The Pension Funding Policy (Att. C) adopted in May 2018 requires that on an annual basis the Chief Financial Officer (CFO) and/or the County Administrator provide a report to the Board of Supervisors on the status of Pension Funding as well as provide a lay summary of actuarial valuations, once published by the the California Public Employees' Retirement System (CalPERS).
Pension Funding Status
Below is a summary of the plan's funded status for the most recent four years.
Miscellaneous Plan*
| Valuation Date |
Accrued Liability |
Market Value of Assets |
Unfunded Liability |
Funded Ratio |
Annual Covered Payroll |
| 06/30/2014 |
$589,829,588 |
$434,324,206 |
$155,205,382 |
73.7% |
$71,013,770 |
| 06/30/2015 |
$621,622,997 |
$434,857,444 |
$186,765,553 |
70.0% |
$77,396,858 |
| 06/30/2016 |
$656,120,093 |
$428,536,758 |
$227,583,335 |
65.3% |
$81,109,780 |
| 06/30/2017 |
$694,805,957 |
$468,048,005 |
$226,757,952 |
67.4% |
$82,607,781 |
*The information presented above is for the entire Miscellaneous plan and does not separate the Yolo Superior Courts, Yolo First 5 Commission, or Yolo LAFCO.
Safety Plan
| Valuation Date |
Accrued Liability |
Market Value of Assets |
Unfunded Liability |
Funded Ratio |
Annual Covered Payroll |
| 06/30/2014 |
$172,135,582 |
$123,296,009 |
$48,839,573 |
71.6% |
$20,101,152 |
| 06/30/2015 |
$182,537,621 |
$125,791,611 |
$56,746,010 |
68.9% |
$19,810,589 |
| 06/30/2016 |
$195,919,390 |
$125,914,064 |
$70,005,326 |
64.3% |
$21,600,778 |
| 06/30/2017 |
$211,921,385 |
$140,459,704 |
$71,461,681 |
66.3% |
$22,260,933 |
The funding status of the plans increased for the June 30, 2017 valuation primarily due to strong investment returns of 11.2% recognized by CalPERS compared to the 7.25% discount rate. However, overall as the discount rate reductions have been phased in, the funding status of the plan has dropped from above seventy percent in 2014 to mid-sixties in 2017. The discount rate reduction to be reflected in the June 30, 2018 valuation is expected to drop the Miscellaneous Plan and Safety Plan funding level to 65.6% and 64.4% respectively.
Actuarial Report Summary
CalPERS, as the pension plan administrator, performs various administrative services including investment, benefit administration, and actuarial services for the County of Yolo. In July 2018 the County received the June 30, 2017 Actuarial Valuation Reports (Att. A and Att. B) which are used to set the pension funding rates for the County for the 2019-20 fiscal year. The key changes as summarized in the actuarial reports are shown below, together with comparative values from the prior reports:
Changes in CalPERS Actuarial Assumptions
The key actuarial assumptions included in the June 30, 2017 valuation are as follows:
| Actuarial Assumption |
June 30, 2017 Valuation |
June 30, 2016 Valuation |
| Actuarial Cost Method |
Entry Age Normal |
Entry Age Normal |
| Discount Rate |
7.25% |
7.375% |
| Payroll Growth |
2.875% |
3.000% |
| Inflation |
2.625% |
2.750% |
| Amortization Period |
30 Year Inv. Gain or Loss / 20 Year Assumption Method or Benefit Change |
30 Year Inv. Gain or Loss / 20 Year Assumption Method or Benefit Change |
Also presented in the valuation are various other actuarial assumption changes that will have impacts on the June 30, 2018 or June 30, 2019 valuations.
- Discount Rate - CalPERS will move to a 7.0% discount rate for the June 30, 2018 valuation. CalPERS recently performed Asset Liability Measurement (ALM) workshops and plans to hold the discount rate at this level through implementation of amortization changes. The reduction in the discount rate has the immediate effect of increasing the liability.
- Payroll Growth - CalPERS will move to a 2.75% assumed rate of payroll growth for the June 30, 2018 valuation. This is a decline from the previous assumed growth rate of 3.00%. This adds additional growth in pension liability and funding risk for organizations in which cumulative payroll growth (merits, equity, cost of living, etc.) exceeds this level.
- Amortization - CalPERS will reduce the amortization of all bases beginning with the June 30, 2019 valuation to a 20 year amortization. CalPERS currently allows for 30 year amortization of investment gains/losses. This will phase in any future gains or losses over a shorter time horizon, causing additional funding pressure.
Pension Rates
As a result of the actuarial changes above and investment results, CalPERS is projecting the upcoming rates for the pension plans as follows:
| Fiscal Year |
Miscellaneous |
Safety |
| 2018-19 (Known) |
25.254% |
35.966% |
| 2019-20 (Known) |
28.439% |
40.149% |
| 2020-21 (Estimated) |
36.600% |
43.500% |
| 2021-22 (Estimated) |
32.300% |
45.500% |
| 2022-23 (Estimated) |
33.600% |
47.200% |
| 2023-24 (Estimated) |
34.100% |
47.900% |
| 2024-25 (Estimated) |
34.500% |
48.500% |
Pension Trust
To prepare for these future impacts, the County of Yolo, in accordance with the board-approved Pension Funding Policy (Att. C), funded a Section 115 Pension Trust to set aside additional resources dedicated to pension funding. This trust was initially funded with $800K of general fund money and in future years will be funded by a supplemental rate of payroll. Below is a summary of the account activity for the 2017-18 year.
| |
Beginning Balance - June 1, 2018 |
Contributions |
Earnings |
Expenses |
Ending Balance - June 30, 2018 |
| Pension |
$0 |
$800,000 |
$67 |
$0 |
$800,067 |
As the account was funded in late June 2018, investment gains were minimal. The funds are invested in PARS Moderately Conservative portfolio. A detail of the investments made to date by Highmark Capital (investment advisor) and information on the Moderately Conservative approach are included in Att. D.
Option for Shorter Amortization
As presented on Page 18 of the Miscellaneous Valuation (Att. A) and Page 18 of the Safety Valuation (Att.B), there is an opportunity for significant long term cost savings of $72.0 million and $25.4 million for the Miscellaneous and Safety Plans, respectively, by choosing a shorter amortization of 15 years. With the June 30, 2019 valuation reports, the County will be required to amortize future gains and losses over 20 years, instead of 30 years. There is, however, the option to implement sooner and apply to past bases.
The Pension Funding Policy requires that the CFO annually analyze and make a recommendation whether a shorter amortization period would be appropriate for the County. At this time, we recommend that the County staff meet with CalPERS actuarial staff to explore migrating early to the 20 year amortization from the current 30 year schedule and report to the Board on the feasibility of such an initiative.
Policy Outreach
Since adoption of the pension policy, the County Department of Financial Services has performed outreach and shared the pension policy with the Yolo Superior Courts. Staff are hopeful that this outreach will translate into productive discussions on ways to collaborate together on pension funding.
The County has also met with and engaged in initial discussions with the State Controller's Office regarding the pension policy, to seek approval and ensure that the policy meets all of the State and Federal Cost Plan rules. Preliminary discussions have been positive, however they have indicated the County will likely need to have an actuarial study support the proactive funding plan above minimum required levels.
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