Recommendation to receive and file a report on the City’s pension costs and trends impacted by changes implemented by the California Public Employees Retirement System (CalPERS) Board over the past several years.  (Citywide)
Ocean carries. Thank you. And now we will be doing item 20, please, which is a report. I know we pushed back a couple of weeks because of the time, but I'm going to have to turn it over to Mr. Modica to introduce and we'll hear this report. Thank you very much. This isn't a request that came from the Budget Oversight Committee as part of their diligence during the budget season. They really look at a number of different things, including our liabilities, and they ask that this get presented to the city council. So with that, I will turn it over to Grayson to go through the presentation. Great. Thank you, Tom. Good evening, Mayor and members of the city council. As Tom mentioned tonight, I will be providing a presentation on CalPERS. This was a presentation provided to the Budget Oversight Committee on July 23rd and was requested by the PSC to be presented to the full City Council. Over the past few years, CalPERS has implemented several changes to its investment strategy, an expected return designed to address the plan's unfunded liabilities and to ensure its long term fiscal sustainability. First, CalPERS adopted changes to its amortization and rate smoothing policy, which began to impact our FY 16 budget. The new rate smoothing approach is intended to eliminate the city's unfunded liability. Back then, it was in 30 years, but also exposes the city to a higher volatility in annual costs. Second, CalPERS also changed the demographic assumptions which began to impact the F.B.I. 17 budget assumptions such as mortality reflected a population that is living longer and thus collecting pension benefits over longer periods of time. Third, the board adopted a new risk mitigation strategy, which was originally slated to impact the FY18 budget. The board felt that their current investment strategy was too volatile with too much risk. So the risk mitigation strategy was implemented to slowly, over time, make the city's investment mix more conservative. Then in December 2016, CalPERS voted to lower the actuarial assumed investment rate, also known as the discount rate from the current 7.5% to 7% over three years. With the first year impacting our FY19 rates, this was done to reflect the expectation of the lower rate of returns over time. Predicted by CalPERS investment advisors for the calculation impacting our Fy20 budget. The discount rate assumption was lowered to 7.25%. The full impact of this change will be realized in Fy21 when the discount rate drops to 7%. At this time, the risk mitigation strategy was put on hold until the end of the three year period, lowering the discount rate and is slated to start back up for FY 21. Finally, most recently in 2018, CalPERS adopted changes to their amortization policy. Currently, investment gains or losses are amortized over 30 years, but this new change will shorten that period to 20 years and will start to impact our fy22 rates. The projections you see in this presentation and also included in the FY 20 adopted budget now factors in all of these changes. To address the challenge of rising pension costs. Several pension reform initiatives have been implemented both by the city and the state. Without these proactive initiatives, the city situation would have been much worse. In 2006, the city lowered the benefit formula for miscellaneous employees, also through negotiations and with the partnership of our bargaining units. By 514, all employees began paying their full employee contribution rate, which had previously been partly subsidized by the city. Then Peprah was passed by the state, which implemented new benefit formulas and new contribution requirements for employees hired on or after January 1st, 2013. Then in FY14, the city created and funded the CalPERS Stabilization Fund. This fund was an innovative approach to addressing some of the challenges we had with budget planning. This fund, however, has been discontinued as the most recent risk mitigation approach adopted by CalPERS PERS has made it unlikely that this fund will be replenished in the way that it was originally envisioned. And lastly, the city made a decision to make an early payment of the unfunded liability portion for FY 18. This was done again for the FY19 and FY 20 budgets. The FY 20 adopted budget now is estimated to save approximately 1.7 million to the general fund and 2.8 million all funds. All of these changes made by CalPERS put the city on a path to pay down its unfunded liability and strengthens the long term sustainability of the fund. However, this has also meant significant cost increases for the city over the past few years. Our pension cost increases in the general fund has been a significant cost driver. The good news is, while the costs are expected to continue to increase, the rate of growth is expected to slow and then peak in FY 31 and then start to actually decrease slowly thereafter. This table reflects the employer contribution rate as a percentage of payroll for safety and miscellaneous employees. As you can see, the rates are anticipated to grow until 531. Pension costs at these levels will be and has been a challenge to fund. But this is putting us on the right track towards paying down our unfunded liabilities and being in a better fiscal position to meet our obligations. And as mentioned before, after 531, our costs are projected to go down. Investment returns have an impact on the pension costs. So an important point to recognize is that even when investment returns are good, with all of the changes that CalPERS has made, our costs will still be expected to increase. Additionally, in the years beyond Fy21, because of the new risk mitigation methodology adopted by CalPERS, any significant gains the city experiences will partially be used to further lower the investment mix to be less risky by lowering the assumed rate of return rather than reflecting reduced costs for the city. Pension costs are not our only unfunded liability. There are three other major employer related unfunded liabilities, including retiree sick leave to pay retiree health insurance premiums, retiree health insurance subsidies and workers compensation. The city currently has 1.4 billion in these unfunded liabilities summarized in the table. Unfunded liabilities are cost for services already delivered but not paid for in full. The principal causes are generally lower than expected investment earnings on system assets, benefit enhancements that were made retroactive, and underfunding the amounts of the unfunded liabilities will vary from year to year based on these factors. For pension, the city will be again on track to pay off the unfunded pension liability. Now, in approximately 25 years for the miscellaneous plan, it is 76.4% funded and for the safety plan, it is 80.7% unfunded. The city with the support and leadership of the Mayor and City Council has worked hard over the past few years to implement strong financial policies and strategies to address these unfunded liabilities. We will continue to look for cost control strategies, explore ways to increase pension funding, and continue to adhere to strong financial policies that will keep us on track with recognizing and addressing our unfunded liabilities. And lastly, before I close, I wanted to address some common misperceptions regarding the city's pension plan that was requested by the BBC. One misperception is that pension benefit formulas continue to be very high to employees with no change or no reform that has been done. The reality is, with the state pension reform benefit, plans were also significantly reduced for new employees, and contributions that they are required to pay has increased. The miscellaneous formula is 2% at 62 for Pepper employees, and the safety formula is 2.7 at 57. As more employees become pepper, employees cost to the city will continue to decrease. Another misperception is that pension costs are increasing again, because benefits are increasing. And I just want to reiterate that pension benefits have not increased and rather decreased for new employees, and pension costs are increasing because we are working to pay down our unfunded liabilities and because of the various changes implemented by CalPERS as described in this presentation. Another misperception is that employees pay nothing towards their pension. The reality is employees pay a contribution rate required by CalPERS for classic employees safety, pay 9% of their principal wage, and miscellaneous employees pay 8% of the principal wage. And after the state reform that took effect in 2013, Peprah employees pay 50% of the normal cost rate for safety employees. That's currently 12% of their principal wage. And for miscellaneous, that's 6.5% of their principal wage. And lastly, another misperception is that the city will be paying these higher pension costs forever with no solution or end in sight. And while it is true that costs have been high, as noted in the presentation, we are on a path to pay down our unfunded liabilities. And also we're already seeing this, but the rate of increase is starting to slow down again. We are expected to peak around 531 and then it is anticipated that the cost will decrease after that. That concludes my presentation and I'm available for questions. Thank you, Miss Yoon. Councilwoman Price. Thank you. Oh, I want to thank our PSC chair, Stacy Mango for allowing us to have this presentation. Initially at BFC, we all felt it was very important to have this topic come to the full council. I think all three of us spoke at length and asked a lot of questions at the BFC meeting but were helpful that our colleagues who did not get that presentation at the time will have the opportunity to ask questions regarding this very substantial issue facing the city tonight. And that's why we felt it was important to bring it to your attention. As I said during the BFC meeting, and as I'll repeat again today, I believe that our pension liabilities are. Of huge concern. We're certainly not alone. There are many other municipalities that have to address the unfunded liabilities that are attributable to pensions in in the coming years. But as many of you will know, that these numbers continue to change for the city. And really, we have limited control in terms of what we are able to do in terms of managing the payback options and the impacts to the city. Every time CalPERS makes an adjustment, it impacts really what our projections look like and what the projections for our overall budget looks like for, in this case, decades to come. So we talked at the PSC meeting about the possibility of the city paying more into our unfunded liabilities so that we can get ourselves to a place where we're, we're. Looking more stable earlier than in the 2040 era, because it wasn't too long ago that we were looking at being more stable in the 2025 to 2030 era. So as a result of the changes that CalPERS has made, of course, now we're looking at liabilities that are really going to be taxing us as a city into the 2040 era. I think this our pension obligations should be at the forefront of every conversation we have regarding the budget. This is an absolute burden for the city as it is for many cities. We're certainly not alone and in fact, we've done more and more aggressively than many cities have. You know, we we we were the first to take pension reform to a different level, especially in the area of law enforcement and public safety. We were the first to really set some trends in regards to employee pick ups and the rates that we were looking at in terms of our pension obligation. Having said that, we find ourselves in a position now where our budget, our annual budget can be severely impacted as a result of CalPERS making modifications and changing their calculations. So I, I wanted all of I'm going to stop talking now because I talked at length about this at BMC, and I'm sure you can go back and watch it if you're interested in hearing what some of my questions were. But I wanted to make sure that my council colleagues had an opportunity to ask questions and understand really the reality of this issue. It's a significant issue. And I think if we don't have this on the forefront of our minds in our budgeting, the commitments that we have similar to the commitments that you would have in a family mortgage or other family expense, will overtake our ability to fund some of the necessities that we have in the city. So with that, I defer to my colleagues to engage Yoon in this presentation, and thank you, Ms.. Ewan, for bringing it back, and thank you for coming back on multiple Tuesdays, because I know this is such an important topic. I wanted us all to be awake and alert when we're hearing the presentation because I think like many other cities, it really is the topic of the decade. So thank you. Thank you, Councilman Mongo. Thank you. I want to thank the city staff for this presentation. I think that page eight really sums it up. I think it's important important for us to know all of our unfunded liabilities, not just the pension liability, but the the complete package of what we are responsible for providing, whether this council or previous councils committed to it. The city had made a commitment. So I think it's important that we know and understand what those look like. I think it's a broader conversation about how we handle it. I've had discussions at length with our budget division and there are cities who have made investments of buying down that debt sooner, only to see a downturn in the economy. And then they're thought to have made a terrible mistake. Other cities who try to buy down that debt sooner and experience a boom in the economy and are thought to be brilliant. And really timing has more to do with the decision outcome than the actual decision of investing in itself. And so. I think that we need to be prudent. I think we need to recognize that we have a commitment with an organization where the decisions that they make are really influencing us. So we need to, as an elected body, focus on and pay attention to the economy, the returns we're getting as a system, and then the influencers of that system and the policy by which they make investments on behalf of our employees. It is of the utmost importance that their focus remain on investment returns because it is us at the city level that get the opportunity to focus on programs and policies that improve the entirety of our region. And yet. Those policies and end programs would potentially need to be cut because of investment strategies at a higher level that could could impact us. And so I think that we need to keep this in mind, perhaps as a part of our state legislation discussion or state legislation committee. Perhaps that's the appropriate place for us to follow that legislation as we move forward and also follow the PERS board, which is not technically a legislation but another state entity. So thank you for my colleagues on the Council for their continued efforts to know and understand what liabilities we have ahead of us and continue to work hand in hand with our labor partners to solve these important issues. Thank you. Controversy for now. Thank you. And thanks for the report, Ms.. Yoon. Great job. I want to follow up on what actually both my colleagues said. First, the point about the changing calculations are miscalculations. I think Senate bill is it too 66 just hit the news cycle yesterday. So I won't put you on the spot tonight for a comment. But moving forward, should that bill become law, it'd be nice to have a follow up either to from for Memo or maybe another study session on that in particular. Thank you. Thank you. There's no public comment on this, but I'm going to go ahead and just add that. Also want to think, I think we're finding Steph has done a really good job of, um, you know, keeping the back myself, keeping the counsel informed about what our entire liability picture looks like. I think it's something that obviously oftentimes the community may not have the complete picture in. And the way, you know, CalPERS impacts us depending on what happens year to year and depending on the markets. I will also say that the state has over the last few years certainly provided a pretty robust framework for for how we we pay back our payments and they've given us additional flexibility as the years move forward. And so I think we appreciate that. And I think that it's important for folks to know that we we make significant payments every year. And and and I think that's something that we will continue to do and we should do. And I think that counts on Mongo is right that a lot of of how our our liability looks is really dependent on on on risk taking and what happens year to year. But I want to just commend you for the plan we have. And the truth is, is that right now we are making these these investments in the future, because those that will see the benefit of us paying down these liabilities over the next ten or 20 years are really going to be the next generation of young people that are in our city that won't have this this level of liability in front of them. And so that those investments can be made directly back into programs in parks and then the things that we love in our city. And so it is the right thing to do and it's also the legally mandated thing to do. It's both those things. Councilmember Richardson. Thank you. It took me a while to hit the button. I was breaking down some of these slides. So on slide nine. And first of all, thank you for this presentation. And it's a big issue. You know, I remember when we accomplished the first pension reform, you know, when Mayor Foster was here and and we learned a lot. But but I think this is a sort of a what you show on these slides. It really shows that the next, you know, 12 years, 11, 12 years are going to be the decisions we make are going to be incredibly important. So I see on the second bullet on page nine in terms of moving forward and says continue to explore ways to increase pension funding further, which reduces cost, how are we working on this strategy now and when can we get some feedback from staff on, you know, I know what our obligations are, but if the idea is we're going to sort of pay in advance, I think the sooner and the more regular regularly we hear about this, the better we can plan and prepare for it. So is there a schedule or cadence that you'll get back to us about some of these ideas that you're exploring? Certainly. So we do explore different options and work with our consultants and independent consultants on CalPERS as well as the contacts we have at CalPERS themselves. They do have become come out with offering more options that city cities have to potentially pay into a trust or pay down or pay earlier into their unfunded liabilities. There are some potentially unintended consequences with that or risks that the city may not want to take. So that is something we're continuing to explore at this time. That's not something we have recommended. But as we continue to work with our CalPERS partners, that's something we are going to look into and we can report back to city council if things change. And then the slide councilmember, if I may, talks about pension, but we have other unfunded liabilities as well. And so those strategies might also be a way that we address some of the health care liabilities that are on the books. Long Beach is very fortunate in that we have comparatively very small health care liabilities compared to some cities that offer, for example, lifetime medical. So are not is a lot smaller. But we do need to be thinking about some of those as well. Sure. Just, you know, when when I anticipate a big bill coming down, you know, there's always where do I get more money and where do I save costs? I see a lot about where do we save costs? But we got to also focus on how do we grow revenue and and intentionally say, hey, if we anticipate through economic development or whatever it is, one of the first things we pay on new revenue isn't the next great idea. It's the tuck away for unfunded liability. So whatever plan we come up with, I love to see an economic development strategy that says we're going to do our best to grow revenue that we can receive and set aside for this. So that's what I'd be looking for as we move forward. Thanks a lot. Thank you. And with that, we do have a motion in a second to receive and filed this report. Please cast your votes. Motion carries. Thank you. With that, we are going to go. I don't see anyone. I don't have a sheet for the second public comment period. No one signed up for it. So with that, let me go to new business. Is there any new business concern we ringa.