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Resolution No. 2022-16 | Establishing Pension Funding Policy | Adopted 04/04/2022RESOLUTION NO. 2022-16 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF GILROY ESTABLISHING A PENSION FUNDING POLICY WHEREAS, the City of Gilroy, a municipal corporation and charter city duly organized and existing under and pursuant to the Constitution and laws of the State of California (“City”), is authorized to enter into contracts and agreements for the benefit of the City; and WHEREAS, the reasons supporting this Resolution are set forth in detail in that certain City Council Staff Report submitted for City Council consideration at its meeting of March 21, 2022 for presentation and direction, and April 4, 2022 for formal adoption, submitted to the City Council by the City Administrator (the “Staff Report”), the contents of which Staff Report are incorporated herein by this reference; and WHEREAS, over the years, the City Council has taken several steps to address rising pension costs – establishing tiers for classic members, implementing Public Employees’ Pension Retirement Act (PEPRA), and establishing and funding a Section 115 Trust for Pension; and WHEREAS, a Pension Funding Policy has been developed for the City of Gilroy to provide guidance in the management of the City’s employee defined benefit pension plans established for sworn public safety “Safety” and non-sworn “Miscellaneous” personnel and administrated by the California Public Employees’ Retirement System (CalPERS); and WHEREAS, the consideration by City Council of the adoption of this Resolution has been duly noticed pursuant to applicable laws and has been placed upon the City Council Meeting Agenda on the date set forth in the Staff Report, or to such date that the City Council may have continued or deferred consideration of this Resolution, and on such date the City Council conducted a duly noticed public meeting at which the City Council provided members of the public an opportunity to comment and be heard and considered any and all testimony and other evidence provided in connection with the adoption of this Resolution; and WHEREAS, the City Council determines that adoption of this Resolution is in the public interest. NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Gilroy does hereby approve the attached Exhibit A – Pension Funding Policy. DocuSign Envelope ID: 1A5C0B8C-1C82-42BE-9FD4-23137CA8ACA5 Resolution No. 2022-16 Establishing Pension Funding Policy City Council Regular Meeting | April 4, 2022 Page 2 of 3 PASSED, APPROVED, AND ADOPTED by the City Council of the City of Gilroy at its meeting held on this 4th day of April 2022 by the following vote: AYES: COUNCIL MEMBERS: ARMENDARIZ, BRACCO, HILTON, LEROE-MUÑOZ, MARQUES, TOVAR, BLANKLEY NOES: COUNCIL MEMBERS: NONE ABSTAIN: COUNCIL MEMBERS: NONE ABSENT: COUNCIL MEMBERS: NONE APPROVED: Marie Blankley, Mayor ATTEST: Thai Nam Pham, City Clerk DocuSign Envelope ID: 1A5C0B8C-1C82-42BE-9FD4-23137CA8ACA5 Resolution No. 2022-16 Establishing Pension Funding Policy City Council Regular Meeting | April 4, 2022 Page 3 of 3 CERTIFICATE OF THE CLERK I, THAI NAM PHAM, City Clerk of the City of Gilroy, do hereby certify that the attached Resolution No. 2022-16 is an original resolution, or true and correct copy of a city Resolution, duly adopted by the Council of the City of Gilroy at a Regular Meeting of said held on Council held Monday, April 4, 2022, at which meeting a quorum was present. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the Official Seal of the City of Gilroy this Monday, April 4, 2022. Thai Nam Pham, CMC, CPMC City Clerk of the City of Gilroy Seal) DocuSign Envelope ID: 1A5C0B8C-1C82-42BE-9FD4-23137CA8ACA5 DocuSign Envelope ID: 1A5C0B8C-1 C82-42BE-9FD4-23137CA8ACA5 PENSION FUNDING POLICY Purpose The purpose of this policy is to define how the City's pension funding obligations will be met. As part of its overall compensation plan, the City provides a defined benefit pension benefit to its employees. This benefit is administered by the California Public Employees Retirement System (CalPERS) and funded through contributions from the City and its employees and from investment earnings on those contributions. The CalPERS Board of Administration, under the California Public Employees' Retirement Law (PERL), is responsible for the administration and investment of the funds it receives and determines the amounts contributed by each of the governmental entities that participate in CalPERS. The PERL sets employee contribution rates. The City has two separate plans with CalPERS, one for Safety employees (the Safety Plan) and one for all other employees (the Miscellaneous Plan). Policy It is the policy of the City to fulfill its obligation to maintain fiscally responsible management practices and to ensure that promised retirement benefits are funded. To that end, the City will meet its pension funding obligations as follows: 1.Section 115 Pension Trust: The City has established and will maintain a pension stabilization fund in the form of a Section 115 Pension Trust. Assets in the Section 115 Pension Trust may be used only for pension related costs and at the direction of the City Council. Once the targeted funding level is reached, the earnings on the assets in the Trust may be applied to offset a portion of the City's annual pension contributions to CalPERS or make additional discretionary payments to CalPERS. 2.Actuarially Determined Contributions: Each fiscal year, the City will contribute to CalPERS the amount determined by CalPERS actuaries to be the minimum required employer contribution for that year. The minimum contribution consists of two components, normal cost and unfunded accrued liability (UAL). The normal cost is expressed as a rate that is applied to pensionable payroll costs and reflects the cost of pension benefits earned by employees in the current fiscal year. The UAL payment is a flat dollar amount that represents a portion of the cost of past benefits earned by employees, but for which, because of deviations in actual experience and changes in assumptions about investment performance, the normal cost rates established for those prior years has been determined to be insufficient to provide the promised retirement benefit. The CalPERS actuaries recalculate the total UAL each year and an updated multi-year amortization schedule is provided to show the projected annual minimum payments. 3.Annual UAL Prepayment: CalPERS offers the option to make monthly payments on the UAL or prepay the entire annual amount at a discounted level by the end of July. The City will prepay its annual obligation each year to achieve budgetary savings. The City will transfer an amount equivalent to the budgetary savings from the prepayment to the Section 115 Pension Trust. The transfer to the trust shall be within the same fiscal year the savings are realized. 4.Allocation from Annual Year-end Savings: Upon meeting the City's General Fund Reserve Policy of 30% (20% for operations, and 10% for economic uncertainty), up to 25% (twenty-five percent) of all future year-end savings in General Fund expenditures shall be transferred to the Section 115 Pension Trust subject to approval of the City Council. Year-end savings are determined upon the close of the fiscal year. Special considerations shall be made by the Finance Director each year when determining potential year-end savings so as not to leave any General Fund supported funds (Worker's Compensation and Liability Insurance Fund) with a negative fund balance. EXHIBIT A Resolution No. 2022-16 Establishing Pension Funding Policy City Council Regular Meeting | April 4, 2022 Page 5 of 3 5. Targeted Funding Level: The City’s goal is to achieve and maintain a funded status for each of its plans of between 90% and 100%. A funded status of 100% signifies that the City’s pension assets with CalPERS match its accrued liabilities. 6. Additional Discretionary Payments: CalPERS allows member agencies to make additional discretionary payments at any time and in any amount, which would serve to reduce the UAL and future required contributions. The City will consider this option in the context of its annual evaluation of reserve levels and budgetary requirements. 7. Pension Obligation Bonds (POBs): POBs are a tool that can be used to provide an additional discretionary payment to CalPERS upon the determination that the cost to borrow the funds for the payment is less than continuing to make the projected prescribed UAL payments at the current discount rate. If the City issues POBs, the following guidelines will apply: a. Expert advice and analysis by actuaries and municipal advisors will be utilized to quantify the risk of CalPERS investment underperformance (including discount rate reductions, stock market crashes, or sustained investment underperformance) and the threshold at which the City would be worse off issuing POBs versus not. b. The interest rate on the POBs shall be at least 2% less than the current CalPERS discount rate. c. The final maturity date on the POBs will be no more than the then current term of the UAL. d. The POBs structure will contain an early call provision. e. The POBs shall not finance Normal Costs and shall only be used to refinance unfunded pension liabilities. f. The POBs should provide significant demonstrated cash flow savings. g. The City shall budget and transfer 100% of cash flow savings (determined at bond issuance, not adjusted annually for any new unfunded liability, or change in actuarial assumptions) to be transferred to the Section 115 Trust to bolster the pension trust to mitigate against future UAL likely to occur. The annual transfers should occur until a reserve target amount of $12 million is met, at which time the Council would revisit the policy. h. In the event of an economic hardship, or other unanticipated fiscal emergency, the City Council may make an emergency declaration to reduce the annual transfer to the section 115 trust, only if the existing 10% economic uncertainty reserve in the General Fund is projected to be depleted. This declaration will only apply to the fiscal year in which it was made. Ongoing fiscal challenges will require a second or third emergency declaration. EXHIBIT A DocuSign Envelope ID: 1A5C0B8C-1C82-42BE-9FD4-23137CA8ACA5