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8.B. - Page 18 of 122 Expenditure Projections Rising employee -related costs, due primarily to escalating payments to fully fund benefits for already - retired employees, are the most significant contributor to rising expenditures. The Preliminary Ten -Year Forecast does not include increases to ongoing staff. This section provides information about the City's status and strategy for addressing pension costs and other employee -related costs. Pension Liabilities As shown below, pension benefits are funded by a combination of employer contributions, employee contributions, and investment earnings on those contributions. When there is a gap between the assets available to fund benefits, and the assets needed to fund benefits, the City must make up the difference. Currently, about 16 percent of the City's General Fund goes towards paying for pension benefits; this amount will grow to 20 percent over the next ten years, as required City pension contributions ramp up to fully fund benefits for already -retired, as well as current employees. The City's most recent actuarial report from the California Public Employees' Retirement System (CaIPERS) indicates that the City has an unfunded pension liability of $242.0 million as of June 30, 2017, up from $238.8 million a year prior, an increase of 1.3 percent, and a retiree health liability of $57.6 million. The City's total unfunded pension and retiree health liability is $299.6 million. The increase in the City's unfunded pension liability is due to the lowering of the CaIPERS assumed rate of investment return (otherwise known as the discount rate) to 7.0 percent in FY 2018-19. CAPERS is modifying its investment strategy to a more conservative approach to reduce the likelihood of investment volatility. This is needed to ensure there is cash on hand to pay benefits statewide and to reduce the chance the public agencies will have to fill large gaps when investment returns do not meet projections. The City did not experience an even more significant increase in unfunded liability for two primary reasons: first, actual CaIPERS investment returns performed better than expected at 11.2 percent, which is higher than the assumed rate of 7.0 percent; second, the City made additional annual contributions to CaIPERS, beyond the required annual payment, in the amount of $1.5 million in 2017. City of Redwood City 1017 Middlefield Road, Redwood City, CA. 94063 Tel: 650-780-7000 www.redwoodcity.ore 244