CalPERS uploaded the 2020 Actuarial Valuation Reports into agencies’ MyCalPERS portals during the week of August 9, 2021. Here is an overview of what you will find in the reports:
- The Unfunded Accrued Liability (“UAL”) continues to go up. CalPERS added two new amortization bases to both the Miscellaneous and Safety plans of the pool members:
- ~Investment Loss Base increased the UAL by approximately 2.45% of the plans’ 2019 assets, accounting for the investment underperformance during the 2020 fiscal year.
- ~Non-Investment Loss Base increased the UAL by approximately 0.45% of the plans’ 2019 assets, accounting for the difference between the actual combined pool plan experiences (demographics, salary increases, etc.) and CalPERS’ actuarial assumptions.
- ~Overall, for every $1 million of pension plan assets, the UAL went up by approximately $29,000.
- The newly added UAL balances immediately started accruing interest at 7%. CalPERS continues to delay collecting payments on the new bases, exacerbating the UAL problem through negative amortization.
- The 2020 Reports do not reflect the recently announced 2021 strong investment returns and the automatic reduction of the CalPERS discount rate to 6.8%, which did not go into effect until July 1, 2021. All calculations in the 2020 Reports are still based on the 7% discount rate.
- The impacts of the COVID-19 pandemic on the pension plans are still largely unknown and not reflected in the 2020 Reports.
- CalPERS reiterates that it is still going through the Asset Liability Management review process and Experience Study, the results of which it expects to announce in November 2021. The outcomes may include assumption and discount rate changes. Our contacts within CalPERS indicate that the automatic discount rate reduction to 6.8% is likely to be just the starting point. The pension system is likely to announce an additional discount rate reduction in November, increasing the UAL further.
You can take the following actions to reduce your agency’s future UAL costs:
- Make the annual prepayment of the 2022-23 UAL Payment before July 31, 2022 to take advantage of the CalPERS’ early payment 3.326% discount.
- Ask your CalPERS actuary to put the 2020 Investment Loss base on the level repayment schedule, rather than ramp-up. This will eliminate a portion of the negative amortization impact.
- Make additional discretionary contributions for the 2020-21 and 2021-22 interest accrued on the 2020 Investment Loss and Non-Investment Loss bases and ask your CalPERS actuary to apply the payments against these bases. This will address the remainder of the negative amortization impact.
While you cannot prevent future UAL increases, you can prepare for them and make them less costly.
Ridgeline Municipal Strategies, LLC is a municipal advisory and financial consulting firm helping cities, water and wastewater agencies, and fire districts in California with financial planning and financing for infrastructure, facilities, and equipment. Contact us to learn more about our pension cost optimization services and how your agency can save money on its CalPERS UAL.
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