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8.A. - Page 38 of 104 3. CalPERS Pension and Retiree Health Liabilities The City's most recent actuarial report from the California Public Employees' Retirement System indicates that the City has an unfunded pension liability of $274.3 million as of June 30, 2019, up from $264.5 million a year prior, an increase of 3.7 percent, and a retiree health liability of $49.5 million. The City's total unfunded pension and retiree health liability is $323.8 million, up from $314.0 million a year prior, an increase of 3.1 percent. The City's overall funded status for its pension plans is 65.0 percent, up slightly from 64.7 percent the prior fiscal year. CalPERS Unfunded Actuarial Accrued Liability (millions) A majority of the increase in the City's unfunded pension liability is because CalPERS lowered the 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. 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 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 BUDGET MESSAGE ?4b7 Miscellaneous Plan Safety Plan 6/30/18 6/30/19 Actuarial Accrued Liability $359.1 $423.9 Market Value of Assets $243.7 $265.0 Unfunded AAL $115.4 $158.9 Funded Ratio 67.9% 62.5% A majority of the increase in the City's unfunded pension liability is because CalPERS lowered the 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. 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 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 BUDGET MESSAGE ?4b7