Title
Staff Report for Discussion on OPEB and Pension Funding Policy
Staffreport
COUNCIL PRIORITY
Fiscal Sustainability and Transparency
SUMMARY AND RECOMMENDATIONS
Staff recommends the Finance Committee review the proposed Other Post-Employment Benefits and Pension Funding policies and forward to the City Council for approval.
BACKGROUND
A primary City Council priority is placing San Leandro on a firm foundation for long-term fiscal sustainability. One component for achieving this goal is reducing the City’s unfunded liabilities related to employee benefits (i.e., retiree health care and retirement pensions). An unfunded liability is the monetary difference between the estimated future costs of future benefits and the assets set aside to pay those benefits.
City unfunded liabilities fall into two categories - Other Post-Employment Benefits (OPEB) and pensions. OPEB refers to health benefits for employees who have retired from the City. The City provides its employees with a retiree health care plan that is relatively modest in scope with strict not-to-exceed monthly contribution caps, which has fortunately limited its associated long-term financial liability. Pension refers to the City employees’ pension plan that is administered by the California Public Employees Retirement System (CalPERS). As of June 30, 2024, preliminary unfunded liability amounts are approximately $1,074,764 for OPEB and $235,676,854 for pension. Additionally, the City has agreed to pay the fully burdened cost of Alameda County Fire Department (ACFD) contract services for personnel assigned to the City of San Leandro, which includes an amortized portion of ACFD’s unfunded OPEB costs.
The current OPEB and Pension Funding Policy was adopted by Council with resolution No. 2022-200 and discussed in staff report No. 22-658.
DISCUSSION
Current Pension and OPEB Funding Policy
This Policy establishes guidelines for setting City contributions to both the OPEB and Pension Trusts:
• The City will make contributions toward the unfunded liabilities annually.
• The Plans’ respective actuaries shall conduct actuarial evaluations biennially.
• Coordination of funding and investments earnings will attempt to minimize volatility of each trust’s Actuarial Determined Contribution (ADC).
The OPEB and Pension Funding Policy outlines fully funding the OPEB ADC using a 12-year amortization schedule. ADC includes normal cost for benefits earned during the same fiscal year and unfunded liability payments (funding shortfalls) that occurred over years. Funding OPEB liability based on ADC will result in a fully funded plan over time, as measured by actuaries. Current assets plus future assets from annual investment earnings will eliminate the OPEB unfunded liability.
Proposed Pension Funding Policy
If adopted, the proposed Pension Funding Policy will establish a risk-based capital (RBC) approach to managing the City‘s California Public Employees’ Retirement System (CalPERS) pension liabilities consistent with the best practices outlined by the Government Finance Officer’s Association (GFOA). This policy aims to mitigate funding and investment risks associated with CalPERS' Public Employers Retirement Fund (PERF) by maintaining external capital reserves that help absorb market volatility and ensure the City can meet its pension obligations while maintaining fiscal stability.
Proposed OPEB Funding Policy
If adopted, the OPEB Funding Policy will ensure that the City’s Other Post-Employment Benefits (OPEB) program is financially sustainable and that the program accumulates adequate resources in a systematic and disciplined manner over the active service life of benefitting employees.
FINANCIAL IMPACT
The City’s proactive approach to funding unfunded liabilities generates investment income and sets aside dedicated reserves in the Pension and OPEB Trusts to pay down unfunded pension and OPEB liabilities and manage risk. Additionally, adopted Pension Funding and OPEB Funding policies provide a safeguard against unpredictability and economic fluctuations to facilitate the financial flexibility necessary to meet current community needs while funding long-term obligations. Further, adoption of the proposed Pension Funding and OPEB Funding policies demonstrates the City’s commitment to funding long-term pension and OPEB obligations for stakeholders, such as employees (former, current, and future) and credit rating agencies.
ATTACHMENTS
Attachment A: Attachment A - Pension and OPEB Funding Policy Presentation
Attachment B: Attachment B - Proposed Pension Funding Policy_Dec 2024
Attachment C: Attachment C - Proposed OPEB Funding Policy_Dec 2024
Attachment D: OPEB and Pension Funding Policy_Nov.2022
PREPARED BY: Felicia Silva, Assistant Finance Director, Finance