[0:09] And welcome to the webinar. This is interpreting and communicating the new CalPERS Actuarial Report.

[0:16] Today is September 11th, 2019. Glad that all of you have joined us here. This program is a service of the CSMFO coaching program.

[0:26] It's 21st year of that coaching program being a member benefit. It's guided by the Career Development Committee, headed by Nina Nomura.

[0:35] and a cast of about 12 volunteers who identify topics like this in presenters to help be of service

[0:41] to you in the profession. We've got an important topic here, probably one of the most critical

[0:47] issues driving budget decisions these days is what's happening with the CalPERS contributions

[0:52] and how can agencies adjust to those and understand what they are in person foremost communicate them effectively.

[1:00] So that's what this webinar is all about, how to interpret the report, how to determine sensitivity

[1:05] of your contribution rates to potential future returns.

[1:10] What are some ways that people are addressing their

[1:12] unfunded accrued liabilities, which you can be thinking about strategies for dealing with

[1:16] the impact of these contribution rates?

[1:20] And today, we're very pleased that Rich Lee has taken the initiative on the city of

[1:26] San Mateo to step forward and provide his interpretation for San Mateo to let you

[1:34] and see an illustration of how you might take this information integrated and provided to

[1:40] your labor groups, to your elected officials, to people in your agency, et cetera, the public

[1:44] at large.

[1:45] So that would be a big benefit for you out of this session.

[1:48] And of course, CalPERS is going to be identifying the resources that they have available.

[1:52] So we're pleased to have Julian Robinson back.

[1:56] He's very popular with CSMFO.

[1:59] He's a senior pension actuary in the valuation services team.

[2:02] He's been elected to the Society of Actuaries Retirement Council and has been a leader both in the private sector prior to coming to CalPERS and now at CalPERS in the whole area of how do you determine what future requirements are going to be to fund the retirement of the employees.

[2:24] Also notably, he's a performing amateur stand-up comedian, so we really appreciate the

[2:32] good humor that Julian always brings to these sessions.

[2:35] Then we have Nina Ramsey, she's an associate pension actuary.

[2:39] She's been joining this valuation services team and it probably works with many of you

[2:44] and has been helping you find your reports, get connected, interpret them, etc.

[2:51] and she's interested in water sports, which is great.

[2:56] And as I mentioned, Rich Lee is coming as finance director

[2:58] from the city of San Mateo.

[3:00] He's been there since January of this year,

[3:02] but he's worked for 14 years in a number of communities

[3:05] around the San Francisco Bay Area.

[3:08] He serves on the board of directors of CSMFO.

[3:10] He's been helpful in the career development, committee efforts,

[3:13] prior to that.

[3:15] And we really appreciate all of his support

[3:17] it on a volunteer basis for the profession. He's also a freelance bass trombonist, so we

[3:27] base trombonist, so we're really excited that he's done that. He's performed at Monterey

[3:32] Jazz Festival, so we could have a whole gig here with our presenters, but we've got important

[3:37] serious things to do, so we'll proceed with those. So let me go forward, and of course I'm

[3:50] We're going to go to a polling question, and so we'd always like to see if you're learning with your colleagues, because we find if you're learning with your colleagues, that will help your agency implement what comes forward.

[4:02] So give us some feedback on who's there. If you're there on your own, that's okay. We're delighted that you're with us. Perhaps you'll want to share this information with your colleagues after the session.

[4:14] or direct them to the digital recording, all of which are available for you through the CSMFO

[4:21] coaching program. So, let me again highlight that you can use the control panel on go-to-webinar

[4:30] to download the handouts for today's session. You can also get those at the genders and archives

[4:40] tab at csmofo.org slash training slash webinars and all this information about

[4:47] where to find things and so on will be provided to you again in the follow-up

[4:52] email to the day session. So if you missed something or didn't get it when I

[4:56] sent out the reminder emails, no fear will help support you and get you what you

[5:02] need. So let's take a look at what we have here in our audience. We've got 63

[5:08] three percent of you are there in your own and the remainder in small groups. We're glad to have

[5:13] all of you today and look forward to this being very productive for you. So let me turn with that

[5:20] to our presenters here and I'm going to give the controls over to our team at CalPERS

[5:31] So, they can handle the presentation for this piece and I'll take myself and a rich off

[5:38] the camera so you can just be focusing on the CalPERS team and what they have to offer

[5:43] to you today.

[5:46] Good afternoon, everybody.

[5:47] I'm glad to be here with my colleague Nina Ramsey to discuss the CalPERS Actual Valuation

[5:53] Reports as of June 32, 2018.

[5:56] I'm sure you received them eagerly back in the beginning of August, middle of August,

[6:02] and have been spending many hours pouring over the numbers in the details.

[6:07] I

[6:13] need to expand the slides here, but...

[6:17] First around the forward arrow, and then you have control.

[6:20] Okay, there we go.

[6:21] So what we want to cover today is a little bit of background, a short discussion on the difference

[6:28] between our non-pool plans and our pool plans that's always an area where there's a little bit of confusion.

[6:33] So we want to set the situation right about that, then we'll dive into the actual reports

[6:41] and discuss the highlights of both non-pooled and pooled plans.

[6:45] And then we'll turn the tables over to Rich Lee and he'll discuss communicating CalPas

[6:50] information to all the important stakeholders that you have.

[7:00] So the key takeaways we expect to provide you with throughout this webinar are the following.

[7:06] You should know by the end of the webinar where to find your fiscal year 2020-2021 contribution

[7:14] requirements. We want you to also know what the funded status of your plans are. Our report

[7:20] shows five-year contribution projection, and we'll show you where that is. And we know that's always

[7:25] been a useful tool for you in your budgeting process. And also, we'll continue the discussion as

[7:35] we've had over the past couple of years on proactively managing your unfunded

[7:39] accrued liabilities and seeing what the options are available to you and how

[7:44] you can take action on that.

[7:54] So a

[7:57] bit of background on pooled and non pooled

[7:59] plans.

[8:04] Pooled plans which have less than 100 active members are our pooled

[8:09] plans and they're combined into two risk pools at the moment. We have a

[8:12] miscellaneous risk pool and the safety risk pool.

[8:16] As you know, all your members are either a classifier's

[8:19] miscellaneous members and they'd be part of miscellaneous plan

[8:23] or they're safety members and there'd be participants

[8:28] in some of the safety plans.

[8:30] So from an actual point of view, this 100 active member

[8:35] on the threshold is considered an appropriate level

[8:39] or to distinguish between what plans should be standalone plans,

[8:44] those are the non-pool plans,

[8:45] and those plans which should be part of the pool.

[8:47] And once a plan is part of the pool,

[8:50] we aggregate all the data and the experience

[8:52] of all the plans in the pool,

[8:54] and use that firstly in setting the normal cost,

[8:58] and just a quick review, the normal cost

[9:00] means the value of benefits which are accruing

[9:04] in the current year for the services

[9:07] as being provided by currently active people.

[9:10] And that's normal cost is shared by the employer

[9:13] and by the employee.

[9:16] And then the other component of the contribution

[9:20] is the payment of the unsundered accrued liability.

[9:25] The gains and losses experienced by the poor plans

[9:29] are shared among all the participants in the poor.

[9:32] And this is considered a good idea

[9:35] in terms of reducing the volatility that potentially would hit a small plan, if some event

[9:43] happens.

[9:43] For example, if a disability event happened to a particular plan, that could be a very

[9:48] costly event, increasing the liability significantly.

[9:53] So for our pool plans, which tend to be on the smaller side, the act of pooling spreads,

[9:59] the gains and losses across all members of the pool and they gain and they lose equally.

[10:08] On the other hand, the non-pool plans, those with greater than 100 active members,

[10:13] either miscellaneous active members or safety active members, those plans are deemed large

[10:19] and asked to be able to speak for themselves, that their own experience is what's reflected

[10:25] in their normal cost and also in the gains and losses which they have to handle into the future.

[10:38] This is an excerpt from the section 2 part of the report. Now from the, and this is referring to the pool plans.

[10:48] So each pool plan actually has two sections of the report.

[10:52] The section 1 provides you with all the contribution information, my built information, for your particular plan.

[11:02] I wanted to show what the section 2 plan is or one page out of it, which shows the results for the entire plan.

[11:10] Across the center of this slide in the grayish blue box, you can see all the different formulas that appear in the miscellaneous plan.

[11:20] On the next slide, we'll see similar information for the safety plans.

[11:26] You can see the first formulas, two percent of 62, that's the PEP formula and all of the

[11:31] other formulas across the top.

[11:36] What may be interesting to note, if you look down in the bottom part of the screen, the

[11:42] funder's status of the risk pool, as of June 30, 2018, you can see the miscellaneous pool

[11:49] had about $17.5 billion in liabilities just over $13 billion in assets and the fund

[11:58] at status for the pool in its entirety is 75.4%. So you can compare the fund at status of your

[12:07] particular player to what the fund at status is for the pool and that's one area of comparison.

[12:19] This slide shows the similar information for the safety pool.

[12:25] You can see there's a few couple more formulas applicable to the safety members.

[12:33] You're looking down at the bottom part of the screen.

[12:35] You can see the total liability for the plans in the safety pool is about $23 billion.

[12:42] dollars, supporting that is about $16.3 billion in assets. So the safety pool has a slightly

[12:53] lower fund rate ratio of 71.2%. Again, you can compare that to the level of your own

[13:06] plan.

[13:10] I'm going to switch over now and hand the bets on to my colleague Nina to discuss

[13:15] some of the actual report highlights. Thank you Julian. So every year we hand out and distribute

[13:22] the annual valuations and every year we get a bunch of questions. A lot of them are listed

[13:28] here on this slide. We're going to go through this presentation to hopefully address all of these

[13:33] questions and get you the answers that you need.

[13:37] So first, the most important question is what

[13:40] are my required contributions. On the cover page of your annual report, you'll find

[13:44] your required contributions for the 2021 fiscal year. Here is a clip of a report that lists

[13:52] the normal cost rate, the UAL, and also for non-pooled plans and PEPRA pooled plans. It

[13:59] also lists the PEPRA employee rate. We've also included the projected required contributions

[14:05] for the 21-22 fiscal year, these projections do not include the 18-19 asset loss.

[14:14] You can see in the employee-peparate column, oh no, that the employee-peparate is to be determined.

[14:23] We calculate the Peparate every year and because we need to wait for the next annual valuation,

[14:29] we won't be able to calculate that until we do the next valuation.

[14:32] Page

[14:35] 4 lists similar information as to what's on the cover page.

[14:39] The differences here would be that it includes your monthly UAL payment.

[14:44] It is simply the UAL amount from the cover page divided by 12 to give you a monthly amount.

[14:51] We've also included the annual prepayment option below, which is almost $9 million there.

[14:58] the annual prepayments.

[15:00] Doing so saves you a half year's worth of interest, so for this particular plan, that savings amounts to just over $300,000. Again, the PEPRA employee contribution rate is listed, but again, this would be only for non-pulled plans and PEPRA pulled plans.

[15:22] You've seen from the past couple of slides, your total employer contribution is comprised of two parts. The normal cost rate, which is presented as a percentage of payroll, which will need to be paid throughout the year and your UAL.

[15:34] dollar payment. The options for the UAL are monthly or that annual prepayment option as mentioned

[15:39] before.

[15:44] Here's a sample of the July UAL invoice. You can see that the monthly amount is clearly

[15:50] stated there on the left, almost $700,000, and kind of hidden in the text is that prepayment

[15:56] amount that's in the blue box. Sometimes it's easy to skim over that and miss it, but that's where it is.

[16:03] So, since we are past your live, this is no longer an option for this year, but this is

[16:07] something that you may want to look out for next year.

[16:11] Also, I did want to mention that these were the two options that you have to pay your

[16:16] UAL amount.

[16:17] Please only pay one of these amounts.

[16:20] We've had several agencies who decide, hey, I've got a little extra cash, I'm going to

[16:24] tax them on to this UAL payment that really makes things a little more complicated for

[16:28] us.

[16:29] So if you could refrain from doing that and then just contact your actuary so that we can help you facilitate making that payment and getting it applied to your plan.

[16:39] Right, and we've also had some issues where agencies have just taken a monthly amount and multiplied by 12. You will certainly get a credit for that overpayment, but it will be easier for our counting folks if you choose to make the prepayment in July to actually pay the amount in this.

[16:58] So I'm showing a report and reflected on the invoice

[17:01] to avoid any later adjustments.

[17:08] All right, the next big question is,

[17:10] how is my plan doing?

[17:11] Is it in good shape?

[17:13] As you saw with the pulled section two reports,

[17:16] we also have a page in your annual evaluation page five

[17:19] that will give you your funded status for your individual plan.

[17:24] So here in the green box, you can see

[17:26] that our funded ratio is 67.1%, that is simply

[17:30] the market of value of assets divided by the entry age normal accrued liability, generating

[17:36] the 67.1.

[17:39] Now, 67.1 isn't a bad place to be, but we definitely want to strive for that 100% funded status

[17:45] as is CalPERS goal.

[17:48] Also just to mention, you may hear me or anyone else say UAL, unfunded accrued liability or unfunded

[17:54] liability, they all mean the same thing, they're just used interchangeably, saying the whole

[17:58] and gets kind of tired some after a while for UAL works for us.

[18:03] So this information is as of June 30, 2018, and you can definitely compare your funded

[18:08] status to the funded status of the pool, or compare it to your last year's funded

[18:14] status to see how your plan is doing, is it getting better or worse, and maybe you can make

[18:19] steps to improve your funded status.

[18:23] Okay, we're going to go to a polling question here because we'd like you to be sure that

[18:27] What you're interacting with your report, you're taking a look at it and you're figuring

[18:30] out some of these issues that Julian and Nina have been highlighting for you.

[18:35] So one of them is what you're even seeing is funded status for all of its plans.

[18:40] So ask you to identify which of these best to describe where your plan is currently.

[18:50] I do see additional questions here about asking people asking where to find their valuation

[18:55] report.

[18:55] Again, that was sent to you with the details for how to find it in your MyCalPERS.

[19:03] Was outlined in the reminder email for today's session.

[19:09] And we encourage you to take a look at that and follow that in detail.

[19:15] It will be, we'll send it out again in the follow-up email so that you can be looking at that.

[19:21] and of course Nina and her team are willing to help you after today's webinar and finding

[19:26] it if there's some difficulty with your particular information.

[19:34] So we'll give a moment more here and then we'll close this poll and here we go.

[19:44] So let's see what we have from our audience here.

[19:50] So a brief commentary, Julian and Nina about what you're seeing and where people are with their funding levels.

[19:57] Some of them are as deadly less than 50%, but only 1% of you are in that situation.

[20:03] But others are over 80, so it has both extremes and a bunch in the middle.

[20:09] Yeah, I think this is the kind of distribution that we expected to see.

[20:14] that no solid wasn't 50% in that range 70 to 79% and also a group in the 60 to 69%

[20:23] no of which covers almost 80% of the plants, so that's consistent with our expectations.

[20:40] The materials here and some questions are coming in so we'll be at the next break.

[20:43] We'll be covering some of the questions that are flowing in.

[20:48] Great.

[20:49] So moving on, why did my required contributions change?

[20:53] Every year, we have our economic and demographic assumptions.

[20:57] We assume what your UAL will be in the future.

[21:00] But we all know that year over year, we can't match those assumptions perfectly,

[21:05] so you will have gains and losses.

[21:07] This is page 14 of the annual report, which gives you a brief analysis of your gains and losses.

[21:13] We have the contribution game loss here of 346,000, meaning this would be a loss, saying

[21:22] that we did not receive the amount of contributions that we expected.

[21:27] Under that, we have your asset gain of $2.6 million.

[21:31] This is probably due to our investment gain for the June 30, 2018 fiscal year.

[21:37] and then below that we have the liability game loss which relates mostly to the

[21:42] demographics of how your employees experience is throughout the year and that

[21:47] is also a game. The sum of those creates your total game loss.

[21:55] Okay maybe I'll

[21:55] drop in here with just a few questions that are right and so we don't have them back

[21:58] up too much. So one of the things that people are asking is especially about the

[22:10] compare them with others, and wondering why is their ratio higher or lower than some

[22:17] other city. And they're asking us a simplest answer that the funded ratio changes based

[22:22] on the risk pool for pool plans and the census of the plan participants or are there other

[22:27] factors that you would highlight people mentioning in trying to describe the differences between

[22:33] one city and another? So for non-pool plans as we discussed mentioned a little bit earlier their

[22:42] experience is the main focus so if they've given for example larger salary increases or there's

[22:53] a whole lot of disability events so those those are expensive events in terms of the

[23:02] mobility and can increase liability and therefore reduce the fund ratio of the plan.

[23:11] For pooled plans, when the whole pooling structure was set up, different plans entered the pool

[23:18] at different funding levels.

[23:21] And most plans, I think at this point are almost done, amortizing their side funds, but those

[23:30] certainly had an impact on what the funded status of the plans were over time.

[23:37] I would say another factor in determining the funded status is if a plan has made additional payments in the past,

[23:44] or in the past few years even, making those additional payments will result in an increase to your funded status.

[23:54] One other question is coming up on the page 4.

[23:57] The presentation you noted that PEPRA contribution rate is 6.25%.

[24:02] It's personally saying that their agency rate is annual rate is 7.25%, wondering why there's

[24:08] a difference or are they just misinterpreting it.

[24:11] Right, so that was just a sample clip.

[24:15] For any given plan, the PEPRA employee contribution rate could be different.

[24:18] It's possible that the person asking the question, maybe they have a safety plan.

[24:24] Those pepper contributions rates tend to be higher.

[24:28] Right.

[24:28] And also within the non-pool plans in particular, the demographics of the plan have a large

[24:37] impact.

[24:38] The older the group of pepper participants are, the shorter the time until they reach retirement

[24:46] and therefore the contribution rates for the normal cost for those benefits is higher,

[24:53] and therefore half the normal cost for those per per members is also going to be higher.

[24:58] And within the pool there's going to be different rates as well because besides the basic benefits,

[25:03] there are certain tier one benefits which are elective. For example, in some of the classic plans,

[25:10] that could be a final average of one year instead of a final average, three year, PRSA and

[25:16] other kind of benefits which all add to the basic ongoing normal cost of the plan.

[25:23] And if that's, if some of those have been applied to, well, of course, you kind of find

[25:28] a one year for PEPRA, but some of those other elective benefits can apply to PEPRA and impact

[25:34] the PEPRA normal cost in that respect.

[25:38] Just one more question here to make sure we're getting everybody on the same page.

[25:41] So to speak, people are looking for their page 14 in their report, some don't see it.

[25:47] Wondering is that because of the nature of their plan?

[25:49] They don't have a page 14 that you refer to.

[25:51] Yeah, right.

[25:52] The page 14, I think that slide we need to correct through the heading.

[25:56] Is that only applied to non-pool plans?

[25:58] Yeah.

[26:01] For plans, if you can look in the section 2 report,

[26:08] And that shows the complete game loss analysis with the entire pool.

[26:14] And what happens is each plan in the pool is allocated a certain percentage of that total game loss for that plan.

[26:25] And that shows up in the amortization page, which we're going to be looking at shortly for pool plans as well as non-pool plans.

[26:33] So thank you very much.

[26:36] I think we've cleared up a number of the questions that were arising just wanted to be sure

[26:39] people were tracking along and this was working for them.

[26:42] So just a couple of things that I'm hearing from you is that some of your illustrations

[26:46] are from specific agency situations and your agency may be different and therefore some of

[26:51] your rates or numbers are obviously going to be different and again there's a difference

[26:56] between the pool and the non pooled plants as to which pages are there for which purpose

[27:00] and so people need to kind of keep that in mind if you're not seeing exactly what

[27:04] But in your plan, what you're seeing on the screen here, is that fair?

[27:09] Yes.

[27:12] So, let's move forward here.

[27:14] I'll take the results down, we're ready to move on to the next.

[27:20] Okay.

[27:20] Let's take a look.

[27:23] All right.

[27:23] So, this slide right here was mentioning what we were just talking about, was that the pulled

[27:27] plans can find their gain loss analysis in the Section 2 report, and you can access that

[27:32] through the CalPERS.ca.gov website.

[27:34] Right, and the slide also needs to be updated because it's showing the 630-2007-17 front page,

[27:43] but the new section should be available pretty soon, and you can see the, or the analysis for the

[27:51] most recent valuation in that report. Okay, just a quick question on that because we got a number of

[27:57] emails that were coming in. People weren't able to find their reports on the calpers.ca.gov,

[28:03] and you were directing them to my CalPERS,

[28:07] some information in one place and not the other,

[28:10] or not for everybody yet in the website.

[28:13] Can you help clarify that because people,

[28:15] if you're questioning the folks?

[28:17] Yeah, that's correct.

[28:18] The reports have not yet been uploaded

[28:21] to the general CalPERS public website.

[28:26] So we expect that to be happening pretty soon.

[28:29] There's been some delays in that.

[28:32] But each agency should be able to access their own valuation reports

[28:38] through our MyCalPIS platform.

[28:41] Okay, so the most important thing for our audience right now

[28:44] is if you're seeking to find your report and you haven't successfully yet,

[28:48] go through MyCalPERS and use the instructions that we sent out

[28:52] in the reminder email for today's session.

[28:55] They'll get you right there.

[28:56] Okay, thank you.

[29:03] All right, where are my contributions headed?

[29:05] Now, this is definitely very important information for your budgeting purposes, so we've included

[29:11] it on page 5 of your report.

[29:14] You can see that year-over-year, we expect the normal cost to stay relatively stable,

[29:18] which is why you don't see it changing, and our UAL payment is also listed and you can see

[29:23] it growing, and I will touch on why it might be growing in the next couple of slides.

[29:28] We've also presented your projected future contributions as a percentage of payroll.

[29:33] Now, we calculate what we think your payroll is going to be, but you might have a better idea of what it actually is.

[29:40] In that case, you could apply your known payroll to the percentage of payroll figure that we've provided to hopefully give you a more accurate or more precise total dollar amount.

[30:01] So in December of 2016, our CalPERS board decided to reduce the discount rate from 7.5% to 7%. We've been

[30:09] phasing this in over the past few valuations and now have fully phased in the discount rate drop

[30:15] to 7%. This affects all of the non-pooled and pooled plans. And generally with the lower discount

[30:23] rate, it's going to cause your costs to increase. This is just because we can no longer

[30:29] assume a higher rate of return going into the future, meaning that these plans are

[30:34] going to be more expensive today. The full impact of this discount rate change will take

[30:39] total seven years. We have five years remaining on that to fully phase in. This is due to

[30:45] our current amortization policy, which smooths in costs with a five-year ramp. So your

[30:51] For 2021 rates, we'll have the first step in that ramp and we'll increase over the next

[30:56] four consecutive years at which point it will level out.

[31:07] New to this year's valuation too far.

[31:12] We have implemented our new actuarial valuation system.

[31:16] You will find the cost of these changes, not the cost of the system.

[31:22] The cost of the changes in your amortization schedule listed as method change.

[31:26] We are now able to perform some of our calculations better and to get more precise numbers.

[31:32] This changing cost is accounted for in your amortization schedule.

[31:39] We've also reduced the inflation rate to 2.5 percent and our payroll growth assumption

[31:47] to 2.75 percent as the board adopted a reduction in the inflation as well.

[31:52] The demographic assumptions we're using are the same as we used in last year's valuation,

[31:57] and we don't expect those to change for the next couple of valuation.

[32:02] Effective in next year's valuation, the June 30, 2019 valuation, we will be implementing

[32:07] our new amortization policy. This will first impact your fiscal year 21-22 rates

[32:13] and will be prospective only, meaning that only the future basis will have this new policy applied

[32:19] And all of your existing bases will continue with the current amortization policy.

[32:27] And with that, I'm going to hand it back to Julian for some UAL talk.

[32:31] That's right.

[32:32] You all talk about these things, so we'll talk about UAL now.

[32:37] The amortization schedule and alternatives is an important part of the report.

[32:43] And I find with most of my discussions with the agencies I have really focuses on that schedule.

[32:50] So let's look at it now. I know it's a little bit imposing. To me, it's a work of art and maybe

[32:58] Hank should be hanging in the gallery somewhere because it tells really a very interesting story.

[33:04] We have highlighted the bottom three rows of the table here in a blue shade to show you the

[33:12] the last three rows which were added in the final evaluation this year. This is for

[33:22] a non-pool plan. Actually, for a pool plan, there's a fourth row because there's a split

[33:27] between the asset game loss and the other components of the game loss. We show here the date

[33:36] each of these bases was established, and we indicate, you know, the amortization pattern.

[33:43] So some of them have no ramps, some of them have ramps, and we've indicated where along

[33:49] the path of the ramping it is, so if you flick your eyes down that column, you can see that

[33:55] the older bases, no, the votes established in 2006, 2013 and 2014 have already reached

[34:05] the top of the ramp, the 100% and the bases below are ramping up over the next number

[34:13] of years. We also showed the escalation rate because our current methodology allows the payments

[34:24] in each consecutive year to be increasing by 2.75%.

[34:30] The intention of this escalation rate is, in general,

[34:35] to match what the payroll increase radius,

[34:38] so the contribution amount to amortize

[34:41] a new particular basis remains a relatively stable percentage

[34:46] of salary.

[34:48] Back in the day that was, I guess, more significant,

[34:51] but nowadays we charge you a flat dollar amount to pay down the UIL so that

[34:59] connection is not as strong as it was before. Then we show across the rest of

[35:08] the columns how we expect the amortization to unfold and in the last

[35:15] outcome we determine what the payment will be for fiscal 2021, the next fiscal year.

[35:27] Whenever I have a discussion with an agency about making an additional payment towards

[35:32] paying down their unfunded credibility, the discussion focuses on this table and the selection

[35:39] of a base or two to pay off completely or partially depending on the funds available

[35:47] at the particular time.

[35:52] One of the other methods of handling your unfunded accrued liability is to consider doing

[36:00] a fresh start.

[36:02] So on this schedule in the report, we show on the left side of the page what the current

[36:07] monetization schedule is essentially the minimum payment that you need based on our

[36:15] monetization policy.

[36:17] Then we say, what would happen if you essentially did a refinancing of your entire balance?

[36:26] And here for this plan, the balance is 114.5 million dollars.

[36:32] So what will happen if we said, let's refinance this whole debt over 15 years or over 10 years.

[36:42] And we still, and as you can see in the payment column, the payments are still escalating

[36:47] at 2.75%.

[36:51] What this essentially does is, you know, pay down your unfundered accrued liability more rapidly.

[36:57] And at the bottom of the page, in the bottom of the screen, you can see if an agency elects

[37:03] a 15-year amputation fresh start, they would end up saving close to $20 million.

[37:12] And if they elected a more aggressive fresh start a 10-year, they'd end up saving almost

[37:19] $50 million.

[37:20] dollars. This is no surprise for finance people. We're financing this obligation at 7 percent

[37:29] and the interest component certainly adds up. With the fresh start, if an agency elects

[37:37] a fresh start, it's an irrevocable election, which means you can't change your mind in

[37:44] two or three years that, oh, I wish I never had elected that, we can't handle the payments.

[37:51] So what I suggest to many agencies is, well, instead of electing the fresh start, let's

[38:00] do what I call a soft fresh start and decide to make an additional contribution each year

[38:07] equal to the difference between what the 15 year fresh start or the tenure fresh start

[38:14] would have been compared to the minimum required contribution.

[38:21] So for example, on the child in front of you, if the agency wanted to make an additional

[38:27] contribution, it would be the $10.3 million minus the $9.3 million, approximately $1 million

[38:35] dollar additional contribution if they wanted to essentially patent their payments to meet

[38:43] a 15-year amortization. And then each year, when we produce a new report and a similar process

[38:51] can be adopted. And doing it this way, you maintain the flexibility of not being locked in

[39:00] to a fixed ematization schedule.

[39:04] And of course, when you elect a fresh start,

[39:07] it fresh starts all the bases at a particular date.

[39:10] But each subsequent valuation,

[39:12] you're gonna have the additional rows

[39:15] bases appear that we saw on the previous page.

[39:25] What we suggest if you're considering making an

[39:28] additional discretionary payment and ADP

[39:31] or fresh start is to contact your actually, we have a tool which is very useful and a new

[39:40] instructional video that goes along with it to show you how to navigate this complex spreadsheet

[39:50] and which will help you analyze the impact of making an additional contribution to the plan.

[39:58] In order to obtain this tool, managing my contributions, you have to reach out to your

[40:08] CalPas Actuary and because each spreadsheet is customized based on the unfunded approgulability

[40:17] of your particular plan and all the bases in it, so we need to generate those on an individual

[40:23] basis and we can provide them relatively quickly. It's a very powerful tool and helps understand

[40:33] the impact of paying off a base, which has been a short number of years to the end of

[40:39] the amortization compared to a large number of years to the end of the amortization period.

[40:44] I

[40:48] mentioned pension avenue. Yes, so thank you, Nina. We've helped in the process of developing

[40:56] a new tool which is going to be called the Pension Navigator which is going to allow agencies

[41:02] or at the outset of those agencies with non-pool plans to do a more sophisticated long-term

[41:11] projection of where their costs are going to be.

[41:15] So it's going to allow flexibility in assuming different investment return scenarios into

[41:26] the future and different discount rates and the impact that might have on their contributions.

[41:34] We expect that to be, well we know it's going to be presented to CalPAS Board next week

[41:38] And there's a session on that at the educational forum coming up in October, and we're not quite sure exactly when it's going to be released, but it's going to be part of my kelpas platform when it is.

[41:55] So stay tuned for that.

[41:59] And I'll turn it back over to Dean.

[42:01] No, okay. Right, so also a lot of plans are interested to know where are my PEPRA members?

[42:09] So non-pooled plans, they have their classic and PEPRA members all mixed together to determine

[42:14] their rate and their UAL.

[42:19] The pooled plans will have their specific plan, the PEPRA-only

[42:24] plan, which will have all the PEPRA members and the costs associated to them.

[42:30] You may notice

[42:31] in your nonpled plans that we establish an employee contribution rate for your

[42:37] PEPA members and it may differ from your classic employee contribution rate

[42:41] that is because the classic rate is established by statute and the PEPA

[42:47] rate is calculated by us. You can find this clip from your report in Appendix D.

[42:55] Right, and this is a non-planned plan.

[43:02] We did receive a question about, I guess, what's on this slide and then connected to what's

[43:09] on the next slide, and this also appears in Appendix D, and is a breakdown of the normal

[43:16] cost rate for each of the benefitiers that you have in the plan.

[43:20] So, in this plan, they have a miscellaneous first-level, second-level, and the pepper level.

[43:27] And you can see the normal cost rates which apply to all of these things.

[43:34] The determination of the pepper rate actually follows quite a complex formula

[43:42] depending on the number of pepper members in the plan and the percentage of the pepper

[43:49] members compared to the total number of active members. So there can be sometimes a difference

[43:56] between the pepper level normal cost you see on this page and the pepper level analysis

[44:04] on the previous page. If anybody has any further questions about that, I feel free to

[44:11] reach out to me or to your CalPas actuary for a deeper dive into this complex issue.

[44:26] As I mentioned earlier, the pooled plans have their own PEPRA member report that has the contributions for just those PEPRA members.

[44:39] Here we have some additional information that we include in your annual valuation.

[44:43] This is a clip from the non-pooled plan page 23 and in the pooled plans at DONPage 15.

[44:49] This is the discount rate sensitivity.

[44:52] Here we have a list of

[45:00] Crew liability, unfunded, and the funded status, which those numbers occur throughout the report. So, those should be familiar. But we also show you what your contributions would look like if we increased or decreased the discount rate by 1%. In the 6% row, you can see that the decrease in the discount rate drives up costs and reduces your funded status. The opposite is true for a discount rate of 8%. The normal cost goes down, your funded status goes up.

[45:31] Now, this is a new one that we've included this year.

[45:34] It is mortality rate sensitivity.

[45:37] We decided to look at what would happen if we increased or decreased the post-retirement

[45:43] mortality rates.

[45:45] The 10% lower mortality rates means that people live longer.

[45:51] When people live longer, that means we're going to be paying out their benefits for longer,

[45:54] which means their accrued liability has increased.

[45:57] And if you flow through, the assets stay at the same, the unfunded liability increases

[46:02] and your funded status decreases.

[46:05] The same can be said for the 10% higher mortality rates, meaning that people are dying sooner

[46:11] than we thought they would, unless benefits are going to be paid out, so your accrued liability

[46:17] is decreased, and your funded status is increased.

[46:23] Apologies for the noise in the background, the shades have decided to close.

[46:28] Moving on, one more new table that we've decided to include this year is inflation rate sensitivity.

[46:34] So, you can see our current inflation rate of 2.5 percent, those results are in the first column.

[46:40] Also, we've decided to look at what would happen if the inflation rate were decreased or increased by 1 percent.

[46:48] Decreasing the inflation rate by 1 percent affects a lot of things.

[46:52] Basically, pay raises wouldn't happen as we expect, which means your accrued liability

[46:57] has gone down just because you aren't paying out as much to your employees.

[47:02] Also your funded status has increased because that accrued liability has decreased.

[47:07] If inflation were to go up, we would expect pay raises to be more frequent or higher in general,

[47:13] thus increasing your accrued liability and reducing your funded status.

[47:17] Right, and of course, our inflation assumption that impacts benefits in pay, because almost

[47:24] everybody has at least a 2% caller attached to their pensions of this inflation rate sensitivity

[47:33] analysis.

[47:34] I'm also reflect the impact on pensions in payment too.

[47:41] Here's another page that should be familiar.

[47:44] It is our hypothetical termination liability.

[47:47] Here we have listed your market value of assets and your liability.

[47:50] termination liability at 2.5% discount and 3.25% discount.

[47:57] When a plan decides to terminate, we move them into the terminated agency pool and at

[48:02] that point, CalPERS assumes all liability and risk for that plan, that is because we

[48:07] are no longer to reach out to the employer to say, hey, we need you to contribute more money.

[48:12] That's not an option for us anymore because we don't have any ability to receive future

[48:19] contributions, we need to put these plans into a much more conservative portfolio, which

[48:24] is why the discount rates are significantly less than the 7% discount rate we have for

[48:30] active plans.

[48:32] Decreasing the discount rate, as mentioned before, really increases that accrued liability,

[48:37] which is why you can see that the termination liability is so much higher.

[48:47] We've seen a lot of information here about what's happening with your contribution rates,

[48:51] what is going to be occurring and that of course starts to raise the issue for you

[48:56] of what your agency is doing to address its pension liability. So we're going to invite

[49:01] you to respond to a polling question here and to click off as many of these initiatives

[49:08] as your agency is undertaking to try to address these challenges. While that's happening,

[49:15] let me see what I can do to try to move through a mountain of questions. So some of these obviously

[49:23] are going to need to be addressed when you talk with your CalPERS X-Wary. So

[49:37] some interested

[49:38] in getting some additional clarification about how the annual unfunded accrued liability payment

[49:47] is calculated for each year on page five shows the five you're projected and required contributions

[49:55] and this agency you see in their UAL increase because you just describe a little bit again how

[50:02] you make that kind of calculation just in broad terms so that people can understand how that comes

[50:08] together? Sure. The projection is based on what we require to amortize each of the

[50:20] bases, each of the components of the unfunded accrued liability. So on that very busy

[50:25] page, which we looked at earlier, we show what the amortization payment is through the fiscal

[50:34] 2020-2021.

[50:37] So when we produce our projection for the next five years, we're essentially extending

[50:45] the payment table out for the next five years and add up the payment on each of those

[50:54] basis, and that's how we determine what the expected the projected UAL payments will

[51:04] be in those years.

[51:08] Let's take a look here and see what people are doing, share the results.

[51:13] So here's a cross-section from our several hundred sites participating today, nearly 300 are

[51:20] on this live session, even more registered for it than that.

[51:24] But just a quick commentary about what you see that people are doing and how that compares

[51:29] with some of the other things that you've been observing in your practice with agencies

[51:34] around the state.

[51:37] Yeah, I think it's very good news that I see that no over 80% of agencies are doing something

[51:45] to deal with the unfunded recruit liability issue.

[51:49] I guess the most direct way of doing it is making the additional discretionary payment,

[51:57] but if you want to maintain, I guess, more of your own control over the money than the

[52:03] 615 pension trust is a very good idea, and as you probably know, CalPERS has established

[52:11] it's own. It's called the SEPT, which is now open for business, a section-month-15 trust.

[52:19] So you can use that vehicle. I know there are other vehicles available as well,

[52:24] and the cost sharing and internal reserves are also powerful tools in dealing with the cost

[52:35] for an agency over the long term.

[52:40] The cost sharing here just to clarify for people

[52:42] is really what share the employees pick up of the contributions that you're referring

[52:49] on that.

[52:50] Yes, I think that's the intent here, yeah.

[52:54] Okay.

[52:55] All right.

[52:55] Well, thank you very much for those clarifications and observations.

[52:58] And let's move forward.

[53:00] I know there's quite a bit more to cover, but see what's here and we'll move along.

[53:07] Yeah, but we're going to be wrapping up the count as part of the presentation pretty soon.

[53:12] And so there's some other information which you can find in the reports.

[53:17] This is the actual assumptions can be found in appendix A, if you're interested in

[53:22] a deep dive into that, the discount rate, the inflation assumptions or the mortality assumptions

[53:28] withdrawal of assumptions, disabilities, et cetera, et cetera.

[53:32] The benefit provisions are found in appendix B for non-pool plans on page 18, this is a brief

[53:40] summary for pool plans.

[53:42] In Appendix C, we have the participant data, I'm showing the number of the average age

[53:48] average service for the active members, average salary and some relevant statistics for the

[53:54] retirees as well as the terminated and transferred employees.

[53:59] There's also a section, a pepper section which we discussed a little bit earlier can be found

[54:03] in the non-pool plans, in Appendix D, and of course the pool plans have their own separate

[54:12] PEPRA graduation reports, so information for those can be found in that separate report.

[54:19] So just before you go on here, I wanted to cover a topic that came through in the number

[54:25] of questions.

[54:26] People are especially interested in being able to explain to their elected officials into

[54:31] the public. What's happening with their unfunded accrued liabilities? How to parse out all the

[54:37] different contributors to those moving up or down? Do you have any guidance for how people could

[54:44] go about that analysis and be able to explain clearly to their elected officials in public?

[54:54] Hey, this is why that number is changing because there are many factories that are coming to play

[55:00] people want to know what's driving us getting our liability larger or you know flat or smaller or

[55:06] whatever. Well I think we're very lucky that Rich Lee is going to just share with us his approach

[55:13] to that and maybe after he's shared his views and stuff we can add some of our own help as

[55:21] the views to that too but I don't want to feel anything under of course. All right great great thank

[55:27] So

[55:31] the key takeaways again is we should be able to determine what your requirements are

[55:36] for fiscal year 2021, the fund status of your plan, we've talked in detail about the

[55:42] five-year contribution projections and how we've created those, we've had a brief discussion

[55:49] on the productively managing your unfunded reliability with making additional discussion payments

[55:55] as well as fresh starts, and then also we'd like to throw out a mention that the Calpa's

[56:00] educational forum is going to be coming up at the end of October, and we'd love to

[56:05] see as many of you out there at that event to meet your actories and the other Calpa staff

[56:11] to discuss any of your pension or health issues.

[56:18] So just a couple quick slides just wanted to give you some information on how you can contact

[56:23] your actuary.

[56:24] Your actuary's name is there in the Actual Certification section of your report.

[56:29] So you will be able to find out their name.

[56:31] We've had some new actuaries or maybe your agency's seen some turnover.

[56:36] You don't know who your actuary is. That's one way to find it.

[56:38] You can also call in to the CalPERS customer support center at 188 CalPERS

[56:44] and just request to speak to your actuary or you may list whatever question you have

[56:48] and we'll get back to you.

[56:51] Lastly, as Jillian mentioned, our educational forum is coming up.

[56:55] It's October 28th through 30th in Oakland.

[56:58] The information is on this slide.

[57:00] Hopefully you've all signed up to attend already.

[57:02] But I do believe there is still time if you want to sign up.

[57:05] And that concludes it for us.

[57:08] And we'll get to more questions later on in the discussion.

[57:13] Great. Well, thank you very much.

[57:15] And in order to tee up the next section here,

[57:18] We really wanted to give you a polling question because the important thing is, you know,

[57:21] you've got to tell your story to your elected officials, to your agency, to the labor groups,

[57:26] into the community.

[57:28] So, you need to, first of all, figure out, you know, what is your bottom line of your story

[57:33] and where are you in that?

[57:36] And in order to see what that is for our audience, we have this polling question.

[57:41] And so we ask you to pick which of these situations you see yourself in, your agency in with regard to the CalPERS contributions, et cetera, so that then, you know, that's kind of the bottom line of your story.

[58:00] And the question is, okay, now what are we going to do to deal with that?

[58:05] And that's where you're going to be hearing Rich Lee's story from San Mateo about what

[58:12] they face and how they're dealing with it and how they're communicating it.

[58:16] So we'll give you a bit of time to go through that.

[58:20] And again, I'm still getting questions here about section two of the report, et cetera, being

[58:25] posted on the CalPERS website.

[58:26] When is it going to happen?

[58:28] And it is available now on my CalPERS, but when is it going to be on the CalPERS website

[58:34] itself?

[58:35] The Section 2 report is not yet ready, so I don't think you can find it on either place.

[58:42] Right now only the Section 1 reports and the non-pulled reports are available only through

[58:46] my CalPERS.

[58:48] Okay.

[58:49] And when do you expect the Section 2 that you were referencing to be available?

[58:55] We're hoping sometime in the next few weeks we can respond to the group if we get a definite

[59:00] date.

[59:00] Does that help?

[59:03] Yeah, what would be useful, I think, is if you could just contact CSMFO and they can send a notice out on the member's list.

[59:13] Email list and that would be a quick way to get information out to people.

[59:18] Sure.

[59:18] Okay, so let's take a look at the situation here, and this is actually a good time for us to segue over to Rich Lee and Rich.

[59:31] Why don't you share an observation here about what you're seeing from this information and the polling question, and that'll be a good kick into your section.

[59:47] Good afternoon, CSMFO, Richlee, and this looks pretty consistent with the discussions I've

[59:53] had with my colleagues throughout the state on.

[1:00:00] Contribution on up to their challenge for their organization and they're going to have to make significant changes to their operations in order to handle the additional contributions.

[1:00:14] So let's get into how you can describe and share the story. And it's all set up for you to launch forward. Great. Thank you, Don. And I just wanted to say thank you to Jillian and Nina for lending their expertise.

[1:00:31] to CSMFO. I really want to very valuable to our members, so thank you. Obviously, there's

[1:00:38] quite a bit of information that's in the actuarial evaluation each year, as kind of professionals

[1:00:45] for our organizations that were asked to essentially become conversions and fluent and really become

[1:00:51] the resident experts in pension benefits and pension liabilities. I've been looking at actuarial

[1:00:59] evaluations for over seven years, and I can say that CalPERS has done quite a bit in investing

[1:01:05] and the information that's provided in these evaluations. Every year they've added enhancements,

[1:01:12] improvements, so my hats off to them for continuing to address the member agency's need for information.

[1:01:20] So the next portion of the presentation, whether you're just starting on your journey of understanding

[1:01:27] pensions, or if you are the resident experts, I've always found that there's something new

[1:01:32] to learn through reading through the actuary evaluations.

[1:01:35] So that being said, I recognize that time is a valuable commodity.

[1:01:42] And if there's any section that you're going to look at in the actuarial evaluation, that's

[1:01:47] pretty comprehensive.

[1:01:48] It's this section right here, so that's the plan's funded status, because it has everything

[1:01:53] the major components of what makes up your contribution.

[1:01:57] Namely, that it's showing you your total pension liability.

[1:02:05] That's the 275. This is an example.

[1:02:09] San Mateos miscellaneous plan.

[1:02:11] So our total pension liability is 275 million.

[1:02:14] Our market value of assets for the miscellaneous plan is 194 million.

[1:02:20] So that leaves us with an unfunded

[1:02:22] a crude liability of $80 million and the funding ratio of 70.7%.

[1:02:28] So if you only have three seconds to spare, this is what you want to look at.

[1:02:34] If you have additional time, you want to dig into the market value of assets.

[1:02:39] So at the top is the beginning value or beginning balance of your market value of assets

[1:02:44] and at the bottom is your ending.

[1:02:47] And I've highlighted some of the major components of the market value of assets.

[1:02:51] It's lines three and four, those are your contributions, whether they're their employer

[1:02:56] or employee, at the major part of how you get from the beginning to the end.

[1:03:01] Line five, those are payments to retarded nuisance and beneficiaries, so obviously a large

[1:03:07] portion of the outflow going from the market value assets to your those that have earned the

[1:03:13] benefit.

[1:03:14] And finally, probably most importantly is the net investment return, so how much money

[1:03:19] and investment income is coming to this pension plan.

[1:03:26] Looking at the total pension liability,

[1:03:27] there's really a couple of things I wanted to point out.

[1:03:30] So, San Mateo's total pension liability

[1:03:32] for its miscellaneous plan is 275 million.

[1:03:36] I've highlighted the members and beneficiaries

[1:03:38] receiving payment because just that portion alone

[1:03:42] is 50 over 58% of the total pension liability.

[1:03:46] Put a different way, these are members

[1:03:49] that are no longer working for the agency.

[1:03:50] So over half of our total pension liability are people that are no longer here but earning

[1:03:55] benefits.

[1:03:59] The actuarial evaluation does show the funded status and there are really two areas that

[1:04:04] I focus on in communicating this to our elected officials, to our members of the public and

[1:04:11] to staff.

[1:04:12] First is the unfunded liability.

[1:04:15] So this shows an eight-year history going back to 2011 in terms of the valuation date.

[1:04:20] As you can see, our unfunded liability grew from $47 million to $80 million dollars, so that's quite a significant jump.

[1:04:29] Along with that, obviously related is the funded ratio.

[1:04:33] So the funded ratio decreased overall from 75% down to 70%.

[1:04:38] That's a metric that you want to keep a very close eye on.

[1:04:42] And what we dig into some other important metrics in the next couple of slides.

[1:04:47] This is also a very important historical trend that CalPERS provides is their return on investment

[1:04:53] for the entire trustment. This goes back to 1999 and as you can see quite a bit of volatility,

[1:05:01] and of course the significant loss of negative 24% in 2009. Why this volatility is important

[1:05:09] is this red line, which is an approximation of the discount rate.

[1:05:15] So, the discount rate put in layman's terms is the assumption for the long-term return

[1:05:22] on investment.

[1:05:24] So, any deviation from that, whether above or below, is going to result in what Julian and

[1:05:29] Nina spoke to in hammeredization base.

[1:05:32] If the return is actually below the discount rate, then that's when we might have a problem.

[1:05:39] So, this is San Mateo's actual list of amortization bases for its miscellaneous plan.

[1:05:48] A couple of things to reaffirm.

[1:05:51] That's relatively new.

[1:05:53] The ramp up, ramp down the arrows.

[1:05:56] That's indicating what trajectory it's currently headed at.

[1:06:00] Something that I think I have Julian on speed dial.

[1:06:04] I basically call him at least once a month with questions.

[1:06:08] and something that's helpful that he explained to me other than the percentages with the ramping method

[1:06:14] for market gains and losses. The ramping method that is essentially ending with this current actual

[1:06:21] value evaluation, actually let me correct that.

[1:06:26] Anyways, it's one fifth every year, one fifth for the first year and then two fifths for the second year and so on and so forth.

[1:06:35] Essentially, you're recognizing 20% of the impact each year until you get to year 5 and

[1:06:42] then you have 100%.

[1:06:44] The second is to emphasize that this is the last year of having 30 years as the amortization

[1:06:51] period.

[1:06:52] In other words, how long are we going to be paying off the market gain or loss?

[1:06:57] The amortization period was changed by the CalPERS Board of Administration, so it's no longer

[1:07:03] over 30 years for market gains and losses.

[1:07:05] It's not going to be 20 years.

[1:07:07] There are really two principle motivations for that.

[1:07:11] The first was to address negative amortization.

[1:07:14] I know it's hard to see here,

[1:07:15] but you should look in your own amortization,

[1:07:17] list of amortization basis.

[1:07:19] What you'll see, if you look at the balance,

[1:07:22] you'll see the balance, for example,

[1:07:24] here the first balance is 4.9 million,

[1:07:28] and we're making a payment of $836,000 and the balance for June 30th of 2019 is going down to

[1:07:37] 4.4 million. So in that case, the balance is going down. However, if you look at a larger

[1:07:44] amortization base here, probably the largest one for the city is $26 million. That's for the

[1:07:49] amortization base they are established on June 30th of 2013. We're making a payment of $1.4 million

[1:07:56] dollars in 2018-19 or made-up payment, the balance is actually increasing to 27.3 million and

[1:08:06] really that addresses the phenomenon as negative amortization. So the balance of the loan or

[1:08:15] the mortgage if you will is actually going up for a number of years until you're able to return

[1:08:20] it to the original principal amount. So again, one of the motivations for moving to a

[1:08:27] shorter amortization period is to address negative amortization. The second and related

[1:08:33] motivation is a term known as intergenerational equity. That means that the liabilities

[1:08:40] that are being generated in my generation, that my generation is paying for those, my community

[1:08:49] is paying for those,

[1:08:52] the liabilities that are generated for my children's generation

[1:08:57] will be paid by their generation, so there's a little bit of equity or fairness in terms

[1:09:02] of who the liability belongs to.

[1:09:07] One of the things that we're asked to do, again, I want to emphasize that there's quite

[1:09:12] a bit of complex information and there's a wealth of information in the actuarial valuation.

[1:09:18] Our role, as I see it, as finance professionals is to make it more accessible, especially to

[1:09:25] those that are not finance professionals are like officials, are members of the public.

[1:09:30] So there's a few terms that I like to re-translate that are used in actual evaluation.

[1:09:36] First is the amortization base.

[1:09:39] I think of that as more like a mortgage or a loan.

[1:09:42] It's very similar, there's a balance that we're paying off, and there's interest that

[1:09:47] we're being charged.

[1:09:48] So that's a different way of seeing it, but it's very similar.

[1:09:51] The second is the amortization period.

[1:09:54] That's really how much time are we given to pay off that loan?

[1:09:57] It's helpful when you're thinking of a fresh start.

[1:10:02] So the fresh start, I think of that as you're refinancing all

[1:10:06] of the existing amortization basis or your loans,

[1:10:09] I do want to re-emphasize something that Julian mentioned

[1:10:13] and that the fresh start is irrevocable.

[1:10:19] In other words, once you say yes

[1:10:22] and the CalPERS makes it so, you can't go back, so it's not a decision to be entered into lightly.

[1:10:29] The funded status, I do want to revisit that.

[1:10:33] Yes, there is complex, actuarial map happening to create the actuarial valuation.

[1:10:39] I try to simplify that for the into simple map.

[1:10:43] So you're really just looking at your assets divided by our liabilities

[1:10:47] and that's how they derive the funded ratio.

[1:10:49] So if you look at San Mateo's funded ratio, again, if you recall, this was the first,

[1:10:56] and if I mentioned if you only had three seconds to spare, this is what you should be

[1:11:01] looking at.

[1:11:02] So we had 194 million in assets, and we have 275 million in total liability, so that's

[1:11:11] how CalPERS gets a funded ratio of 70.7%.

[1:11:15] Again, this is our miscellaneous plan only if you were to combine it with our safety plan

[1:11:22] as a whole.

[1:11:24] All of our pension plans are 65% funded for this most current actuarial valuation.

[1:11:33] Again, this is CalPERS forecast for contributions for normal cost and for the UAL payment.

[1:11:42] One area that I wanted to emphasize is that these contributions assume and I've highlighted

[1:11:46] that CalPERS will meet its mark, that it will meet the discount rate of 7%.

[1:11:52] If there's any deviation from that, I'll show you that in the next slide.

[1:11:57] But even with a 7% return on investment, the UAL is still going to be increasing

[1:12:02] for our miscellaneous plan from just under 6 million to 8.1 million in 2020.

[1:12:10] However, if there's any deviation from the discount rate, that really is one of the value

[1:12:17] the sensitivity analysis that CalPERS provides.

[1:12:22] For example, if the, over the next three years,

[1:12:26] if the return on investment is more like 4%,

[1:12:29] if you look out at 24, 25, that's the difference

[1:12:33] of a million and a half dollars.

[1:12:35] So a 3% difference in return on investment

[1:12:38] compared to the discount rate,

[1:12:40] that will equate to a million and a half dollars more

[1:12:43] that the city's going to have to contribute

[1:12:44] just for its miscellaneous plan alone.

[1:12:46] something to consider and to fold into what we're going to discuss on the next couple of slides.

[1:12:54] So this is the next couple of areas that I'm going to kind of skip over a little bit because

[1:12:59] Julian and Meena addressed it. The first one is the sensitivity analysis on the unfunded

[1:13:06] decree liability and the funded status for the discount rate. That's been in the actual

[1:13:13] for evaluation for a number of years just by demonstration if the discount rate were to be reduced down to 6% rather than 7% that would reduce our funded status from 70% down to 62% so quite a significant decrease.

[1:13:32] And of course our related unfunded accrued viability would increase from 80 million to 115 million.

[1:13:39] The second sensitivity analysis that is new to this year is the mortality assumption.

[1:13:46] So if the mortality assumption were to be 10 percent lower, our funded status would

[1:13:53] decrease slightly 10 percent.

[1:13:58] The third sensitivity analysis that is new for this year is the inflation rate.

[1:14:03] So to reemphasize, the current inflation rate assumption is 2.5 percent.

[1:14:08] If the inflation rate were to decrease down to 1.5%, then our funded status would increase

[1:14:15] to 75%.

[1:14:18] In order of magnitude of these three sensitivity analyses that were provided by CalPERS,

[1:14:24] the discount rate still has the most magnitude in terms of the impact to the unfunded

[1:14:31] crew liability on the funded status. But again, these are the latter two are enhancements

[1:14:37] that the CalPERS Actuarial Team continues to add each year to the evaluation.

[1:14:46] For the

[1:14:46] Cidius Emmetale, this shows over the next 10 years what our anticipated increase in total

[1:14:53] of pension contributions is expected to be.

[1:15:00] For the current fiscal year, we're paying just over $16 million for our decilinious and safety plans. By the year 2030, we expect that to be well over $27 million. So that's quite a significant increase in contribution. And it's not all that uncommon for our colleagues all throughout the state. And where this comes into play is we have to put that into context.

[1:15:29] and to our operations.

[1:15:31] We can't look at it in a vacuum.

[1:15:33] So what I've shown here is for the next six years,

[1:15:38] how our pension contributions are in relation to all of our other operating costs.

[1:15:43] As you can see in the light blue colors,

[1:15:48] our salaries, wages, and benefits,

[1:15:50] that is the majority of our operations.

[1:15:53] And that is consistent with what I've seen with my colleagues as well.

[1:15:57] Yes, they are related because pension contributions are a percentage in terms of contributing to

[1:16:07] CalPERS, but in the grand scheme of things for San Mateo, it is a small and growing part

[1:16:16] of our operating budget.

[1:16:20] This is our 10-year plan shown graphically with the total resources or total revenues shown

[1:16:27] known in the green line and the total requirements or projected expenditures in the red line.

[1:16:34] As you can see for a majority of the 10-year plan, our total requirements are anticipated

[1:16:39] to exceed our total resources.

[1:16:43] The tune of somewhere between $2 and $3 million per year.

[1:16:47] Now there's an important caveat behind that.

[1:16:51] As our total requirements exceed our total resources, we're going to continue to draw

[1:16:57] down upon our fund balance. Here in San Mateo, we're very fortunate to be in a good position.

[1:17:07] Our fund balance, our reserve policy, is 25% of our budgeted expenditures. So this

[1:17:15] unassigned fund balance is above and beyond that fund policy. So we have currently $45 million

[1:17:22] in unassigned fund balance that we anticipate we're going to draw down upon over the next 10 years

[1:17:27] until there's nothing left.

[1:17:30] One important or a couple of caveats behind our long-term plan,

[1:17:35] first is that there are a number of discretionary items

[1:17:39] that we've funded in our 10-year plan.

[1:17:42] Probably most importantly is the additional discretionary payment.

[1:17:46] So in the average, we're anticipating to contribute $2 million

[1:17:51] more to CalPERS each year to address our pension liability.

[1:17:56] The second is additional support from our general fund to support our CIP program.

[1:18:03] And third is we have what's known as the housing set aside.

[1:18:07] One million dollars form as a reserve in our general fund to address housing needs in San Mateo.

[1:18:15] In order to address the deficit over the 10-year plan, our city council can very easily tell us to forgo

[1:18:25] any one of these discretionary items. However, there's trade-offs with that. For example, if we were to

[1:18:32] not make additional contributions to CalPERS, then we would continue to accrue interest on the

[1:18:39] liability that we would, that we did not pay off. So that's one trade-off. With a CIP support,

[1:18:45] that $2 million really goes towards CIP for our street. That would be a direct impact on providing

[1:18:56] reliable infrastructure to our community.

[1:18:59] And the third and just as important is our housing set aside, where one of the many

[1:19:04] counties located in the state that has housing crisis, and our council was doing all it

[1:19:11] can to address that, and then to really, we need that to, they need the support in terms

[1:19:17] of funding to provide these resources for the members of our community that needed to desperately.

[1:19:22] So, to sum it up, there's really, yes, these answers can be easily addressed to the

[1:19:30] deficit in our 10-year plan, but there's going to be trade-offs if these are the answers

[1:19:35] that you're looking for.

[1:19:42] So, there's a few action items that were you to address with your own agency.

[1:19:49] First, is to download your actuarial valuation.

[1:19:53] You can go to my CalPERS, you can also just look to a web browser and search for CalPERS

[1:19:59] actuarial evaluations and these are documents that are available to the general public so

[1:20:04] you can download them from there and just search for your agency.

[1:20:08] The second is once you have your actuarial evaluation is to go to the first couple of pages

[1:20:13] and find your fiscal year 21 contribution requirements so again that's going to be your normal

[1:20:18] cost and your UAL contribution.

[1:20:20] Third is to find out what your fund and ratio is.

[1:20:26] It appears from the polling survey

[1:20:29] that everybody is aware of how to find that.

[1:20:32] But keep an eye on the trend.

[1:20:34] Is it trending upwards or downward?

[1:20:39] If your agency has not been making additional contributions to purrs,

[1:20:45] contact your actuary and ask them if they can provide that tool

[1:20:50] to analyze what the impact would be.

[1:20:52] If you did make additional contribution and determine if that is a resource that city council or your board is willing to make in order to address the pension liability.

[1:21:06] The third is to get to know your CalPERS Actuary if you don't already.

[1:21:11] If I can take just a minute to promote two things.

[1:21:13] In addition to the CalPERS forum, CalPERS has graciously volunteered to, again, come to the

[1:21:21] DSMFO conference. It will be January 28th through the 31st in Anaheim. Please keep an eye out for

[1:21:31] notification emails from our leadership team to schedule meetings with CalPERS actuaries. While it's

[1:21:39] to contact your loan over the phone, there's something to be said about having a face-to-face

[1:21:44] meeting.

[1:21:45] So I definitely want to advertise that.

[1:21:50] For San Mateo and we found the best value for addressing CalPERS contributions as well

[1:21:58] as other competing demands is to put them into our long-term financial plan.

[1:22:03] If you haven't expanded your financial plan to go beyond five years, it's something that

[1:22:07] I definitely recommend for you to do.

[1:22:09] And I guess I was a little ahead of the card before the horse.

[1:22:16] Please schedule a meeting with your CalPERS actuary for our conference.

[1:22:20] And with that, we'll move on to the next one question.

[1:22:25] Thanks. That was great. Rich, thank you very much for sharing how you're navigating through these data to provide useful information for your organization.

[1:22:35] So, tick off as many items as you think would make sense for your agency to be doing with regard to its

[1:22:41] actual referral report while it's happening and going to invite Julian and Nina to come back on the camera here.

[1:22:49] We're going to be covering a number of additional questions after the polling question is done here.

[1:22:56] There is a question for you that came up about your presentation wondering if you have a particular target

[1:23:04] have in San Mateo for what funded ratio to be? Is that something that you're working

[1:23:10] towards or how do you how do you calculate what your target is here that you're trying

[1:23:15] to achieve? You know that's actually a subject that hasn't come up with our council. What

[1:23:21] I can say is we do have a our council that established a goal a couple of years ago. My predecessor

[1:23:31] the city council established a goal to have no pension liability by the year 2050.

[1:23:41] So that's quite a lofty goal. I think the city has the political will and the

[1:23:48] the operational staff to get it done in terms of the funded percentage over the next foreseeable future.

[1:24:01] I don't think we've quite identified a goal other than 100% funded by 2050.

[1:24:09] All right, great.

[1:24:10] Let's take a look at the action items here and what people look to do.

[1:24:17] So

[1:24:20] people are targeting many of the items that you highlighted for them.

[1:24:25] So thanks for providing a crisp action list there so people can make their way through

[1:24:32] the forest here and find what they need to know.

[1:24:35] That's super.

[1:24:36] I'm going to come back here to the group as a whole.

[1:24:39] I do want to highlight as we're covering some additional questions that have come in before

[1:24:44] we finish.

[1:24:44] There are post-webinar discussion questions, we encourage you to think about these questions.

[1:24:50] What are the implications of your actual report for your budget, your labor discussions, etc?

[1:24:55] Are you going to communicate the information and what's your plan for managing the CalPERS

[1:24:59] contribution requirements?

[1:25:01] I did get a request that came through the question function here about that CalPERS tool for

[1:25:07] figuring out what an advanced contribution might be.

[1:25:15] And again, I want to highlight to people.

[1:25:17] If I heard you correctly, Julian and Nina,

[1:25:20] they really need to ask their actuary for that,

[1:25:22] because the actuary needs to load their specific information.

[1:25:25] It's not something we can just put out on the CSMFO listservant.

[1:25:29] It's going to help people get to where they need to go.

[1:25:31] Is that correct?

[1:25:32] People weren't clear about that with their question.

[1:25:34] Yes, that's correct.

[1:25:35] We would preload the Excel worksheet with the individual data from that specific plan and then we would be able to provide it to the employer directly.

[1:25:45] Okay, that's great.

[1:25:47] So we have contact information for today's presenters.

[1:25:50] We have another polling question here and then we'll finish up with some other questions that came in.

[1:25:57] But we'd like you to tick off as many items as you or your agency gained value out of today's presentation.

[1:26:03] So we get some feedback for the hard work of our presenters and some learning from you about what was particularly useful for you out of today's session.

[1:26:12] While that's happening, I want to just take a look at some of the additional questions that have come in and see if we can knock off a few more of them here.

[1:26:21] So people were asking, you know, it's gotten around that CalPERS didn't meet its discount rate for 18, 19.

[1:26:27] And so people are getting asked, well, given what the actual rate is, what's the implication

[1:26:33] of what they actually earned in the current fiscal year for the just closed fiscal year

[1:26:39] for future rates.

[1:26:40] How good people figure that out?

[1:26:44] Well, the returns that we got for the late 1990 was 6.8 percent, so we were slightly below

[1:26:53] our target of a long-term target of 7%, so that's going to generate no asset loss,

[1:27:02] it's going to be relatively small since we only miss the target by a small amount.

[1:27:14] If an agency wanted to try and do an estimate for that, I think that can be done in the

[1:27:19] manager employee contribution tool, I think that's a tab on that which allows you to do a projection for the next year

[1:27:29] with a adding-in asset loss based into the next year's projection. But it's not something I would expect

[1:27:38] to have a large impact on the projection since it was a relatively small loss.

[1:27:46] And we can see from the polling results here that people got value out of the many areas

[1:27:52] and this is a very ambitious webinar to try to cover all these different topics.

[1:27:56] So thank you presenters for doing a fantastic job on this account.

[1:28:01] And let me just see if there's anything else here.

[1:28:04] Julie, and did you have a comment about what people might use as a target?

[1:28:08] A lot of people are asking for, hey, is there some sort of target they should have on their

[1:28:12] funded ratio?

[1:28:13] So what does CalPERS advise about that or how can people think about it because they're

[1:28:19] getting questions from their elected officials in public while is their contribution funded

[1:28:24] ratio good, or is it bad, or is it whatever?

[1:28:29] You know, as an end point that before our target is for all plans to be 100% funded, and you

[1:28:38] with our U-ambitization policy with the maximum,

[1:28:41] you know, for maximum of 20 years,

[1:28:44] that's the long-term goal.

[1:28:48] The granted there are some basis

[1:28:49] which are gonna amortize over a still a longer period than that.

[1:28:53] A lot of people say a fund that's that is over 90%

[1:29:01] is a more comfortable place to be in.

[1:29:04] and I think that's true.

[1:29:09] But any steps, whether it's additional contributions

[1:29:12] or a 15-trust or building up internal reserves, all of those,

[1:29:20] if you actually, that's an important point

[1:29:22] that if you do have these reserves in excess of what CalPAS has,

[1:29:28] that's not going to be reflected on the fund and status

[1:29:31] to show now report, because we can't reflect additional money which is accumulated separately.

[1:29:37] All we can reflect now reports are the assets that CalPIS has in the Perth.

[1:29:43] So make sure that when you're communicating to your council or your stakeholders, if you

[1:29:51] have significant other holdings that you add that into your calculation for the funded status.

[1:30:00] Okay. Well, we're at our timing. So I'd just like to turn, in turn, first to Julian and then Nina and then the rich. What's just a short word or phrase that you would offer is a closing comment, something to stick in people's minds from today's session?

[1:30:16] Julian? I think it's valuable to stay engaged with your actual report and your actuary to CalPERS. We're here to help. We understand the

[1:30:30] the issues and the one to give us, give you our best advice and know the challenges which are facing you.

[1:30:39] Yeah, definitely don't hesitate to reach out to your actuary. We are here to help you with your future planning,

[1:30:45] and if there's any way that we can make the process easier for you, we would definitely be willing and happy to do that.

[1:30:56] Automatic lines in their facility and they operate regardless of what's happening.

[1:31:01] So, risks are a quick closing word.

[1:31:06] Thank you for the opportunity.

[1:31:08] As the CSMFO members may recall,

[1:31:11] the Lincoln California City has released that survey results indicating that

[1:31:15] pension contributions are going to be an ongoing concern and going to consume

[1:31:19] a greater portion of our operating budget.

[1:31:21] So, it's incumbent upon us as finance officials to become conversion

[1:31:25] and really the agency experts in leading our agencies through this,

[1:31:30] the next generation.

[1:31:31] So my closing word is thankful. I'm thankful to Julian Robinson and neither Ramsey and to

[1:31:40] Rich Lee for their outstanding work and preparation for today's webinar. And to all of you who are

[1:31:46] working so hard to help your agencies figure out and their responses to the challenges that you

[1:31:52] face on these and many other financial issues affecting your community. So this is Don Mariska on behalf

[1:31:58] the CSMFO coaching program, thanking you all for your time today and encouraging you to continue

[1:32:05] to participate in our upcoming webinars. You'll be getting information via the CSMFO email list,

[1:32:11] but when those are and encourage you to sign up and participate and learn together.

[1:32:17] Thanks so much and have a great day.

Interpreting and Communicating the New CalPERS Actuarial Report [see Agenda for presentation materials and polling results]

Agenda

Transcript