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9.A. - Page 15 of 21 A majority of the increase in the City's unfunded pension liability is due to the lowering of the CalPERS assumed rate of investment return (otherwise known as the discount rate) to 7.0 percent in FY 2018-19. CalPERS modified 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. CalPERS has implemented a new actuarial valuation software system for the June 30, 2018 valuation. With this new system, CalPERS has refined and improved the calculation methodology. Any difference in liability between the old software and new software calculations is captured as a method change line item. For the June 30, 2018 valuation, this method change had a negative impact on the City's pension liability of $3.5 million. The City's unfunded pension liability is primarily related to retired or inactive (employees not currently employed by or retired from the City) employees: 52% of the unfunded liability for the miscellaneous plan (non -safety employees) is associated with retired or inactive employees, and 71% of the unfunded liability for the safety plan (safety employees) is associated with retired or inactive employees. The City's unfunded pension liability is primarily related to retired or inactive (employees not currently employed by or retired from the City) employees: 60% of the unfunded liability for the miscellaneous plan (non -safety employees) is associated with retired or inactive employees, and 73% of the unfunded liability for the safety plan (safety employees) is associated with retired or inactive employees. The City is not unique in facing these pension challenges, and public agencies across the state, including school districts and state agencies, are facing increasing pension costs. The City began reforming pension benefits in 2011, and statewide pension reform occurred in 2013. Though these efforts provide long-term relief, they are not sufficient to fully fund promised benefits. Unfortunately, no statewide pension reform measures appear to be imminent. As a result, it is up to local government agencies to absorb steeply increasing contributions and to implement other strategies that will help place their pension plans on sound financial footing. The City Council has taken a proactive and strategic approach to addressing the City's pension liabilities. The City implemented a second-tier pension formula in 2011 even before the statewide Public Employee Pension Reform Act (PEPRA) was enacted in 2013. As these newer formulas only apply to recent hires, there has been little immediate impact on the City's total pension costs. However, such changes will reduce future liabilities and costs over the long-term. The City has also negotiated cost-sharing agreements with each bargaining group to ensure current employees pay a greater proportion of pension costs. Employees contribute between 8.0 and 18.0 percent of their salary toward their pension benefits, depending on bargaining unit and pension tier. Although these cost-sharing agreements represent important commitments by City employees to help pay for their pension benefits and assist the City in paying the required annual payments to CalPERS, such arrangements do not provide any additional payment toward the City's unfunded liabilities. In September 2017, the City Council approved establishing a Section 115 pension trust account with Public Agency Retirement Services (PARS) to pre -fund the City's pension obligations over time. An initial trust deposit of $10.5 million was made in January 2018, including $8.8 million from the General Fund and $1.7 Page 15 of 20 City of Redwood City 1017 Middlefield Road, Redwood City, CA. 94063 Tel: 650-780-7000 www.redwoodcity.org 704