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8.A. - Page 24 of 42 The City can anticipate increased pension contribution requirements because of investments losses experienced by CalPERS for the fiscal year ended June 30, 2020, due to COVID-19. CalPERS assumes 7 percent annual investment returns in determining the City's annual required pension contributions. However, CAPERS has reported a rate of return of 4.5 percent for the fiscal year ended June 30, 2020. The City's annual required contributions will not be impacted by this underperformance until FY 2022-23. The impact of this underperformance in FY 2019-20 results in estimated increases in annual required contribution amounts of $220,000 starting in FY 2022-23, increasing to $1.5 million in FY 2026-27. The total impact to the City is a total increase in annual contributions of $25.4 million over a 20 -year period. These estimated increases have been included in the Preliminary Ten -Year Forecast. Accelerating payments toward unfunded liabilities allows the City to control future required contribution increases, to a certain extent, and to realize interest savings over time, much like making additional payments on a home mortgage. During the FY 2019-20 budget adoption process, the City Council adopted an ambitious pension plan funding strategy to make higher additional annual contributions (beyond the budgeted $1.5 million to the Section 115 trust account and CaIPERS) directly to CAPERS over the next 18 years to accelerate the payoff period. This approach is estimated to save the City approximately $38 million in interest payments and allow the City to fully fund pensions approximately three years earlier. The City Council acknowledged that adopting this strategy would be a challenge, given that it would require greater contributions, even though the annual budget projections indicate a potential deficit for most of the next 18 years. Adopting this goal requires an even stronger commitment to significant revenue increases and cost reductions. Even though the City is experiencing negative impacts on operating revenues, the accelerated 18 -year payoff strategy is still in place. The strategy is revisited annually as annual contribution projections change and may be altered in future years. In Fiscal Years 2022-23 through 2024-25, the City does not have any estimated additional payments, as certain existing amortization bases will be paid off (amortization bases consist of pension plan components used to project the City's annual unfunded liability). The City's additional payments would ramp up again in FY 2025-26 as new bases are created. In the Preliminary Ten -Year Forecast, minimum additional contributions of $250,000 have been estimated, as contingency, for the years that additional payments are not required. Other Post -employment Benefit (OPEB) Liabilities — Retiree Health A second category of retirement -related benefits that affect the City's finances is the City's retiree health program. The City currently provides eligible retirees with reimbursement of their medical insurance premiums, subject to their collective bargaining agreement, which includes a maximum reimbursement amount. In 2010, the City established a Section 115 OPEB trust account through the California Employer's Retiree Benefits Trust (CERBT) program to fund retiree health benefits. As of December 31, 2020, there was a balance of approximately $52.3 million in the trust account. As of the most recent actuarial report, June 30, 2019, the City's unfunded liability for these benefits was $49.5 million. Page 24 of 28 .AMAL . City of Redwood City 1017 Middlefield Road, Redwood City, CA. 94063 Tel: 650-780-7000 www.redwoodcity.ore 555