mitigated because of smoothing technique . Experience Gains/Losses: o Salaries o Retirements . Pooling . Benefit Improvements? o 3%@50 ADN 6 . Members Included in Valuation Safety sou 400 300 250 200 150 100 I 06/30/%- -106/30197 - - IDA,,,,, -~ -r -40;;--- 1 420 -- 1m Transfers 42 +- 38 ImVested TermInatIOns 35 I 35 I IIIIRewvmg Payments 410 : 434 __ _ _ _______ _ _ _---.L~_ 06130/98 --------..----r----n-- , 06130/99 I 06/30/00 I ----422----1- 428 --1 ~: --t---;-i--- --., ._._._~7__ __J.._ 447 405 3. 42 451 kJN 7 r--------- , I Average Age/Service Safety 40.00 30.00 25.00 20.00 - 15.00 10.00 ".00 f--------c--------- ---T ------ 06/30/96 i 06/30/97 06/30/98 I_~______~ ___~n_U___~____ o Average Age 38.26 38.08; 38.54 !IIIA.,,,g,_~,,,,,,, ____~1,90_]__II29..___L__..1_"~~__ _~~6/30J99'-I-- 06130/00 38.96 I 39.74 _----.!32~___, 13m kJN 8 . . Average Pay Safety , 10,000 ~') 70,000 60,000 50,000 40,000 20,000 1---- 06/30f96~.. ~.f .--. -06/30197 --~T-...- ---U6J}O/98 -~ .--06130/99-. ~ 06~30/00 r=-------+----------- - -----~.---------r---------_;__---.- lQAv~~~8_~_E~rL__~Z~_~_ __ _~_.._. 54,361 ~ __ __27-2-~~____~__ 60,1~___~_ 66,293 kJN 9 . 1- ------ I i --...-9- l........,. .-:....'i~. Total Annual Covered Payroll Safety 5,000,000 3'5,000,000 30,000,000 2'5,000,000 20,000,000 15,000,000 10,000,000 o ~----- OAnnuaJCoverroPa O~oj.Cov..rrdPay 06/301% -_~_ -----:~~~30I9~~I- -~::~06/301~_+_;~~OI99----=r 06/30100 21,5~~~_ ___J2.'~~~'~__.. __ ___~3.'300P~l__+___ ~_5~~~'9~)~__-t.- _~.400,OOO ___ ~,600.000 __ ___!5.500,OllO__ __ _2.5.900,000 _~_,400,OOO __ ___l!200,OOO kJN 10 . Actuarial Investment Return Safety 30.00%- 5.00% 2'5.00')f- 20.00% 15.00% 10.00% 0.00%- I ,----.--+-- 19Jnvestment Return i 06/30197 =+ _ 06/30198__j 15.49%~_~_~6.08%' ._._ ~.- I ------, 06l30/9?.~C 06/30/00,.._._ ! 11.76% ~~-.J kJN 11 . r----- I I Actuarial Investment Return Safety . Above assumes contributions, payments, ete. received evenly throughout year. . 6/30/01: . Market Value return '" (7.23)% . Actuarial Value return '" 4.7% . 6/30/02: . Market Value return '" (5.97)% . Actuarial Value return '" (3.6)% kJN 12 . Asset Values Safety 100,000,000 300,000,000 l V 250,000,000 l.. i 200,000,000 ~~-- 150,000,000 -- 50,000,000 o r 067;oI96-~----'--- 06130/97 =r - 06J3~- 0613019') I I!D~,~':;a', 166,70l~()(){} HI9,OOO,~ 1--- 2B500,00-o--r m.200,000 -+- L~~~~,:~_J___.!!.?,ooo,OOO__ ___210,000,000 -1.-- 2~5,800,OOO 27MOOOOO I __ 06130100 J 279,600,000 I' 294,200~_---, kJN 13 r--- Asset Values Safety . Actuarial Value historically < Market . 6/30/00 Actuarial Value'" 95% Market . 6/30/01 Actuarial Value will '" 107% Market . 6/30/02 Actuarial Value willlike1y be 110% kJN 14 ) . f'.:'.<.) '.:.~i-1' . Funded Status Safety 50,000,000 300,000,000 250,000,000 20D,OOO,aDO 150,000,000 IOO,GOO,ODO . 1-- 06130<96 T-- 06"0,>>-r--0030198 10^{tuaria'Li~bilit;--1- 189,600,000-- 1'}!l,H)(j~oOOT 21\1,800,000 :mA<;tuarial ^>>t't~~e I 166,700,000 ---.L___~89,OOO,OOO __~_2]~~.~~..:~__ 0613019') -- -o6i3Oioo--l 234,700,000 272,700,000, I ~~~200,OO~.J_~_ 279,600,000 -' kJN 1) . 1---------- i Funded Status Safety . 6/30/97 actuarial assumption changes: . Interest rate 6/~0/96 6/~0/97 o General inflation 4.50% 3.50% o Real rate of return 4.00 :l1.i o Total 8.50 8.25 . Payroll growth 4.50% 3.75% . 6/30/00: . PPPA 75%? 80% and each plan stands on its' own . Significant actuarial loss (2.2%) . Investment losses - Impact on funded status: . 6/30/01 [-7.23% compared to +8.25%] -15.5% . 6/30/02 [-5.97% compared to +8.25%] -14.25% . Actuarial asset "reserve" -i2Jl% . Total estimated % loss -24.75% . Total estimated $ loss $ 69.2 million [24.75% x $279.6] kJN 16 . Contribution Rates 25'1f 10% '5')( -S'}f. -10% 106130/96 -f'- --- 06/30/97---r-06!30/98 -T- 06130199 I o6l30fOO ~-o~~~Cosr! 13.6% -10.4%~-r--~-- I 13.0% I 15.8% ElUAIAmort : 8.7% i U'/f'. : -7.9% I _-=-~~_--+---- -3.2% mTora]__~__--f:~-__:~-E:~f!....,_~:l~~~~lu;-~~--T~~=_~ii~~r_=___},8% ____Lu .__ !~.6~,__ kJN 17 ) . ,- , ,...~. ';;~.'''', '.~,,; - '.-,~.' Contribution Rates . Normal cost . Amortization bases: 6/30/99 2001/2002 13.0% 6/30/00 2002/200, 15.8% . Method Change 6/30/98 . Gain/Loss . CalPERS Minimum 6/30/97 . Benefit Change 6/30/99 . Benefit Change 6/30/00 . Assumption Change 6/30/98 Sub-total . Total: . Amortization period . 6/30/01: . Significant asset loss . Actuarial gains or losses? kJN 18 -4.0% -9.4% 1.3% -3.7% -8.7% 1.2% 3.9% 1.4% l..J..'lQ ~ 12.6% Multiple ~ ~ 3.8% Multiple . Super Funded Status 50,000,000 - 350,000,000 30n,unO,noo 2')0,000,000 200,000,000 -- 1 so,OOO,OOO -- l()(I,()OO,{)()() lopv Bens --- o Acruarial Asset Value lEI Super Funded StatUS ifllMarket_~alue of ~~[~ -----:-06/30/98 -r-- 06130/99 -- i. 06"130100 ----,1 --'-~-1------~--'------- 247,700,000 i 271,700,000 I 292,700,000 i 338,100,000 189,000,000 t' 233,500,000 257 ,20(),~ 279.600,000 --- 58,700,000 ----. 3B:200,OQ(~--! 35;;O:~lOO----58,soo.ooo --1 ~lO,OOO,ooo___ _~~oo,ooo ___L____323,400,O(?~____~,~~~~~_.J 06130/97 .kJN 19 . Super Funded Status . Super Funded if Actuarial Value Assets> Present Value of Benefits . Super Funded Means: . Super Surplus may be used to pay employee contributions . 6/30/00 valuation? contriburions during 2002/2003 fiscal year . Electing Actuarial Value Assets> 100% will not make plan super funded. . Plan will not likely become Super Funded in the near future. .kJN 20 . 3% @ 50 "",..htv.......fB....rM' !kfn,. ~';l '" 10 p,..,.""V.I.....flk...r." M.~._I","SlI Before ~% @ SO $ 58,500,000 7,000,000 After ~% @> SO $ 73,000,000 Unfunded PVB Excess Assets I (Unfunded Liability) Actuarial Liability PVB (5,100,000) 284,700,000 352,600,000 272,700,000 338,100,000 ,kJN 21 I-~-- i 3% @ 50 . Present Value of Benefits Increase '" $14.5 million . Actuarial Liability Increase '" $12.0 million . Employer contribution rate increase "'8.0% (without A V A increase) . Normal Cost '" 2.4% . Prior Cost '" 3.7% . Asset Method '" (O.O)% . Fresh Starr '" 1.9% . Employee contribution rate increase 0.0% ,kJN 22 " j . ;"<.;'~" .~. .~""-'- ~f~~~ . 3% @ 50 . Consider amendmenr as 4 separare pieces: . Increase in Future Normal Costs (Normal Cost Rate) o "Permanent" current & future service increase . Increase in Actuarial Liability: o 20 year amortization for pasr service increase . Increase in Actuarial Value of Assets: o Varies based on Alternative Chosen o Higher AVA: o Harder to meet assumed actuarial invesrmenr rerum of 8.25% o Likely more conrribution volatility - lower conrributions now, higher later . Fresh Start: 1.9% 2.4% 3.7% o Excess assets amortized over a 30-year period after amendmenr. kJN 23 . . PVB 3% @ 50 Alternative I 2 3 $ 14.5 $ 14.5 $ 14.5 12.0 12.0 12.0 0.0 (/4.6) (29.0) . Actuarial Liability . Actuarial Asset Value . Employer Rate: . Before Change 12.6% 12.6% 12.6% . Change Due to: 0 Normal Cost 2.4 2.4 2.4 0 Prior Cost 3.7 3.7 3.7 0 Asset Value 0.0 (4.1) (8.0) 0 Fresh Starr .L2 0.0 M 0 Sub-total 8.Jl W iL.2i . After Change 20.7 14.7 10.7 Note: Alternatives 2 & 3 not available after 6/30/02 kJN . 24 kJN 1',..,..ntV.I...oflk_li.. s.f"",,:I~.~SD Before ~% @ 50 $ 58,500,000 7,000,000 . 272,700,000 338,100,000 r-' 3% @ 50 Police Only Pr........Volu,."flk_r." M"...,\~"'Sfl Unfunded PVB Excess Assets I (Unfunded Liability) Actuarial Liabilicy PVB 25 3% @ 50 Police Only . Present Value of Benefits Increase . Actuarial Liability Increase . Employer contribution rate increase (without A V A increase) . Normal Cost '" 1.5% . Prior Cost '" 2.4% . Asset Method '" (0.0)% . Fresh Start '" 2.6% . Employee contribution rate increase . Above increase applied to total Safety payroll kJN 26 After ~% @ 50 $ 68,000,000 (900,000) 280,500,000 347,700,000 -"} . .%,";,';~'''':C'i ~ '" $9.5 million '" $7.9 million ",6.5% 0.0% . 3% @ 50 Police Only . Consider amendment as 4 separare pieces: . Increase in Furure Normal Cosrs (Normal Cost Rate) o "Permanent" current & future service increase . Increase in Actuarial Liability: o 20 year amortization for past service increase . Increase in Actuarial Value of Assets: OVaries based on Alternative Chosen o Higher AVA: o Harder to meet assumed actuarial investment return of 8.25% o Likely more contribution volatility - lower contributions now, higher later . Fresh Start: 2.6% 1.5% 2.4% o Excess assets amortized over a 20-year period after amendment. IJDN 27 . 1_._.. . PVB 3% @ 50 Police Only Alternative 1 2 3 $ 9.5 $ 9.5 $ 9.5 7.9 7.9 7.9 0.0 04.6) 09.0) . Actuarial Liability . Actuarial Asset Value . Employer Rate: . Before Change . Change Due to: o Normal Cost 1.5 o Prior Cost 2.4 o Asset Value 0.0 o Fresh Start 2.& o Sub-total .6,2 . After Change 19.1 Note: Alternatives 2 & 3 not available after 6/30102 12.6% 12.6% 12.6% 1.5 1.5 2.4 2.4 (4.1) (5.3) 0.0 Q.,Q tiU2 J..lA2 12.5 11.3 . IJDN 28 3% @ 50 Fire Only ~,..,nIV.lu."fB.""fu' Be("... ~'lf.@ ~ll p,.."""...Vol"""fa.""r.., Ah...J'l:.f/I'Sll Before ,% @ 50 $ Unfunded PVB $ Excess Assets Actuarial Liability PVB 58,500,000 7,000,000 272,700,000 338,100,000 IJDN 29 3% @ 50 Fire Only . Present Value of Benefits Increase . Actuarial Liability Increase . Employer contribution rate increase (without A V A increase) . Normal Cost "" 0.9% . Prior Cost "" 1.4% . Asset Method "" (0.0)% . Fresh Start "" 2.4% . Employee contribution rate increase . Above increase applied to total Safety payroll IJDN 30 After ,% @ 50 63,500,000 2,800,000 276,800,000 343,100,000 "" $4.9 million "" $4.2 million ",,4.7% 0.0% . '"~,''' ~\.~~,-- ~ii:'~.. . 3% @ 50 Fire Only . Consider amendment as 4 separate pieces: . Increase in Future Normal Costs (Normal Cost Rate). o "Permanener current & future service increase . Increase in Actuarial Liability: o 20 year amortization for past service increase . Increase in Actuarial Value of Assets: o Varies based on Alternative Chosen o Higher AVA: o Harder to meet assumed actuarial investment return of8.25% 0.9% 1.4% o Likely more contribution volatility - lower contributions now, higher later . Fresh Srart: 2.4% o Excess assets amortized over a 20-year period after amendment. IJtJN 31 . r . PVB 3% @ 50 Fire Only Alternative I 2 3 $ 4.9 $ 4.9 N/A 4.2 4.2 N/A 0.0 (9.8) N/A . Actuatial Liability . Actuarial Asset Value . Employer Rate: . Before Change . Change Due to: o Normal Cost 0.9 o Prior Cost 1.4 o Asset Value 0.0 o Fresh Start 2.4 o Sub-total 1.1 . After Change 17 . 3 Note: Alternatives 2 & 3 not available after 6/30/02 12.6% 12.6% N/A 0.9 N/A 1.4 N/A (2.9) N/A 0.0 N/A (M} N/A 12.0 N/A . IJtJN 32 I~ , I I I I Actuarial Asset Values 95% 110% 100% 6/30/2000: Market Value Actuarial Value 100 95 100 100 100 110 -7.2% -7.2% 92.8 92.8 108.3 119.1 103.1 110.3 102.1 102.1 2.1% -7.2% 110.0% 110.0% . .~ .'.::~'l::: 6/30/2001: -7.2% 92.8 Market Value Actuarial Value Project @ 8.25% Adjust [1I3(MV -A V)] Limited by corridor Actuarial Rate of Return Ratio of Actuarial Value to Market Value 102.8 99.5 99.5 4.7% 107.2% IJDN 33 Actuarial Asset Values . Actuatial Asset Method . Project Actuarial Value forward from prior year using 8.25% . Adjusr Acruarial Value by 113 difference between MV & A V . Actuarial Value must fall within corridor of: o 90% of Market Value and o 110% of Matket Value . Recent Board Action: 95% incentive replaced by options. Actuarial Value !lli!}': (at agency option) inctease $2 for every $1 increase in Present Value inctease, subjecr to cap (again at agency option) of: . No AVA change . AVA set to 100% MVA . AVA set to 110% MVA Expired at 6/30/02 IJDN . 34 Contribution Projection Safety . Market Value Investment Return: . June 30, 2001 . June 30, 2002 . Expected June 30, 2003 and subsequent . Fresh Statts: . 20-year Fresh Start . CalPERS used 30-yeatFtesh Start for 3%@50 02/03 and 3%@55 03/04 rates -7.23% -5.97% 8.25% . No Other: . Gains or Losses . Method or Assumption Changes . Benefit Improvements IJDN 35 . :-- ---...------------.-.-.-.-----------.---- Contribution Projection Safety 40.0% 35.0% 30.0% 25.0% 20.0% ,D - -----.~ -"'-.'--..-._---,~._--- ~.o . o .... .~_.'c3..--o~--<> ..g. 15.0% 10.0% o // ----L---..7'.:'--- .($/ o' __________.,~._4 /0 ./' ./ / 5.0% 0.0% Ioo/O~I~I~2~0~~3/-0~4iO~~5/06 i 06i0707~O~ o 3%. @50 ~. 5.1% i 3.8%121.3%._.~24.6%. ~4..6% f.6. .6% 37.7% 38..~% <> 3%@55 '5.1% 1 3.8o/""-~15.2%j.!B.4% I 28.4%eO.5% 31.6% 32.0~ o 3@55wo Fs15-'.1 %1}.8% i 12:691>J.!6-:-4%j~,9% .l~..i% ,}0.9% T3i8~1 . IJDN 36 Attachment "e" Excerpt of Ways & Means Committee Meeting October 23, 2002 Mr. Wilson: How much time do you have John? (John Bartel of Aon Consulting). Mr. Bartel: I have whatever time you guys need. So how's that? Councilwoman McCammack: Is he on the clock, that's the question? Mr. Wilson: Yeah, he's on the clock. Councilwoman McCammack: (Then) you're up. Will you have a seat over here. Mr. Wilson: Ifhe doesn't know next whose numbers in the budget are going to change. Councilwoman McCammack: No one can call me a waster. Mr. Bartel: No, you're not hearing me arguing about it. Councilwoman McCammack: No, but you're going to hear me argue about it. Mr. Bartel: I have actually two things to go over, that I've gone over with staff. And it occurred to me that one (of the things) that might be of most interest to the committee is probably, the safety numbers. What I've done, at the direction of staff, is to take information provided by CaIPERS, present it in a form that's, a little bit more easy to understand and project it to contribution rates over the next five years. So, it occurred to me that we could start with safety, hit some highlights, and then go to miscellaneous. If that's O.K.? I have more than enough copies here, try that. Ms. Sassoon: You paid good money for those copies. Mr. Bartel: Pardon me? Ms. Sassoon: You paid good money for those copies. Mr. Bartel: Yeah, well, I don't charge by the piece of paper. Just so you know, do you have a copy? Councilwoman McCammack: I have one, thank you very much. Mr. Bartel: Just so you know, the way that this is set up is two slides per page, double sided, so if you hear me refer to an even numbered slide it's at the bottom, and odd is at the top. What I'd like to do is take a couple of minutes and talk about definition of terms, because when you are talking about the miscellaneous plan and the alternative benefit formulas, or you're talking about the safety plan, and moving from 3 at 55 formula, to the 3 at 50 formula, the question everybody wants to know is what's the cost of the WordllITC/ac[WaysAndMeansI0-23-02] 1 additional benefit formula. And, the example that I use, really is if you go out an buy a new car, (the) car dealer offers you a brand new car, no car payments for the next year, most people would say, that doesn't mean the cost of the new car is zero. The funded status of the two programs, safety and miscellaneous, are very, very different. And, so the definition of cost is crucial to sort of get in as part of the question what is the cost of the benefit, before you can answer the question, what it the cost of the benefit. So, most agencies, counties in particular, cities too but maybe to a little bit lesser degree, focus on cost as cash flow, what is the difference in the cash flow, one benefit program vs. another. A lot oftimes cities will really focus on cash flow as really being the difference. When you're talking about actuarial issues, important though to understand, all the CalPERS actuaries are doing is making their best guesses as to what's going to happen. The fact of the matter is they don't really know how long people are going to live. They don't really know, for sure, how people are going to retire, but they're giving you their best guess in terms of what behavior is going to be. (This is) important to keep in mind. Councilwoman McCammack: By the way, our Mayor just walked into the room, I just wanted to introduce her to you. Mayor Valles: Oh, thank you, I'm sitting back here, because I need to slip out to another meeting, I'm trying to see how you all are doing. Thank you. Councilwoman McCammack: We're doing great, how are you doing? Mayor Valles: I'm fine. Mr. Bartel: So lets start off with a couple of very quick definition of terms. When the actuaries gather information, what they actually do is they are projecting out into the future, future benefit payments. The discounted value of all of those future benefit payments is called the present value of benefits. In a way, that's a number that a lot of times people focus on, but it's not the most important number when looking at how well funded a plan is. The most important number is the portion of the present value of benefits that is earned or attributed to service earned prior to the valuation date. That's referred to as the actuarial liability. So the measurement, the comparison between actuary value of assets and actuarial liability, even if you don't fully understand what that actuarial liability represents, that comparison of those two numbers, is a great representation of how well funded the plan is. And, important also to know, the most recent information the City has is unfortunately two years old, June 30, 2000. The June 30,2001 information should arrive pretty shortly. I'm getting calls regularly from clients stating that they have gotten it, so this City should get it within the next couple of weeks at the latest. The June 30, 2000 generates contribution rate information for the 02/03 fiscal year, so there is a two year delay between when the information was calculated as of and what the contribution rates are going to be. Important to understand that because that two year roll forward, two year projection, does not take into account reality that happened during that two year period. So the June 30, 2000 information looks at asset information in CalPERS at June 30, 2000 and ignores that fact that CalPERS investment returns over the last two years have not been good. So... WordIHTClac[WaysAndMeans 1 0.23-02] 2 Councilwoman McCammack: That's a nice statement. Mr. Bartel: Yeah, well the reason I say it (has) not been good, because it has been substantially better than anything that I have in my retirement account. So, everything is relative. Councilwoman McCammack: And for those of use who earn $50 a month, it really doesn't matter. Mr. Bartel: There you go. (In) the grand scheme of things, what happens to my account, doesn't matter either, I can assure you that. And, important to know that the 02/03 fiscal year contribution rate is really based on that June 30, 2000 funded status, and the way it really works is CalPERS calculates something called the normal cost. All that represents is the value of benefits being earned during the year by active participants. And what they say is O.K. City, you have to contribute the normal cost rate, plus or minus something based upon how well funded the plan was two years ago. So if the plan had assets greater than actuary liabilities the City gets to contribute less than the normal costs, and if the plan had assets less than the actuary liability the City contributes something more than the normal costs. So if you take a quick look at slide four. Slide four shows the change of the funded status, June 30,1999 rolling forward to June 30, 2000. So looking at the numbers moving up from the bottom, the present value of benefits 293 million dollars, increasing to 338 million dollars. Couple of important things to note though, between 99 and 2000 there was actually, between the 99 and 2000 valuation there was a change in the law, which increased the present value of benefits. The City went from a 2 at 50 to 3 at 55, which increases present value of benefits. Furthermore, there was what is referred to as actuarial loss. Actuarial loss means that when CalPERS prepared the 99 evaluation they thought the next year's (numbers) were going to be at a certain level; low and behold they ended up being higher than that. The primary reason for that loss, by the way, is average pay went up from 99 to 2000 almost 10 percent. From 60,000 to about 66,000, that is noticeably higher than CalPERS thought it was going to be. If you go up from the present value of benefits, you see the actuary liability also going up dramatically for that period. Now the actuary liability is going up for those same reasons that present value benefits is going up, plus, remember that the actuary liability represents the value of benefits earned. Well, if you moved from 99 to 2000, people have earned an additional year's worth of benefit as well. And the key number here is, what I refer to as the excess assets, that's the distance between the actuarial value of assets and the actuarial liability, while the things I talked about changing, increased the actuary liability so (it) decreased excess the assets. Though there was also an investment gain that mitigated that increase ending for the year June 30, 2000, flip the page to slide five, you see the magnitude of the numbers, 3 at 55 about 14 million dollars the actuarial loss almost 6 million dollars. The change in the law, referred to here as 3PA, 5 million dollars, and by the way, the question mark between the 60,200 and the 66,300 is because we have a new printer and that should be an arrow, and so the fonts didn't print right. I apologize. WordlHTClac[WaysAndMeans 1 O-23'()2] 3 Councilman McGinnis: When you say the average salary went up 6,000 dollars. . . Mr. Bartel: Yes. Average PERSable wages, base pay. Councilwoman McCanunack: Safety only? Mr. Bartel: Safety only. Yes. Ms. Pachon: This is safety, (includes) charter 186, salary increases. Councilwoman McCanunack: That year, their average ended up being 10 percent higher than it was the year before. Ms. Pachon: We ended up giving higher pay increases than what PERS thought. We give pay increases here different than most Cities do that CalPERS looks at, so. . . Councilman McGinnis: (Give) a 10% raise? Ms. Pachon: That was an additional benefit that year that we converted to employer pay member contributions. We had a higher amount of money being reported to PERS that counts towards those things. Mr. Bartel: EPMC. Yeah, the average pay of remaining active went up more than that because in any particular year, the people who retire at the top step and you're hiring people at the bottom step. So, when tbe average pay goes up 10 percent, that's substantial. That's a far higher increase than we see; we do this work for probably more than 100 agencies around this state. And a 10 percent pay raise is reflective of a combination of EPMC and the pay raise. (Mr. Funk): Well, and probably in anticipation in the boost in benefits, there may have been fewer people retiring at the top level. Mr. Bartel: Yeah, if you take a look at slide 7, you see exactly that. The demographics show the number of people receiving payments 447 to June 30, 2000 remaining constant. Now your contract amendment going to 3 at 55, I ought to know when that was effective off of the top of my head, but about two years ago. Right? Councilwoman McCanunack: Two years ago. Mr. Bartel: So towards the end of2000. Ms. Pachon: No, it was July. August of2000. Mr. Bartel: August of2000, O.K. So you should see some changes, I would think, in those numbers when you go to the next year. Also you can see the number of active employees; those are really people on the payroll on the valuation day. The comment WordllITC/ac[WaysAndMeans I 0-23-02J 4 that I would make about those numbers (is that) most cities anticipate that the number of safety employees would have increased over the last two years. The more that number increases, (it) eats away, at the excess asset of 7 million dollars that we saw on a couple of pages ago. Now, what I'd like to do, is skip over, I'm happy to go over this as slow or as detailed as you would like, but there are a couple of key points that I'd like to stress. So if we could skip forward to slides IS and I6. Slide 15 is, it's also true for miscellaneous, the non-safety folks, the most important slide. You all will not all agree with me when we go a little bit later than this, but I feel very strongly that slide 15 is the most important slide you can look at and here's why. You don't even look at the numbers. For me, my eyes are not very good and they're kind of hard to read anyhow. But, if you look at the pattern of the bars, what you see there is the relation between assets and liabilities. The assets are the shaded or the darker bar, the liabilities are the white bar, and if you look back to June 30 of96 you see liabilities greater than assets. And then what happened from 96 to 2000. Councilwoman McCammack: The picture got better. Mr. Bartel: Yeah, and the reason is that CalPERS investment return, the asset return, was terrific during that period of time. So, even though you had a benefit improvement when you get to June 30, 2000 you've got assets greater than liabilities, to the tune of 7 million bucks. But, if you look back at the picture of those bars five years ago, liabilities were greater than assets, with a benefit program that was not as rich. So, you should anticipate what I'm gonna tell you, which is investment return over the last two years has been, for sake of argument, the mirror image of investment returns for the previous five years. So you will see a change, without a change in the program, at 3 at 50, you will see a change in the relationship of those bars. If you just get that picture in your head, a vitally important picture in terms of the cash flow requirement for this plan on a go forward. Let me quantify that for you a little bit. Look at the bottom of slide 16, looking at the impact of the investment losses. Important to know this is kind of an illustration. The way CalPERS brings investment losses and gains into the City's contribution is far slower than what I'm going to tell you here. But this is pretty important, June 30, 2001 CalPERS investment return negative 7.23 compared to expected return of 8 v... So for sake of argument a 15 1/2 percent difference. CalPERS investment return June 30, 2002 negative 5.97 compared to the expected return of 8 v.. for sake of argument, 14 v.. percent difference. So 29 :y. percentage point difference between where they thought they were going to be. Now CalPERS was a little conservative in determining the actuarial value of assets. In other words, they didn't use all of the available market value of assets, they actually used 95 percent of that number, so there's actually a small, relative to the 29 percent number, credit against that. So really you're assets will drop 24:y. percent. If you take 24 :y. percent of the 279 - 280 million dollar actuarial asset value, you get 69 million loss. Ms. Pachon: Loss, right? Mr. Bartel: Yes. 69 million dollars, comparatively speaking, to a 7 million dollar excess means you're moving from an excess position to an unfunded position. Now the 69 WordllITC/ac[WaysAndMeansI0-23-02] 5 '---. million dollar nwnber, just to put it in a slightly different context, you're rough nwnber, your safety base annual pay about 32 million dollars. So that 69 million dollar drop more than two years worth of safety base pay. Councilwoman McCarnmack: And that will be actually getting smaller, as well as less contributions because we've got such a shortage from years past. Mr. Bartel: Yeah, what will happen is that 69 million dollars you have to pay back. If you think about this for a second, the idea is to get sufficient money in there to pay people's benefits at retirement. And there's only two ways to get money into the trust. Way nwnber one is contributions. Way nwnber two is investment return. So if you need to have an X amount of dollars and you get a lower investment return, you have to make that up with larger contributions. There is nothing magic about this. Councilwoman McCarnmack: And if you have less people paying in, because you have less people employed, than the employer's contributions go up. Mr. Bartel: Well, not necessarily, (it) depends on where those people go. If those people retire then the employer's contribution goes up. The asset loss if you're spreading it over a small payroll base still requires you to get back that 69 million dollar difference. So if your payroll is lower that impact of percentage of pay does become higher because they still need that 69 million dollars. I'm not convinced I answered your question. Councilwoman McCarnmack: I'm not convinced you did either. Mr. Bartel: O.K. Councilwoman McCarnmack: If, and it doesn't really matter in the whole scheme of things, but if the last two years experience, well actually, the 00/01 experience was based on a certain amount of people being employed, a certain amount of contributions, and a certain amount of investment return. Mr. Bartel: Yes, Yes. Councilwoman McCarnmack: 02/03 was based on that expectation? Mr. Bartel: Yes. Councilwoman McCarnmack: 02/03 in actuality has a lot less contributions being made, because we have a lot less people contributing. Mr. Bartel: You have fewer safety folks? Ms Pachon: We really don't have that many vacancies at this time, we have a lot of people off on injury, but we are still paying full benefits for them. WordIHTC/ac[WaysAndMeansI0-23-o2J 6 Councilwoman McCammack: Oh we are? Ms. Pachon: Even though they are off, and they're not here, we're still making those payments. Councilwoman: Got it, I'm still with ya. Twenty minutes and I'm still with ya. Mr. Bartel: That's because it's not right after lunch. So, go to slide 17 and 18. Slide 17 is kind of a cousin to slide 15. Slide 17 shows the translation, from the funded status of the plan on slide 15, to the cash contribution the City makes. So when you see the June 30,00 that really refers to the 02/03 fiscal year. Now, um, what I'd like to do is skip, we can talk again (in) a lot more detail, but if you go to slide 35 and 36. I've skipped over a couple of pretty important pages, but in the interest of time, I wanted to show you what I think you folks will think is the most slide here. And that is slide 35 and 36 take into account project the City's safety contribution rate. Taking into account CalPERS recent investment return, and oh by the way. . . (Tape end) Mr. Bartel: Optimistic, assumptions. Councilwoman McCammack: Well, based on the previous two years, I would have considered that very optimistic. Mr. Bartel: Well, of course, you can't look at recent past, because if you had looked at the two years before that you would've thought that 8 14 was pessimistic. But here is a really important fact, through August 31 which happens to be the most recent information we have available right now, CalPERS is down a negative 3 Yz. September was not a great month, by any stretch of the imagination (and) October certainly has looked a little better. But, the odds are very good that they will have a challenging time getting to that 8 14. And so, important to understand that June 30, 03 investment returns begins to get into the City's contribution rate in 05/06. So, those, it's the out years in this projection that could be worse. The other factor too that we have not taken into account is that we have assumed no other gains and losses. So... Councilwoman McCammack: As in? Mr. Bartel: As in pay raises higher than CalPERS thinks (or) disabilities at younger ages. CalPERS has some assumptions for disability, but a large number of disabilities in their 30's has a huge impact on safety numbers, because of the safety disability benefit. So the assumption is that it is as CalPERS thinks. So, adverse experience will change these numbers, good experience will lower them. If you take a look at slide 36, you really see three bars there. The idea is to show a comparative using, what I'll call the same financing method. Same financing method means when CalPERS looks at the difference of assets and liabilities, the cause of that difference is translated into a change in the contribution rate. What CalPERS did when it priced the 3 at 50 numbers was to used a WordIHTC/ac[WaysAndMeansI0.23-02] 7 fixed amortization period, and so, we have taken the 3 at 50 and the 3 at 55 numbers and used a common amortization period referred to as a 20 year fresh start. Councilwoman McCammack: So, we are paying at, paying the difference between the asset and liability over 20 years. Mr. Bartel: Absolutely correct. And the lower line there, the one with the circle (is) the bullet point, would be the 3 at 55 if there was no fresh start. So, what you really see here is for 02/03 fiscal year, your current contribution of 12.6 percent of pay increasing to a 32 percent of pay over a five year period. No benefit improvement. We did a 20 year fresh start that actually goes up a little bit. If you look at the 3 at 50 numbers, you're (going to) see a 38 percent contribution. Again, absent adverse investment return out in the out years. Councilwoman McCanunack: Now do the actuarials on the State level look at ten year economic trends and ten year cycles? Mr. Bartel: Here's really what they do. To select their assumptions out into the future here is really what they do. They are looking way beyond a ten year period. If you think about this for a second, you hire a police officer at age 21. Councilwoman McCammack: I, I probably misstated my question. Mr. Bartel: O.K. Councilwoman McCanunack: When the actuarials are looking at investment returns, do they look at a ten year historic trend to project their investment choices over the next ten years? How do they do it? Mr. Bartel: Longer than a ten year period. Councilwoman McCanunack: Historically, and ...? Mr. Bartel: Historically and projecting out into the future. Even though it didn't sound like my response was on point, where I was getting at is that they really look at where your projected benefit payments are going to be. So they look at the duration of the benefits and they say we need to look at the duration of the investment return to match up with the duration of the payments. Councilman McGinnis: 30 years? Mr. Bartel: Yeah, 30 years or 40 years. Councilwoman McCanunack: Or based on the ages of those who have retired and the life expectancy. WordIHTClac[WaysAndMeansI0.23-02] 8 Mr. Bartel: Yeah, all State, if retired, active, because you're going to have benefit payments. Where I was going with the 21 year old that individual is that he is going to be working with you for 30+ years and then they'll retire, for the sake of argument, retire in their early to mid 50s and they'll live for another 30 years after that. So you really have people who are on the payroll now, who are still going to be receiving payments and still alive 60 years from now. So (with) that investment horizon, they don't look at a short period of time. And the direction I think you're going with the question, if! can anticipate a little bit, is how is 8 Y. an appropriate investment return? Councilwoman McCarnmack: That was an old question, but yes, yes that was the thinking. Mr. Bartel: Yeah, let me sort of comment that for two years the people we're getting, we fall down and we're get a 15 percent rate of rate, how is 8 Y. an appropriate investment return assumption? And the CalPERS actuarys resisted the temptation to increase the investment return making plans look better funded when investment returns were looking good, and they're doing the same thing today when investment return is really bad. The issue from their perspective is, as an actuary I don't 100 percent agree with this statement, but they are saying, look, we need to look at the sound funded status of the plan over the next 40 years. And even though we believe that the investment return next year is not going to be very good, we can't be swinging the investment return from one extreme to the (other). My comment is a little bit different. Most people would look at the 8 Y. investment return for June 30, 03 and say, eh, that's pretty aggressive. Maybe it's appropriate for 30 years from now, but it's not so appropriate for June 30, 03. Councilwoman McCammack: Yes, especially since IRA's are guaranteeing 4 %. Mr. Bartel: Yeah, the one change that I think they ought to make, but you should be aware that they are not going to make this change, is to look at that investment return on a duration basis. In other words, look at your investment return in the short run, have one investment return, and look at an investment return on a longer basis, and use a different investment return. But that's not going to happen. The end result of that not happening is, if it did happen, you would hear CalPERS say, you know you're 12.6 assumption, your 12.6 contribution rate is to low. Because we are not taking into account investment return in the short run, the end result is that your investment return is going to be 30 percent in five years. And where as, if you did take it into account, it might be 20 some odd percent now. Now, most people, most cities would say, good thing Bartel you're not the one setting the assumptions for CaIPERS, because we are having a cash flow crisis in the next two or three years. But by not recognizing that, you're going to have to recognize it at some point in time. It's really a matter of timing. It's like pay me now, or pay me later. Councilwoman McCarnmack: You know, what's really funny, is, and I know we are not comparing apples to apples, but when you look at what the Feds have done with Social Security, of course, what they did with those monies we don't even want to talk about. And we know that the State has done different things, the State of California has done WordIHTC/ac[WaysAndMeansIO-23'()2] 9 different things with its pension fund, but the only solution for the Feds was to increase the age of retirement. Mr. Bartel: Right. Councilwoman McCanunack: And that was the only way that they could continue funding it at the current level. And the contributions haven't necessarily gone up and the rate of those retiring. Mr. Bartel: And Social Security is a pay as you go system. Councilwoman McCanunack: Right. Mr. Bartel: So, if we looked at how well funded Social Security was, on the same basis we'd be looking at this. . . Councilwoman McCanunack: We'd be bankrupt. Mr. Bartel: Yes. It would not be a pretty sight. Councilwoman McCanunack: Yeah. Ms. Pachon: It makes us look good though. Mr. Bartel: Yes, it would. Councilwoman McCanunack: I know what I've contributed and what my employers have contributed over my lifetime, and I know how long I'm, technically, going to live, in terms of actuarial, and there is no way in hell, even ifI invested it at 8 percent, there's no way in hell that money would have lasted long enough. So anyway, it's a side thought. Mr. Bartel: But, that, the trend that you're talking about though, is not unimportant, because the trend for Social Security retirement age have people work longer. The trend for safety retirement and really for public employees is. . . Councilwoman McCanunack: Opposite. Mr. Bartel: Absolutely the opposite. And the question, we haven't talked about miscellaneous, but that is an important question when you look at the miscellaneous formulas. There is a, I really believe, a strong social argument to encourage safety folks not to stay around until they're 60. I use the example and I'm not sure many Police Officers (would) like this, but how many 55 year old cops do you want chasing criminals down the street? Some, but not really very many. The younger guys can do a much better job of that. But when you look at your miscellaneous employees, arguably when people in their, and I feel stronger about this when I turned 50 a couple of years ago, Word/HTC/ac[WaysAndMeaoslO-23-02] 10 arguably you are more productive and, and you've got institutional memory when you're in your mid 50s. So why encourage people to retire in their mid 50s. Councilwoman McCarnmack: Right. But there are certain parts of that statement that, I think, also apply to safety and that part of the difficulty that the City Council members and the other public officials wrestle with in closed session, when you're talking about settlements for safety, that whatever they've done to cause them (the) need to retire, or we've had to payout lawsuits or (pending) litigation for a safety employee that is young and inexperienced may outweigh, depending on the dollars that are paid, that statement that you just made. Mr. Bartel: Yeah, I'm not qualified to talk about those things, and you don't want my comment on those. What, to put what you said in retirement terms though, the issue really becomes when you're looking at the difference the 3 at 50 and the 3 at 55 benefit is that additional six percent cost differential is that worth it in terms of encouraging safety folks to retire in light of what you said. Councilwoman McCarnmack: Well, I mean if you add up the difference between what you're going to pay them at age 50 or if they stay until age 55, depending on what the 186 or the increases in salary are. Of course that's probably going to change over the next couple of years, because all of the cities are having difficulty balancing their budgets, therefore those raises are going to be quite different that what they've been historically, in terms of the average pay. But, if you think about what it costs to pay them between the ages of 50 and 55, being they're at the higher level of pay anyway because of their longevity on the job and the cost of the benefit. You're right, in the long run, ten years from now, we may see the payoff, the financial benefit of having them retire at 50. But, I'm not qualified to add those numbers up either. Mr. Bartel: Let me, let me sort of mention of couple of things in the difference in the two formulas. Both formulas get people to the exact same benefit at age 55. So they both have a three percent multiplier at age 55. The 2 percent at 50 formula started at 2 percent at 50 and increased to 2.7. The 3 percent at 55 formula starts at, gee I ought to remember this, starts at 2.4 at age 50, hang on I'll tell ya. 2.4, I think, at age 50 increases to 3 percent at age 55. Let me verify that. Ah, 2.4 at age 50 increasing to 3 percent. The 3 percent at 50 formula and 3 percent at every retirement age. So, the 3 at 50 and the 3 at 55 are identical at age 55 and the 3 at 55 formula provides some disincentive to retire at earlier ages, it's not at is you're not going to have people retire in their early 50s, you will. And a lot is going to depend upon when they were hired by the City. There's a 90 percent cap on benefits for safety, so a 30 year person at 3 at 55 gets to their 90 percent cap a little, depending upon when they're hired, a little bit earlier. People hired in their mid to late 20s get to the 90 percent cap at the exact same point in time whether it is 3 at 50 or 3 at 55. People hired in their early 20s get to their 90 percent cap earlier and if you look your safety folks are hired, your police officers are probably hired in their early twenties. WordllITClac[WaysAndMeansI0-23-o2J 11 Ms. Pachon: This isn't as big a deal for the firefighters, because they're hired a little bit later. So, 55 works for them. Councilwoman McCammack: Right, and they technically last longer. Ms. Pachon: Exactly. The 3 percent at 50 doesn't really give them anything. Mr. Bartel: They seem to be prone to retire when they hit the 90 percent cap. And hitting the 90 percent cap, by in large, under 3 at 50 and 3 at 55. Police is different. It's a different pattern, they're hired at different ages, and the job is arguably different. And so, it's a tough decision. Councilman McGinnis: In the business that I work for, Pac Bell, the guys go as soon as they get to their 30 years, and then go do something else, because they can gather their pension immediately. Are police officers not allowed to do that? Mr. Bartel: No, you certainly can do it, but you take a hit. What happens is and whether it's safety or not, your retirement is based on, by in large, base pay. Base pay plus employer paid contributions. By in large, base pay, and for your safety officers, I really don't know your safety officers, but 30 percent of their W-2 is overtime, (which is) not included in the pension. And depending upon what you're doing and what job you have, it's easier to find another job and for other people it's not. So I think it's a mixed deal. The other factor is, and I'm regurgitating what other people have told me, which are born out in the actuarial experience. But no matter how large a benefit you provide for some people, they're not going to retire. Councilman McGinnis: Well, some, I've noticed some police officers who are looking to retire elsewhere; they have a small village and places like that. They take their retirement here and they go and become the local sheriff or the local policeman there. Councilwoman McCammack: Northern California or whatever. Ms. Pachon: They can do that as long as it's not a PERS. Mr. Wilson: Out of state they can do that quite a bit. Councilman McGinnis: And I have other guys in the phone company that are moving to Arizona and other places, they want their money now. The local communications company, not only want to hire them because they already have the experience and no training, and it takes about five years to get up to speed. Mr. Bartel: The difference is that if they do that in California, you can't be working at working at one PERS agency and retired from another. Councilwoman McCammack: More than 20 hours a week. WordllITC/ac[WaysAndMeansI0.23-02] 12 Mr. Bartel: Yeah. There's one retirement age if you've worked for multiple PERS agencies. You're retiring from those agencies all at the same point in time. The only way they can do that is if they move out state. Ms. Pachon: Or move to another agency that doesn't have PERS. Like LA doesn't have PERS. Mr. Bartel: Yeah, but even with, I don't know how many people you're going to have moving from here to LA city, there are even some restrictions in their ability to retire from those other agencies. So, it's a different kind of dynamic. Councilwoman McCammack: Police officers, if they are going to another PERS agency, can only work 20 hours, less than 20 hours a week. Councilman McGinnis: A Bell Gardens police officer that I know left there started his own agency. Mr. Bartel: (Some) start their own companies. Yeah, you can certainly do that and I'm not going to suggest to you, there aren't people who do that. Councilman McGinnis: He hires other policemen. He has an armed security service. Councilwoman McCammack: And not paying the benefits. Mr. Bartel: All I am saying is that the numbers don't show that has historically happened in droves. Now, five years from now, I may very well sit here, and go you know, with the new retirement formulas, that is exactly what's happening. But, we don't, I don't think we know. Councilman McGinnis: You think you have another good 20 years, because the government expects you to work until 67, so it's almost 70. So the guys I can see are taking advantage and want to do something else. Even right now at Pac Bell, they're doing early retirement, which they're giving you four years, so you only have to be there 26 years. And, guys are taking it as soon as they can get it. Mr. Bartel: If you're right about that, if that's the pattern of what's going to happen, people are more inclined to do that at 3 at 50 than they would at 3 at 55. That's absolutely right. And one of the issues that cities tell me they have, who have put in the 3 at 50, is that they've had a lot of people leave and their ability to fill those positions. Councilwoman McCammack: That is the issue that was brought up in this committee, previously. Councilman McGinnis: Right. Right now, I think we have just a handful that could leave now, and if we implemented it I think up to 78 of them could leave. And we're WordllITC/ac[WaysAndMeaosI0-23-o2J 13 worried, I'm worried, I won't say we, I'm worried, boy what if they all decided to just do it. We would really be in trouble. Councilwoman McCammack: I think that was over the next five years, I think it is 20 this particular year, but... Mr. Bartel: I would've guessed, yeah. Councilwoman McCammack: 20 sounds. . . Mr. Bartel: There all, the age at which they can retire is not changing. Their ability to retire may well be different, because they're getting a higher benefit. Councilwoman McCammack: But the other thing to that is starting to happen is, and if you look over it long range, is the cost of living has gotten quite a bit higher. What these people were used to living on and what they have to live on are two different things. Mr. Bartel: Well there is also a very real fact that when you're also looking at the amount of overtime that safety officers get vs. the portion their benefits are based on. And, when you look at people, it's not uncommon for people (age) 55 to still have kids in high school. Councilwoman McCammack: That's right. We know that. Mr. Bartel: And, maybe an alimony payment, so cash flow. . . Councilwoman McCammack: Maybe more than one alimony payment. Mr. Bartel: Maybe more than one. So, cash flow becomes really important. And (although) we don't really know, the actuarys have made, I think, a pretty good guess as to what the retirement pattern is going to be. But we really don't, we really don't know. Councilwoman McCammack: Let me ask you one other question. Mr. Bartel: Sure. Councilwoman McCammack: It's not a question that I'm saying I condone or approve of or will push to do, but, you've pointed out some real differences between the two safety units, in terms of age and all of that stuff. Urn, what does splitting the unit cost? Mr. Bartel: Urn, define what you mean by cost? Councilwoman McCammack: In other words, to bring police up to speed without the fire, and to bring the fire up to speed without the police, in terms of the value of benefits, (to offset) the liability. WordIHTClac[WaysAndMeansI0-23-02] 14 Mr. Bartel: So, let me ask one more question, because right now you have one plan. You have one safety plan. You can within that safety plan offer different formulas to fire and police. You can do that and keep it as one plan. Councilwoman McCammack: Oh, you can? Mr. Bartel: You can, or you can take that plan and split it into two and look at them, experience wise whatnot, differently. Councilwoman McCammack: Now would that help us, or does that hurt us? Mr. Bartel: Well let me give you my two cents worth. My two cents worth is the reason to split it is for negotiation purposes. And, what I would like you to do is to go to a couple of slides in here. If you look at slides 21 and 22, which talks about. I'm not really gonna, 1 could go over the numbers, but I'm going to hit upon a couple of really important points. Slide 21 and 22 talks about providing 3 at 50 for all safety. Now you know 25 and 26 provide 3 at 50 for police safety only and 29 and 30 fire only. When you get a contract amendment cost analysis and you have one plan, CalPERS will not tell you the impact of going to 3 at 55 to 3 at 50 on fire payroll is 6 percent of pay. They will tell you the total impact of safety payroll is 3 percent of pay. So, the percentages and the numbers you get end up being different numbers than you're really sitting down and negotiating at the bargaining table. So, if you gave everybody 3 at 50, we could look at this cash flow analysis and I could tell you what my recommendation would be that you sit down and talk with your safety folks about the cost of 3 at 50. When you look at the, and you can pull some numbers off of the CalPERS information that would verify what I'm saying, 3 at 50 for police only or 3 at 50 for fire only is far harder to do, because they are taking that information and spreading it over all of safety payroll. And your growth and your payroll, the number of people for those two groups may be different. So your experience may be different. The need for having those benefits may be different. So that makes it more challenging when you're sitting down at the bargaining table (and) that's the reason to split it. However, the reason to not split it is, from an actuarial perspective, a pretty strong reason as well. And that is when you got, (if) I'm remembering this right, 300 and some odd total safety members? Councilwoman McCammack: 400 and some odd. Mr. Bartel: 400 and some odd. Councilwoman McCammack: 420 something, 450 something. Mr. Bartel: So you probably have, for sake of argument, 180 firefighters and 240 police? Ms. Pachon: Right. Mr. Bartel: Right? Something like that, when you have experience applied to a smaller group, your contribution fluctuations will be greater. So, when you split it into two WordIHTC/ac[WaysAndMeans I 0-23-02] 15 groups, your aggregate, the total amount you'll pay, might be very similar, but your contribution fluctuations are going to be much greater. And the things that drive Directors of Finance, City Administrators, and City Councils crazy, are contribution fluctuations. If you (split the plan) that's what you should expect to happen. And if you're willing to live with that, and the bargaining issue is more important, than split them apart. But don't split them apart without recognizing that you're going to have those fluctuation issues. With 180 people in your smallest group, you don't have as big of an issue there as a city with (a total of) 150 safety officers, and you've got 90 and 60. So, you're in a little better position, because even your smallest group is relatively larger than a lot of agencies in California. I would not over emphasize that as an issue. Councilwoman McCarnmack: It's good to know both sides of that coin. Mr. Bartel: Yeah, that I think those are the arguments both pro and con. Ms. Pachon: From my standpoint in Finance, 1 mean I don't really see pros or cons either way. We have the ability now to give each group, now, different benefits and to negotiate and to give those things. Councilwoman McCarnmack: Yeah, the ability being there is one thing, but the ability to negotiate with the real numbers is another. And that's the issue. Mr. Bartel: That's the issue that people keep coming back to and in fact here's what, I don't know whether you hear this at the bargaining table or not, but if, if. . . Councilwoman McCarnmack: r don't tend to sit at those. Mr. Bartel: Well, your bargainers, if you sit down and talk with the firefighters they'll go "You know the cost of this is far more expensive because of the cops." And then the police officers will go, "You know those firefighters always go out on disability and we're paying for that." You will always get both arguments, and both of them can't be right, but the fact of the matter is. . . Ms. Pachon: But even if you have them separate, they'll still argue the costs are still too high. So no matter how you do the math I will tell you at the bargaining table it is never right. It's always too high. Mr. Bartel: There is no doubt about that. There is absolutely no doubt about that. Ms. Pachon: I think that's what bargaining is. Councilwoman McCammack: r think the only good thing that has come out of this, is that the first time, in a long, long, long time, the safety personnel understand that they are going to have to contribute a piece of it. And, I'm not sure that it will be their first card on the table, it may be their last card on the table, but nonetheless, there are issues of being to afford this benefit and they know what those issues are. WordIHTC/ac[WaysAndMeansI0-23-02] 16 !--- Mr. Bartel: Right. Absolutely understanding those issues. Councilwoman McCammack: Yeah, they are. Mr. Bartel: And two or three years ago they probably understood them, really well. But maybe didn't want to talk about it. Councilwoman McCammack: Well they couldn't talk about it. Mr. Wilson: John, just a question in terms ofreal dollars, there's a lot of percentages here but that doesn't mean a lot unless you convert it to dollars. Can you give us a sense of what we're talking about? Mr. Bartel: Yes, if your safety payroll, for sake of argument, 32 million dollars, so you're talking about 30 percent, 9 million dollars, cash flow in 07/08. Mr. Wilson: Up from? Mr. Bartel: Up from about a 3 million dollars. I mean those are very rough numbers. Mr. Wilson: Right. Councilwoman McCammack: Our police. . . Tape end Councilwoman McCammack: . . . I mean in terms of dollars that the Council can read over the next three years. At least from what we pay now. Ms. Pachon: We will base it on, if you will look on page 36, he's given us the percentages, and we will convert those percentages into dollars. Councilwoman McCammack: Because this is a long term decision, this is not a short- term decision. Mr. Wilson: Last question for John, are there any discussions underway, to your knowledge, either through CalPERS or the League of Cities that would help cities to deal with this fluctuating pattern that you've referred to? Mr. Bartel: Yeah there are and the fluctuating pattern people are most concerned about is the up fluctuation, right? The down fluctuation people like. And, the . . . Councilwoman McCammack: Not the investment down, but the cost down. Mr. Wilson: The cost down. WordIHTC/ac[WaysAndMeansI0-23-o2J 17 Mr. Bartel: Yes, the cost down. And yes, in fact the League of Cities is, and it's probably a little early to have this conversation now, but there are alternatives like pension obligated bonds that allow an agency to mitigate the contribution by borrowing money at relatively low bond rates giving it to CalPERS. And if CalPERS earns a rate of return, higher than what you're paying on the bond, that's why I said the timing for this is probably, today is probably not the most gratuitous timing. If CalPERS gets 8 Y. rate and you're paying 5 percent or 5 Y, percent on your bonds, there is an arbitrage, is the wrong word to use, but that's exactly what's really going on is you're kind of betting on the investment return at CaIPERS. Not a point in time at which people want to bet on the investment return at CalPERS. But, a year from now may be a perfect time to ... Councilwoman McCammack: Well, except for the fact that what you pay your bond holders now is very low, in comparison to what it could be five years from now. Mr. Bartel: Well, what you would do, the idea really would be to structure the debt service to match the credit on the CalPERS contribution rate. I've had several conversations with CalPERS about exactly doing that sort of thing. And, so you would absolutely have to structure that, for an agency to actually get the cash flow value if you didn't do that, then it ends up maybe being a little problematic. Councilwoman McCammack: O.K. Well, we won't tell safety that, how's that. Mr. Wilson: That is something down the road to possibly to look at if it comes together. Mr. Bartel: Yeah, it's not something today. Councilwoman McCammack and Mr. Wilson: Right. Mr. Bartel: That would, when most agencies would really want to look at, would really probably be a year from now, maybe even two years from now. Mr. Wilson: O.K. Just a few minutes. Ms. Pachon: We need to go over miscellaneous. Cause I'll hear it if you only go over safety and you don't hear miscellaneous. Mr. Bartel: Miscellaneous will be a lot faster. Because, you've already gone over the basics. Mr. Carlyle: Yeah, but wait until he really says what he's really going to say, Fred. Mr. Wilson: I've heard it already, I know, I've already got a headache. Mr. Bartel: Urn, what I'd like you to do is skip all the way to slide 15. We can go over all the other stuff, but slide 15 and 16 are really important slides. The excess of assets WordIHTC/ac[WaysAndMeans I 0-23-02] 18 r over liability (has) 7 million in safety and 77 million in miscellaneous. Significantly different funded status, your miscellaneous plan, extremely well funded, but look at the bottom of slide 16 those same, adjusting for those same investment return. Of that 77 million, 65 million is in effect gone. Now that does not mean that the miscellaneous plan is poorly funded. It is still very well funded, you will still have assets greater than liabilities if the downturn doesn't continue for some long period of time. Councilwoman McCammack: Well, and the assets and liabilities would then almost equal out. Mr. Bartel: That's exactly right. Councilwoman McCammack: Even with the loss. Mr. Bartel: That's exactly right. And that's exactly the picture you see when you take a look at the bars of assets and liabilities. That's the historical relationship and that's kind of the historical relationship when you look on slide 17, which is the cash flow difference between the two. Councilwoman McCammack: We are still better off in miscellaneous. Mr. Bartel: Still better off than safety, yes. So skip all the way to (slides) 35 and 36. Councilwoman McCammack: Again, people tend to retire later, and there is a whole other issue there. Mr. Bartel: Yes, that's exactly right. There is a very different dynamic. There are three alternative formulas that the City could negotiate for, over and above the current formula. The current miscellaneous formula is 2 at 55 formula. The three alternatives are what's called the 2 II, at 55 formula a 2.7 at 55 formula. By the way, the 2.7 at 55 formula is the old safety 2 percent at 50 formula. So there are identical. All three of these begin at 2 percent at age 50 and go up to a number and then remain flat. The 2.7 and 2.5 go up to 2.7 and 2.5 at age 55 and then are flat. The 3 percent at 60 starts at 2, matches the 2 II, at 55 and then keeps on going to the 3 percent at 60 and then remains flat. So, the dynamic of these formulas, in terms of when people are going to retire is pretty wild. Meaning, that, lets take the 2 II, at 55, because I think that's the one that's the most bizarre. The 2 II, at 55 formula provides, it's not on this page, but it provides a 2 II, percent multiplier at age 55 compared to a 2 percent. So a 25 percent increase in benefit if you retire at 55. On the other hand, if you retired at the age of 63, the 2 II, formula is 2 II, and 2 percent at 55 is 2.4. So it provides a tenth of a percentage point increase or less than a 3 percent increase in the benefit. It is really a very small; it's probably less than a 2 percent increase in the benefit. So when an individual retires these formulas are vital in terms of knowing what the impact is going to be. So when you look at these, you see a lower cash flow impact for the 2 II, at 55 and the highest impact at the 3 at 60 formula. So, all of these to keep the financing the same use a 20 year fresh start. This graph would look different if you used a shorter fresh start, because the plan is well funded. The shorter the WordllITClac[WaysAndMeanslO-23-02] 19 fresh start, when you have money in the bank, and you use it over a shorter period of time, you get a bigger credit. If you use it over a longer period of time, you get a lower credit. So the 14 and 20 year projections look cash flow wise, a little bit differently. Ms. Pachon: Is 20 what PERS usually uses? Mr. Bartel: 20 is kind of a standard for fresh start. Councilwoman McCarnmack: But 10 or IS could be used? Mr. Bartel: 10 or IS absolutely could be used. Ms. Pachon: Here's an example of the 14. Mr. Bartel: Yes, we have a 14,just to show the cash flow on (slides) 37 and 38. So this cash flow difference is arguably what most agencies will use as the cost of the benefit formulas, the alternative formulas. The strategy, and I think this is really an important question, goes back to what I said when we were talking about safety. That is that when you look at these alternative formulas, when do you want your miscellaneous employees to retire? And I'm not going to suggest to you when that is. I'm not going to suggest to you... Ms. Pachon: (Jokingly) Fred wants to get rid of me daily. Mr. Bartel: I'm not going to suggest that all agencies have really thought about that, but I really believe that it becomes a really important public policy question. When do you want people to retire and when do you want to encourage people to retire. Councilwoman McCarnmack: And do we have those answers? Mr. Bartel: Well, I mean I can give you answers. But I think those are, from my perspective, more important (questions) that the Council grapples with, than it is for you to accept my answer. Mr. Carlyle: You could give the answer and help the Council. . . Councilwoman McCarnmack: That's my point, if you know what the economic feasibility is, and we know at age 50 it's this, it's this kind of impact at age 55, at 60 it's this. Let me ask you another question. How difficult, it doesn't seem difficult, if all of these other numbers have floated around for miscellaneous, that you were to talk about 2 1/2, for instance, at 50 for safety, or 3 at 52 for safety, or some other multiplier that offers some other benefit that we could work towards the 3 at 50. Mr. Bartel: Lets sort of answer that question, I'm an actuary right, so I can't give you one answer. In California law, you only to have the options that are in the California law. WordllITClac[WaysAndMeaosI0-23-02] 20 , Councilwoman McCammack: Which are? Mr. Bartel: Which are, for safety, 3 at 50 above your current 3 at 55 program. There is no 3 at 52 1/2. Councilwoman McCammack: O.K. Mr. Bartel: Now, having said that, you don't have to provide benefit improvements through CalPERS. You could go outside and provide it in a separate system, through Phase Two or PARS. I will absolutely tell you (these options are) probably more important for miscellaneous than safety, but you could do these types of improvements. For example through PARS or Phase Two you could do a 3 at 65 program, encouraging your people to stay longer. But what you could also do, if you could provide a 3 at 60 program, but only give it to people who retire directly from the City. One of the disadvantages and one of the advantages of having this program through CalPERS is the reciprocity nature. Well, the reciprocity nature, in the other words, it helps in your ability to recruit. It hurts in your ability to retain. So if you want to have a goal of retaining people you could have this program outside of CalPERS. The other advantage is you could negotiate differently for miscellaneous unlike safety. For safety you can have a different formula for fire and police. For miscellaneous you've got to have one formula for everybody in your miscellaneous plan. That's the law. On the other hand, if you do it outside of CalPERS, the law says, if you do it through CalPERS this is what you have to do, if you do it outside of CalPERS you could, for example, look at your maintenance folks. You know it is a good idea to not have safety folks work around when they're 60. It's maybe also a good idea to not have people working out paving streets at the age 60 as well, at 105 degree temperatures. And so, you could target one formula for one group of miscellaneous and a different formula for a different group of miscellaneous. Your, and Barbara's going to kick me, but your office, finance folks you may want them, despite that they may not want to be here, you may want them to stay, and you may want to figure out a way to keep them until their late 50s or early 60s. And the way to do that is with an individual design, which would be targeted at the different bargaining groups. Now, (it is) really important for you to understand, in the interest of full disclosure, we do some work with the folks at PARS and Phase Two. We do the actuarial work for some of their programs. The advantage is your ability vary the program, but there is a significant disadvantage. If you do an amendment through CalPERS you don't have to think about administering the plan. You don't have to think about how we are going to invest the assets. You don't have to think about how is the communication of what the benefit formula going to be. On the other hand, if you do it outside of CalPERS, you have all of those issues to think about. And the most important one that you have to think about is, and I cannot over emphasize this, I think this is vitally important, is investing the plan assets. It's easy, and people today look at CalPERS investment return and they go, "This really sucks." And what can we do to have it be better, and they are going through the hard decisions, you mayor may not agree with them, but they are making hard decisions about what to do. Well those are the kinds of decisions the City would have to make if you had a program outside ofCalPERS. And that decision is not right for every city. Some cities are quick to handle those decisions, some are not. WordllITC/ac[WaysAndMeansI0-23-02] 21 Councilwoman McCanunack: Orange County? Councilman McGinnis: Good example. Mr. Bartel: Well, it may be today, they might be equipped to handle it. Councilwoman McCanunack: Maybe not ten years ago. Mr. Bartel: Yeah, ten years ago, maybe not. But you've got to be able to sort of step up to the table and say here's what we're going to do. Ms. Pachon: Just a couple of things that I want to hit on the miscellaneous. Since we are so over funded in miscellaneous remember in our budget, we've been taking the 2 million, because we're super over funded. Give us an idea, when that goes, or what that does. Mr. Bartel: Yeah, I think, and you're going to know here in a couple of weeks whether or not I'm right. Ms. Pachon: We called PERS and within the next two weeks we should have it. We are always one of the last cities they do, because we are a little more challenging than most. Mr. Bartel: You're not the only ones that are challenging, you should be aware. Ms. Pachon: No, we're not the only ones, but we are one of the most challenging. Mr. Bartel: I really believe when you get your June 30, 01 evaluation, you will likely remain super funded. And that means for 03/04. Councilwoman McCanunack: That was the good news. Mr. Bartel: Right. However, 04/05 will you not only not be super funded, meaning that you'll have to pay the employee 7 percent, absent a benefit improvement, plus you'll have an employer rate of about 2 percent of pay. Ms. Pachon: So 04/05 we're going to loose that 2 million credit. Councilwoman McCanunack: Plus more. Ms. Pachon: Plus then we're going to have to start paying 2 percent. Councilwoman McCanunack: Unless we leave the 2 million, for instance, in this and next year. Mr. Bartel: Is that possible? WordllITClac[WaysAndMeansI0-23-o2] 22 Ms. Pachon: Exactly my point, we can't wait for 04/05. Mr. Bartel: You should understand the cash flow implications ofleaving it in there. Let's pretend for a moment, you said that we are not going to use the 7 percent for 02/03. You know when that hit, you won't see that credit until the June 30, 03 evaluation which will be 05/06. Yes, and so, it is the two year delay. . . Councilwoman McCanunack: Understand. Mr. Bartel: That makes it a challenging budgeting decision. Councilwoman McCanunack: Right, I understand. I completely understand. Mr. Carlyle: So which one of the three programs would. . . Councilwoman McCanunack: (Jokingly) Oh, hush up. We are not in labor negotiations right now. Mr. Bartel: The problem, the problem is. The answer to that is that I believe the 3 at 60 program. The problem with that answer is that's the most expensive of the three. Mr. Carlyle: Right, the chart shows. Mr. Bartel: That's absolutely right. The 2.7 at 55 (progral}l), several cities are going to that program. What that will do is encourage people to retire a little bit earlier. Now, in budget tough times, agencies may want to do that. Councilwoman McCanunack: That's another story for another day. Mr. Carlyle: Right. Mr. Bartel: O.K. Councilwoman McCanunack: Thank you very much. That wasn't more information than I needed, but more information than I expected. All I've got to say, for people like me, 55 is not an option, 60 is not an option, 65 is not an option, and 70 is not an option. For those of us who are self-employed, it really doesn't matter. Mr. Bartel: In the private sector, people are not targeting age 55 as a retirement age. Councilwoman McCanunack: Right, I've got people 60 and 65 working for me. And they're good employees and I'm glad to have them. And the 18 year olds that just got done working for us couldn't hold a candle to the 60 and 65 year olds. O.K. so there is no action required for number two, except the absorption of information, which we've done. WordllITC/ac[WaysAndMeans I 0.23.02] 23 r Ms. Pachon: Is there anything we should do with this item to full Council, to bring them, just so I know? Give them a copy? Councilwoman McCammack: It probably wouldn't hurt to put an item on the agenda that simply gives the information and maybe based on the minutes. Ifwe can transcribe the minutes of this gentleman's conversation with us, they can have those word for word. I think that would be real helpful for each of the other council members to understand the whole picture. Mr. Wilson: Or, is there any kind of written summary, just a page or two, so people can understand the bottom line out of all of this? Mr. Bartel: The reason I do it this way, because it ends up being lower in fees. It's lower in fees and it's individual. It's a discussion and I can walk through and I know this stuff. I am a pretty good writer, but I'm a slow writer. I can do it, but I'm not convinced that it would be as good as the hour we Gust spent going over this). It is hard to abbreviate. Councilwoman McCammack: I think this is such good information and it was so concise and specific to our situation. Ifwe simply got our tape transcribed, for the hour that Mr. Bartel has spoken to us, I think that would be real helpful to the rest of the Council. It would be as if they were sitting her and walk through the document just like we did. Put that on the item as a received in file the PERS actuarial for historic and future information. Is that O.K. for everybody? I don't mean to burden a clerical person, but I think it's real important that they Imderstand what we now understand. Excerpt End. WordllITC/ac[WaysAndMeansI0-23-02] 24