Background
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 five years.
| 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 |
| 06/30/2018 |
$753,503,877 |
$498,338,141 |
$255,165,736 |
66.1% |
$86,457,783 |
*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 |
| 06/30/2018 |
$232,675,846 |
$152,555,374 |
$80,120,472 |
65.6% |
$22,153,328 |
The funding status of the plans decreased from the June 30, 2017 valuation primarily due to the decrease in the discount rate being lowered from 7.25% to 7.00% as of the June 30, 2018 valuation, while the decrease is partially offset by CalPERS achieving an 8.6% investment rate of return which was slightly above the 7.00% target rate during the fiscal year. CalPERS announced a 6.7% rate of return for the year ended June 30, 2019 and thus it is expected that the funded status may decline slightly in the next valuation.
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, 2019 the County received the June 30, 2018 Actuarial Valuation Reports (Att. A and Att. B) which are used to set the pension funding rates for the County for the 2020-21 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, 2018 valuation are as follows:
| Actuarial Assumption |
June 30, 2018 Valuation |
June 30, 2017 Valuation |
| Actuarial Cost Method |
Entry Age Normal |
Entry Age Normal |
| Discount Rate |
7.000% |
7.250% |
| Payroll Growth |
2.750% |
2.875% |
| Inflation |
2.500% |
2.625% |
| 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, 2019 valuation
- 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,which may cause 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 (Known) |
30.400% |
43.700% |
| 2021-22 (Estimated) |
32.200% |
45.900% |
| 2022-23 (Estimated) |
33.600% |
47.600% |
| 2023-24 (Estimated) |
34.200% |
48.500% |
| 2024-25 (Estimated) |
34.700% |
49.100% |
| 2015-26 (Estimated) |
32.800% |
49.100% |
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. Below is a summary of the account activity for the 2017-18 and 2018-19 year.
| |
Beginning Balance - June 1, 2018 |
Contributions |
Earnings |
Expenses |
Ending Balance - June 30, 2018 |
| Pension |
$0 |
$800,000 |
$67 |
$0 |
$800,067 |
| |
Beginning Balance - July 1, 2018 |
Contributions |
Earnings |
Expenses |
Ending Balance - June 30, 2019 |
| Pension |
$800,067 |
$2,523,500 |
$52,501 |
$3,688 |
$3,372,380 |
The size of the portfolio increased substantially during 2018-19 due to the charging of the supplemental rate of payroll as well as depositing two years worth of pension prepayment savings. The funds are invested in PARS Moderately Conservative portfolio (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 $59.4 million and $20.2 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 do not recommend migrating to a shorter amortization schedule due to the large budgetary increase required for pension expense.
Policy Outreach
The County met with the State Controller's Office on its pension policy and received approval of the 2017-18 Cost plan including elements of the pension policy. As part of this approval, the County was required to obtain a second actuarial valuation (performed by Bartel Actuarial Services) demonstrating a supplemental pension charge was reasonable and necessary. This analysis demonstrated that the pension policy was prudent and resulted in long-term cost savings.
Since adoption of the pension policy, the County Department of Financial Services has performed outreach and discussed our Pension policy at various intervals with the Yolo Superior Courts. This has led to the opportunity as described below to perform an Additional Discretionary Contribution to CalPERS.
Additional Discretionary Contribution
After interest from the Yolo Superior Courts, the Department of Financial Services prepared an analysis of the options in order to make an additional contribution to CalPERS. Based on the analysis prepared (Att. E), the Courts would contribute at a share of 6.381% and the County at 93.619% consistent which factors used in the 2019-20 budget for the Unfunded Liability to the Miscellaneous Plan. The County would also make a proportional contribution to the Safety plan based on the two plans respective unfunded status in the most recent valuation (June 30, 2018 described above). This would be done while maintaining the policy objective of (1) bolstering the County's ability to pay actuarial determined contributions, and (2) obtaining long-term savings from paying down the funded liability. Based on the analysis, the Courts would contribute approximately $88,000, and the County would contribute approximately $1,286,000 and $404,000 to the Miscellaneous and Safety Pension plans respectively.
Therefore, we are requesting the board authorize the Chief Financial Officer to make a discretionary contribution to CalPERS not to exceed $1.7 million during fiscal year 2019-20. The Chief Financial Officer will meet with CalPERS to optimize CalPERS application of the additional payment for the plan's long term fiscal health. The Yolo Superior Court has requested an MOU to be completed in order to formalize the arrangement and thus staff additionally request authorization for the CAO or CFO to be able to enter into an MOU with the Courts to execute the additional payment. |