Of Pensions, Priorities and Payments
(Published via Facebook on June 11, 2017)
As a local government in California, Atherton is one of the 1,581 public agencies (to include special districts) and 1,439 school districts participating in the CalPERS public pension system. The average monthly service retirement for public agency members is $3,570 per month or $42,840 per year (taxes and healthcare) CalPERS Facts at a Glance and CalPERS Investment Facts
The CalPERS Pension System requires local employers, like Atherton, to pay an annual amount each year based on an Actuarial Valuation conducted by CalPERS. The Town’s Actuarial Valuations are available on the Town’s website in the Archive Center. You can also visit the CalPERS website for the actuarial valuations of any CalPERS Agency (the Town, the Fire District, Sanitary District, etc.). The annual payment is a combination of a base normal rate for the employer plus a contribution toward any underfunded actuarial liability. The rates set by CalPERS dependent on a number of factors - everything from the projected rate for investment return to the average age of current and retired employees and whether or not they are going to die in the next few years (i.e. employee census and mortality rate tables).
The CalPERS Actuarial Valuation prescribes what the Town must pay each year toward its pension obligation - to include a payment toward the underfunded actuarial liability. The Town consciously decided not to "over fund" or contribute more funds into the plans than required under the actuarial valuations because the Town would rather keep its funds local dedicated to local priorities rather than overfund at the State level. In other words, maintaining a healthy funded status is good, but giving more local funds to the State than absolutely necessary is not - particularly since the funded status is market dependent.
If, for example, the Town were to fund its underfunded amount entirely, in one year, if the market performed exceptionally well, the Town could be “overfunded” and those funds would no longer be under Town control - once paid, we don’t get them back but our pension contribution rates will stay consistent. Our “overpayment” money would be earning interest at CalPERS rather than in our local budget. Conversely, if the market performed poorly, we would not have overpaid and instead would have lost funds because someone at the State made a poor investment decision. Given the recent market performances, we expect the Town’s underfunded status to drop but we do not expect our annual rates and contributions to be dramatically different. That said, the Town is conscious of rate fluctuations and via policy commits any excess funds if needed to help smooth out any fluctuations - we have not had to do this in recent years but it remains an option. As I mentioned above, rates also depend on employee census and mortality rates - as well as longevity rates. For example, each valuation, CalPERS assesses what our current employee census is (age, sex, mortality rate, longevity, etc.) and calculates the projected cost of retirement based on that census. BUT, if next year, one of our younger staff leaves for employment in another agency, the amount of funds projected to be needed on behalf of that employee changes with the following year’s actuarial and then changes the Town’s contribution rates. Overfunding would have paid a debt that the Town would not owe.
The Town funds its basic employer pension obligations via General Fund revenues year over year. General Fund Revenues come from basic property taxes, fees for services (building, planning, public works and public safety), franchise fees, sales taxes, business license taxes, and general grants. The total base salaries for the Town’s 39 employees in FY 2016/17 is $3,915,131. The bulk of that can be attributed to the 29 member Police Department at $2,764,557. On the total amount, the Town pays $683,687 each year toward pension obligations - representing 17% of base salaries. The Town’s total annual operating budget for FY 2016/17 (not including an additional $6 million in capital infrastructure projects) is $12,149,639. Pensions represent 5.6% of the Town’s Annual Operating Budget and 3.8% of the Town’s total annual budget for FY 2016/17.
Overall, the Town is in a very positive pension position when compared to other agencies throughout the State. Average funded ratios for the 1,581 CalPERS Public Agency members have grown. In 2011, the average funded ratio was 74.3% and in 2014 it was 77.9%. Across all four of the Town’s Plans, our average funded status is 86.1% - this not only exceeds the funding status for the average CalPERS agency, but also exceeds the average for the top 100 private sector pension plans. Because the Town’s pension obligation is considered an obligation, the Town must fund it at the minimum level required by the State. The Town’s funding policy does so without overfunding thus allowing local money to stay local - dedicated to local priorities.
CalPERS pension plans are not unlike private sector plans with a “funded status” ratio of Market Value of Assets (MVA) to Accrued Liability (AL). The average corporate plan funded ratio (top 100 pension plans) is around 82%. Funded ratios will vary year to year based on market conditions both in the private sector and public sector. The current market rallies will have an affect on the funded status of plans since most plans, public and private, have a stake in the investment market. The most current pension system valuations from CalPERS are as of June 2015. CalPERS Valuation Reports typically lag 18-24 months.
Atherton has 4 types of public pension plans for which the Town receives actuarial valuations every year - Local Safety Classic, Local Safety PEPRA, Local Miscellaneous Classic and Local Miscellaneous PEPRA. All employees are enrolled as either Classic Members (CalPERS members before January 1, 2013) or PEPRA Members (CalPERS members after January 1, 2013). The Town does not participate in Social Security and neither the Town nor the employee have social security payment obligations. Upon retirement, unless the employee has other social security qualifying employment, they do not receive social security benefits since employment with the Town does not constitute qualifying quarters for social security. Therefore, the Town only pays the employer portion of the CalPERS pension obligation and the employee is responsible for 100% of the employee portion. Private sector employers will typically pay into social security at 6.2% and often, some sort of employer-sponsored retirement plan, such as a 401K at 3%-4% for a total employer contribution of 9%-10% of salary. The CalPERS plans are similar - with the exception of public safety plans which tend to have a richer retirement plan. The current average tenure for an Atherton employee is 7 years. What’s discussed below are Town obligations and not the obligations of any other employers for whom an employee has worked.
The first and most significant pension plan for the Town is the Classic CalPERS Safety Plan. This plan is limited in membership to sworn officers only. Membership is further limited to CalPERS Classic Members (i.e. employees who were members of CalPERS prior to 2013). New members are enrolled in the CalPERS Safety PEPRA Plan and as time moves forward more employees are enrolled in PEPRA than Classic. The latest CalPERS Valuation for the Classic Local Safety Plan can be found online - Classic Member Local Safety CalPERS Actuarial Valuation - June 30, 2015. The funded status of this plan is 76.6% as of June 30, 2015. At that time, the AL was $36,891,116 and the MVA was $28,263,430. The Town’s employer-contribution rate is 21.418% of salary in FY 2017/18. The employee portion is 9% (the employee is also voluntarily paying 3% of the employer share in addition to their base cost). The retirement calculation for a top-step Police Officer ($101,712/year in salary) that has worked for the Town for 15 years, retiring at age 60 is: $101,712 times 15 times 3% = $45,770 per year or $3,814 per month in retirement. (In my experience, due to the physical demands of the job, I see most line through mid-level management officers leaving employment prior to age 60. Command staff will usually stay employed into their 60’s since they spend less time wearing field gear and chasing down criminals and more time managing/leading the organization.)
The second pension plan is the PEPRA Safety Plan. New CalPERS (after 2013) sworn officers are enrolled in this plan. This plan was created by CalPERS to reduce long term liability for local agencies and as employees turnover, this plan gains new members. This is the Plan into which most new sworn employees are placed. The latest CalPERS Valuation for the PEPRA Local Safety Plan can be found online - PEPRA Member Local Safety CalPERS Actuarial Valuation - June 30, 2015. The funded status of this plan is 92.1% as of June 30, 2015. At that time, the AL was $71,655 and the MVA was $66,027. The Town’s employer-contribution rate is 12.729% of salary in FY 2017/18. The employee portion is 12.25%. The retirement calculation for a top-step Police Officer ($101,712/year in salary) that has worked for the Town for 15 years, retiring at age 60 is $101,712 times 15 times 2.7% = $41,193 or $3,433 per month in retirement.
The third pension plan is the Classic Local Miscellaneous Plan. This plan is limited in membership to non-police (non-sworn) employees - called local miscellaneous. Membership is further limited to CalPERS Classic Members (prior to 2013). This plan generally has those employees that do not work as police officers - from the City Manager on down. New members (post 2013) are enrolled in the companion PEPRA Plan. The latest CalPERS Valuation for the Classic Local Miscellaneous Plan can be found online - Classic Miscellaneous CalPERA Actuarial Valuation - June 30, 2015. The funded status of this plan is 79.5% as of June 30, 2015. At that time, the AL was $15,806,251 and the MVA was $12,571,337. The Town’s employer-contribution rate is 9.096% of salary as of FY 2017/18 (less than private sector comparatives with social security). The employee portion is 7%. The retirement calculation for an average salaried employee ($112,615/year in salary) that has worked for the Town for 15 years, retiring at age 60 is: $112,615 times 15 times 2.262% = $38,210 or $3,184 per month. (In my experience, most non-public works staff will work well beyond 60. Public Works staff, due to the physical nature of the role will typically leave employment earlier.)
The fourth pension plan is the PEPRA Local Miscellaneous Plan. New CalPERS (after 2013) employees are enrolled in this plan. This is the Plan into which most new employees are placed. The latest CalPERS Valuation for the PEPRA Local Miscellaneous Plan can be found online - PEPRA Member Local Miscellaneous CalPERS Actuarial Valuation - June 30, 2015. The funded status of this plan is 96.3% as of June 30, 2015. At that time the AL was $34,451 and the MVA was $33,187. The Town’s employer-contribution rate is 6.908% of salary in FY 2017/18 (less than private sector comparatives with social security). The employee portion is 6.5%. The retirement calculation for an average salaried employee ($112,615/year in salary) that has worked for the Town for 15 years, retiring at age 60 is: $112,615 times 15 times 1.8% = $30,406 or $2,534 per month.
The total pension obligation as of June 30, 2015 is $52,803,473. The Market Value of the funded portion is $40,933,981 leaving an underfunded obligation of $11,869,492. This is the amount that fluctuates up or down based on market conditions, contributions and employee census actuarial data (i.e. actual and projected lengths of employment, salaries, and mortality). This the part that the Town has opted not to pay off due to its fluctuation and CalPERS investment changes. One actuarial valuation may say the Town has an underfunded liability of $11.8 million and the next year, it may be more or less depending on the factors that affect the calculation. Either way, we are “pay as you go."
Funding Policy
CalPERS Actuarial Valuations, market conditions, employer rates, employee rates, and underfunded status conversations are pointless unless the Town has a funding policy in place - which it does. The Town pays 100% of its employer obligation toward pensions each year based on published CalPERS annual actuarial evaluations. The CalPERS pension system is designed as a “pay as you go” system with projections calculated based on actuarial assumptions such as length of employment, salary, mortality, and investment projection for return - all of which can fluctuate changing the Town’s future obligations up and down.
I am happy to go through any of this one-on-one in greater detail if anyone is interested.
George Rodericks
City Manager
Town of Atherton
grodericks@ci.atherton.ca.us