Corona Finance Division
400 S. Vicentia Ave, Suite 320
Corona, CA 92882
What is the CalPERS Crisis?
Given unfunded pension obligations, our collective crisis (aka The CalPERS Crisis) is: How to effectively secure the solvent financial future of the City, its employees, and its retirees while ensuring the delivery of public services and stewardship of public resources.
What is CalPERS?
The California Public Employees' Retirement System (CalPERS) builds retirement and health security for California state, school, and public agency members. CalPERS manages the largest public pension fund in the United States.
September 27, 2018: Study Session–Pension & Financial Forecast Update
Frequently Asked Questions (Click Question to Expand Answer)
Defined Benefit Plans (DBPs) are pension plans in which an employee receives fixed benefits that are based on length of service and salary earned at the time of retirement. The City’s relationship with CalPERS to provide a DBP to its employees dates back to August 1967.
The City has several employee groups with different CalPERS DBP formulas. The formula represents the percent of salary for each year employed with the City that a plan member will receive at or after the specified age. A defined contribution plan (DCP), such as a 401K, is a dollar contribution to a retirement fund. The total retirement in a DCP is generally based on the amount of assets and growth of the money.
Two-thirds of Funds Come from Investments
Historically, more than 60% of all funds paid to CalPERS retirees comes from investment earnings. When CalPERS does not meet its investment return goals, the City will pay more.
Over the next seven years (FY 2018-19 to FY 2024-25), the City anticipates its annual retirement expenditures to increase by 38.2% from approximately $26.5 million to $36.6 million. The UAL projections are based on the City’s most recent CalPERS actuarial reports dated July 2018 which report data as of June 30, 2017; the normal cost projections are based on the FY 2018-19 Adopted Budget payroll growth of approximately 2.5% based on the PERS Actuarial Reports. The information below provides look at the City’s overall pension costs, for all plans and all funds. The General Fund makes up approximately 75% of the pension costs.
The City’s retirement plans went from having an excess of cash (i.e. super-funded, or funded above 100%) to being under-funded. This is mainly due to investment losses by CalPERS during the Great Recession, which impacted all California agencies’ retirement plans managed by CalPERS. The following factors have also contributed to increasing pension costs:
- Retroactive retirement benefit contract enhancements for City employees between 2002 and 2004;
- CalPERS long-term investment returns not meeting expectations (e.g. 8.1% over the last five years, 5.6% over the last 10 years, and 6.1% over the last 20 years);
- Changes in the CalPERS anticipated return-on-investment rate over the past 15 years, from 8.25% to 7.00% (effective in FY 2020-21); and
- CalPERS retirees living longer
As a result of the above factors, which contributed to the decline in overall retirement plan funding levels, California public entities such as the City of Corona must increase their future payments into the CalPERS system. The payment levels are determined by CalPERS, and they are increasing exponentially.
As of the June 30, 2017 Actuarial Reports, the City’s CalPERS pension plans have funded ratios as follows: 95.3% (Fire PEPRA), 73.8% (Fire), 64.9% Police, and 62.7% Miscellaneous (Non-Sworn).
The City has Taken Several Steps Over the Years to Reduce Pension Costs
- 1995 – Fire Association employees began paying the full employee share of the CalPERS retirement costs (FY 2018-19 rate: 9%).
- 1999-2000 – Created new tiers within each bargaining unit. Required newly hired CalPERS employees, in the Miscellaneous group, to contribute 3% of the employee’s 8% portion of pension costs.
- 2013 – Established lower pension benefits for new (PEPRA) employees, which will ultimately result in lower pension costs. Existing (classic) and new employees paying full employee share, if not already doing so. FY 2018-19 rates: Fire Classic 9%, Fire New 12.75%, Police Classic 9%, Police New 11.75%, Miscellaneous Classic 8%, and Miscellaneous New 5.75%. Currently, the savings impact of this action is mitigated by the California Rule.
- 2013 – Public Safety (Fire and Police) began contributing 1.5% of the employer’s share, in addition to the full employee share mentioned above.
- 2016-2017 – Began pre-paying the UAL at the beginning of the Fiscal Year to save 3.5% (approx. $615K/year).
- 2017-2018 and 2018-2019 Additional PERS UAL contributions to pay down unfunded liability ($10.1M in FY 2017-18 and $6.0M in FY 2018-19).
- Every Year – Implement operational efficiencies, where possible, to minimize costs and impact to service levels as CalPERS costs increase.
Actuarial Report – An actuarial valuation is a type of appraisal which requires making economic and demographic assumptions in order to estimate future liabilities. The assumptions are typically based on a mix of statistical studies and experienced judgment.
Bond Anticipation Note (BAN) – A short-term obligation that is issued for temporary financing needs. The principal payoff may be covered by a future longer-term bond issue. These notes normally have maturities of one year or less and interest is payable at maturity rather than semi-annually.
California Rule – The California Rule is the result of a 1955 court case (Allen v. City of Long Beach) that concludes that an employee’s pension benefit as of the date of hire constitutes a contractual obligation. The California Supreme Court ruled that “Changes in a pension plan which result in a disadvantage to employees should be accompanied by comparable new advantages”. The 1955 ruling is currently being contested.
Defined Benefit Plan (DBP) – A type of pension plan in which an employer/sponsor promises a specified monthly benefit upon retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age.
Defined Contribution Plan (DCP) – A type of retirement plan in which a certain amount or percentage of money is set aside each year by a company (or employee) for the benefit of each of its employees. Benefits directly depend upon individual investment returns.
Discount Rate – Also known as the expected rate of return or the assumed rate of return. It is the estimated long-term average return expected to be earned on investments.
Employee Contribution – The portion of normal cost required to be paid by the employee, subject to the local agencies negotiated memorandums of understanding with applicable employee groups.
Employer Contribution – The portion of normal cost required to be paid by the employer, determined by periodic actuarial valuations under state law and based on the agency’s benefit formulas and employee groups covered.
Funded Ratio - Percentage of assets available today to pay all of the pension benefits promised to employees.
Normal Costs – The annual cost of service accrual for the upcoming fiscal year for active employees. The normal cost should be view as the long-term contribution rate for existing employees.
Pension Obligation Bond (POB) – Taxable bond that some state and local governments have issued as part of an overall strategy to fund the unfunded portion of their pension liabilities by creating debt.
PEPRA - Public Employees’ Pension Reform Act of 2013 – A pension reform bill that went into effect January 1, 2013. The bill impacts new public employees and establishes a limit on the amount of compensation that can be used to calculate a retirement benefit.
Superfunded – A term used to describe periods in which total available CalPERS assets exceed the total CalPERS liability.
Unfunded Accrued Liability (UAL) – Portion of the plan’s unfunded liability that is not funded by the plan’s asset value.
The City maintains a strict commitment to collective bargaining which includes the requirement to meet and confer on any changes affecting wages, hours, promotions, benefits, and other employment terms. The City will not engage in activity that may be seen to run counter to the ability of the City and the Unions to communicate openly and honestly during the collective bargaining process, to find solutions that will ultimately benefit the City of Corona. For simplicity, the City colloquially refers to this commitment as performing in “good faith” with the Unions and unrepresented employees alike.
Additional Resources Regarding CalPERS:
- PERS Report June 30, 2017 – Actuarial Valuation for Miscellaneous Plan
- PERS Report June 30, 2017 – Actuarial Valuation for the Safety Police Plan
- PERS Report June 30, 2017 – Actuarial Valuation for the Safety Fire Plan
- PERS Report June 30, 2017 – Actuarial Valuation for the PEPRA Safety Fire Plan
- Closing the Pension Funding Gap, League of California Cities Presentation
- League of California Cities: Retirement System Sustainability
Pension Tracker provides detailed information about the financial status of California Public Employees' Retirement System (CalPERS) member agencies and independent employer agencies in California's counties, cities, and special districts. Visit www.PensionTracker.org
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