ADMINISTRATIVE COMMITTEE
10.	DISCUSS AND RECOMMEND CREATING RESERVES FOR PENSION RETIREMENT AND OTHER POST EMPLOYMENT BENEFITS (OPEB) UNFUNDED LIABILITY
Meeting Date:		May 14, 2018	Budgeted:	N/A
From:		David J. Stoldt,	Program/	N/A
		General Manager	Line Item No.:
Prepared By:		Suresh Prasad	Cost Estimate:	N/A
General Counsel Review: N/A
Committee Recommendation: The Administrative Committee reviewed this item on May 14, 2018 and _____________________.
CEQA Compliance: This action does not constitute a project as defined by the California Environmental Quality Act Guidelines Section 15378.

SUMMARY: This report is to review and discuss District’s unfunded employee and retiree obligations, and discuss the possibility of developing a funding strategy. Therefore, this item is being brought forward for discussion and consideration of setting reserves towards the District’s unfunded retirement obligation.

DISCUSSION:

Public Employees Retirement System (PERS) Unfunded Liability - The District participates in the California Public Employees Retirement System (CalPERS), a cost sharing multiple employer defined benefit pension plan. CalPERS provides service retirement and disability benefits, annual cost of living adjustments and death benefits to plan members, who must be public employees and beneficiaries. District employees participate in the Miscellaneous Plan. Funding contributions are determined annually on an actuarial basis as of June 30 by CalPERS. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability.

For fiscal year 2017-18, the required Employer contribution rate was 8.921% for District’s Miscellaneous Plan. The required Employee contribution rate is 7%, of which the employees currently pay 6%.

Contributions to the Plan are shared by the District (employer) and employees on an agreed upon cost sharing basis as follows:

· Employer base contributions are paid by the District for Miscellaneous Plan.

· Employees pay their 3% of Employee contribution, plus 3% of the Employer contribution. Effective July 1, 2018 the employees will pay an additional 2% of the Employer contribution, making a total of 8% contribution from the employees.

These formulas are in place for the “classic” PERS members – those who were members prior to January 1, 2013. In accordance with the Public Employees Pension Reform Act (PEPRA), employees hired after January 1, 2013, who were not already PERS members fall under the new retirement formulas. In accordance with the Act, the contribution rates for those employees are primarily shared equally between the Employer and Employee. As of July 1, 2017, the PEPRA Miscellaneous Employer contribution rate is 6.533%, and the Employee contribution rate is 6.250%.

As of June 30, 2016, the District reported unfunded accrued liabilities of each Plan as follows:

	Unfunded Accrued Liability
Classic	$4,986,779
PEPRA	1,680
Total Unfunded Accrued Liability	$4,988,459

The District paid the annual unfunded accrued liability (UAL) as a lump sum for fiscal year 2017-18 in the amount of $231,967. This resulted in a net savings for the year in the amount of $8,542. The District expects to pay the UAL as a lump sum for the 2018-19 fiscal year, resulting in a savings in the amount of $10,370. These savings should minimally impact future Employer contribution rates, most likely slightly curtailing rate increases, which will then benefit both the District and employees due to the cost sharing formula.

If the District were to consider setting aside reserves to fund retirement related unfunded liabilities, this would position the District to have enough funds accumulated in future to pay-off the Total Net Pension Liability. Every year PERS analyzes the liabilities as part of the rate setting process.

Other Post-Employment Benefits (OPEB) - The District provides other post-employment benefits to retired employees in the form of continued healthcare coverage. At retirement, District employees can join a plan of their choice or the District’s health carrier for coverage and select from a variety of medical plans. The District’s health premium contribution for each retiree is dependent upon their date of hire, length of service, and bargaining unit. Currently, the District pays OPEB expenses on a pay-as-you-go basis.

In accordance with Governmental Accounting Standards Board (GASB) Statement No. 45, and Financial Reporting by Employers for Postemployment Benefits Other than Pensions, employers that participate in single-employer or agent multiple-employer defined benefit OPEB plans are required to measure and disclose an amount for annual OPEB cost on the accrual basis of accounting. Annual OPEB cost is equal to the employer’s annual required contribution to the plan (ARC), with certain adjustments if the employer has a net OPEB obligation for past under or over contributions. The net OPEB obligation is the accumulated amount the District is required to recognize as an expense but not funded.

The District’s required contribution was determined as part of the June 30, 2016, actuarial valuation. The District’s annual OPEB cost and contribution to the healthcare plan for the year ended June 30, 2017 were as follows:

Annual Required Contribution (ARC)	$304,674
Interest on Net OPEB Obligation (NOO)	71,660
Adjustment to Annual Required Contribution (ARC)	(75,275)
Annual OPEB Cost (Expense)	$301,058
Age Adjusted Contributions Made	(84,479)
Change in Net Obligation (NOO)	$216,579
Net OPEB Obligation, July 1, 2016	$1,433,196
Net OPEB Obligation, June 30, 2017	$1,674,775

The funded status of the plan based on an actuarial study using age-adjusted premiums. The unfunded actuarial accrued liability (UAAL) is the difference between the actuarial accrued liability and the value of the plan assets accumulated (amount set aside) to finance that obligation. As of June 30, 2016, the District’s OPEB obligation was as follows:

Actuarial Accrued Liability (AAL) $3,227,615

Actuarial Value of Plan Assets 0

Unfunded Actuarial Accrued Liability (UAAL) $3,227,615

Again, the District funds the OPEB retiree medical benefits on a pay-as-you-go basis. Actuarial valuations for an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Actuarially determined amounts are subject to continuous revision as the actual results are compared to past expectations and new estimates about the future are formulated. Although the valuation results are based on the values the District’s actuarial consultant believes are reasonable assumptions, the valuation results reflect a long-term perspective and, as such, are merely an estimate of what future costs may actually be. Deviations in any of several factors, such as interest rates, medical cost inflation, Medicare coverage, changes in marital status, employment attrition rates, and mortality rates, could result in actual costs being less or greater than estimated.

If the District were to consider setting aside reserve funds towards OPEB related unfunded liabilities, this would position the District to have enough funds accumulated in future to match the Actuarial Accrued Liability (AAL). If pre-funding monies are placed in investments that will earn an interest Rate of Return, then some of the future expenses are being funded with “earnings” rather than revenue.

STAFF RECOMMENDATION: Staff recommends that the Board approve creating Pension Reserve and OPEB Reserve and to fund $100,000 to each reserve as seed money to start funding the Districts pension/OPEB obligations. On May 14, 2018, the Administrative Committee voted ________________________.

EXHIBIT

None

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