Title
Adopt a Resolution to Establish an OPEB and Pension Funding Policy and Transferring $8,222,725 In Set Aside Funds to the Pension Trust
Staffreport
COUNCIL PRIORITY
• Fiscal Sustainability and Transparency
SUMMARY AND RECOMMENDATION
Staff recommends the City Council approve a resolution adopting an Other Post-Employment Benefits (OPEB) and Pension Funding Policy and transferring approximately $8,222,725 that has been assigned to address Alameda County Fire Department’s (ACFD) unfunded OPEB liability to the City’s Pension Trust. If enacted, this transfer would bolster the City Council’s prior policy direction to address unfunded pension liabilities associated with legacy City of San Leandro Fire Department employees, as well as past and current City employees.
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. The City currently has unfunded pension liabilities for both legacy employees who previously worked for the City’s former Fire Department that existed prior to fire services being transitioned to the Alameda County Fire Department, as well as past and current city employees.
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, 2022, the respective unfunded liability amounts are approximately $4,523,749 for OPEB and $141,216,723 for pension.
In September 2015, the City Council adopted the Prioritizing Unfunded Liability Liquidation (PULL) plan, which affirmed a 5-year goal of setting aside an additional $5,000,000 toward reducing unfunded liabilities. The PULL Plan calls for the City to direct up to 50 percent of all annual General Fund carryover funds toward unfunded liabilities. In addition, the plan directs 50 percent of all General Fund land sales toward PULL. All funds set aside through this program were to be deposited into an irrevocable trust dedicated towards unfunded OPEB liabilities. The sale of land associated with the Monarch Bay Shoreline project was excluded from this policy.
Seven-years later, the $5 million PULL plan funding target has been exceeded. The City Council authorized several one-time contributions to the OPEB Trust in addition to $750,000 yearly allocations between 2014 and 2020. The OPEB Trust now holds $14.1 million, which exclusively reflects contributions from the General Fund. This Trust balance was further augmented by nearly $4.2 million in investment earnings. As of September 30, 2022, the OPEB Trust portfolio assets total $18.3 million, which includes both the General Fund contributions as well as investments earnings derived from those contributions. This approximately $18 million fund balance also reflects a $2.7 million (approximately 12%) decrease in total portfolio valuation that is a function of market volatility experienced since June 30, 2021.
Focusing PULL plan contributions exclusively toward OPEB since the program’s inception has resulted in a well-funded OPEB Trust. As a result, in 2021, the City Council authorized the creation of a separate Pension Trust that included an additional $6.5 million allocation from the General Fund. The creation of the Pension Trust and the initial payment to it created a mechanism to segregate funds for pension purposes while continuing to reduce the City’s unfunded liabilities. The Pension Trust is managed by Public Agency Retirement Services (also known as “PARS”), similar to the previously existing OPEB Trust, and neatly fits under the established umbrella of the PULL program.
Although the City has no legal or contractual obligation to do so, as part of its ongoing efforts to address pension and OPEB liabilities, along with the above-referenced actions, through separate action the City also began setting aside funds that were designated to assist in addressing the Alameda County Fire Department’s (ACFD) unfunded OPEB liability. According to available City records, these separate contributions commenced in approximately 2015. To date, the total set aside for this purpose is $8,222,725. Additional analysis of these specific funds is included in the Discussion section of this staff report, provided below.
DISCUSSION
OPEB and Pension Funding Policy
The proposed new OPEB and Pension Funding Policy would fully fund the OPEB Actuarial Determined Contribution (ADC) using a 12-year amortization schedule. ADC includes Normal Cost, which represents benefits accrued for active employees during the year, plus unfunded liability payments. Funding OPEB liability based on ADC over the 12-year time period is intended to result in a fully funded plan, as measured by actuaries.
Annual investment earnings are expected to substantially cover the projected ADC, thereby continuing the recent trend of precluding the need to allocate further one-time payments to the OPEB Trust. Targeting a full funding goal may periodically impact the City’s General Fund, such as if extraordinary market volatility results in a need for City Council action to supplement earnings to match the ADC, or in the event of a severe economic recession that substantially impacts citywide revenues. Annual investment earnings over the past five years averaged $1,100,000.
Benefits for current retirees are currently funded by the City on a pay-as-you-go (Pay-Go) basis. The City will continue funding Pay-Go outside of the trust until the OPEB unfunded liability is paid. This amount is projected over the next biennial budget to equal the $950,000 that has been included in the adopted budget in recent years. Once the OPEB Plan is fully funded in about 12 years (around Fiscal Year 2033-2034), the City will have met its OPEB funding liability and may use the funds from the trust to also pay the Pay-Go portion of the City’s liabilities. At that time, the City will need to only contribute toward the Normal Cost. If investment earnings sufficiently cover the Normal Cost, no annual budget allocation would be required, thereby relieving the General Fund of any OPEB expense and freeing up funds that could otherwise be used to support important public services for the community.
As a result of the General Fund already seeing relief from OPEB ADC payments, the City should begin focusing on making contribution amounts that are greater than the Pension ADC to the Pension Trust. Funding pension liability with contributions greater than ADC will result in greater progress toward a fully funded plan over time.
Liabilities Associated With ACFD’s Employee OPEB Obligations
Although the City has for a number of years been setting aside a separate pool of funds that were designated toward ACFD unfunded OPEB liabilities, the City’s existing OPEB trust is now in a good fiscal position. Additionally, the City continues to maintain a strong and effective operational working relationship with ACFD staff. Consistent with the City’s existing contract with ACFD, which was last amended in 2005, the City continues to pay for all maintenance and other costs associated with its fleet of fire suppression apparatuses, five fire stations, and related equipment. Additionally, the City annually pays ACFD for the City’s proportionate share of ACFD’s annual costs to staff the City’s fire stations and support the City’s operations. However, the City has not historically paid ACFD for the costs of ACFD’s unfunded OPEB liabilities because the existing fire services contract that was adopted by both agencies contains the following provision:
Section 6. Personnel
a. No City Liability
City shall not be liable for the payment of any wages, benefits or other
compensation to any officer, employee or agent of County performing services
under this Agreement including, without limitation, the persons to whom ACFD shall
offer employment.
Based on discussions with now-retired former city employees who were involved in the negotiation of the above provision, it is staff’s understanding that this clause was included in the existing contract because ACFD’s staff are employed directly by ACFD. The City of San Leandro has no ability to control the retiree health benefits that are offered to those employees as part of their labor bargaining agreements. Moreover, the retiree health benefits that have historically been offered to ACFD employees are far more generous than the retiree health benefits that have ever been offered to City of San Leandro employees. Furthermore, one of the foundational justifications that was used to justify the elimination of the City’s former in-house fire department and the transition to a contract with ACFD for fire services was to harness the economies of scale associated with a regional fire services model and to reduce ongoing costs to the City. Nevertheless, since ACFD continues to incur liabilities associated with the generous retiree health benefits that they offer to their employees who are staffing local fire stations, ACFD has proactively sought to identify new methods of offsetting the costs associated with their agency’s unfunded OPEB liabilities.
To remedy the above-described situation, the City Manager and the ACFD Fire Chief have agreed that the City will prospectively commence paying the fully burdened cost of the contract each fiscal year. Because the OPEB Trust has a plan for being fully funded, the $8,222,725 set aside should be moved to the City’s Pension Trust. Going forward, the City will be paying the true cost of ACFD services, which includes an amortized portion of ACFD’s unfunded OPEB costs.
Review by Finance Committee
The Committee met on November 1, 2022 to review the proposed OPEB and Pension Funding Policy and the transfer of $8,222,725 from funds set aside for ACFD’s OPEB liability to the City’s Pension Trust. The Committee unanimously recommended the matters be moved forward to the City Council for adoption.
Fiscal Impacts
The City Council’s proactive approach funding unfunded liabilities generates investment income and achieves significant future savings to San Leandro taxpayers over little more than a decade. The intention of the proposed OPEB and Pension Funding Policy is to have investment earnings cover the OPEB ADC and not require a General Fund contribution to the OPEB Trust while beginning to place a greater focus on funding liabilities through the Pension Trust. These prudent steps will ultimately have a positive impact on the City’s overall budget and its long-term financial stability, thereby providing significant long-term benefits to the San Leandro community.
As the City’s OPEB unfunded liability is now on a path toward liquidation, funds can be contributed to the new Pension Trust. The transfer of $8,222,725 from funds set aside for ACFD’s OPEB liability to the City’s Pension Trust will increase the City’s assets to mitigate its pension liability, resulting in the City’s funded pension liability going from 3.6 percent to 8.4 percent. The OPEB and Pension Funding Policy does not affect the PULL Program as PULL directs allocation of funds toward “unfunded liabilities” - including OPEB and pension.
ATTACHMENTS
Att A: Resolution
Att B: OPEB and Pension Funding Policy
PREPARED BY
T. Michael Yuen, Finance Director