CALPER’s latest actuarial report for the Misc Pension Plan shows remarkable progress in reducing the unfunded pension liability. To refresh your memory as of June 30, 2019 the unfunded pension liability for the Misc Plan was $35.9m and had a funded ratio of only 67.9%. Things looked very bleak for sure.
It was at that time the LGCA strongly advocated to make an additional discretionary payment of $10.4 M to aggressively reduce the unfunded pension liability. Councilmember Rob Rennie objected to this, preferring to hold the excess cash in reserve to make smaller ADP’s over time.
This argument made no financial sense to us because CALPERs was charging the Town 8% interest on the unfunded liability while the Town was only making approximately 1% on the invested excess cash. The interest arbitrage was material, and the Town desperately needed to increase its overall asset exposure to potential market rate returns. That meant making an additional discretionary payment.
The core problem was the Town did not have enough assets exposed to the markets and as a result the Town had little chance to earn more than the 8% being charged on the unfunded pension liability, let alone keep up with the annual increases in total pension liability as service costs increased. This is why the funded ratio had been declining over the prior years.
Calpers 2019 actuarial report which is attached, projected that it would take until 2042 and a total of $53.4m in amortization payments (including $22.6m in interest expense) to pay off the unfunded liability, assuming everything went right. You can see these numbers on the attached amortization table.
Thankfully the Council agreed with the LGCA position and made a $10.4m ADP to the Misc Plan ($4.8m in FY 20 and $5.6m in FY 21). These additional payments were then exposed to a very strong 21.4% return in FY 21 which significantly increased the total market value of all of the assets in the plan.
As a reference point, as of June 30, 2019 the FMV of all assets in the Plan was $76.1m and by June 30, 2021 the FMV had increased to $106.2m! That is a staggering $30.1m increase or 40% in 2 years! Of this $30.1m increase, the ADP accounted for approximately 42% or roughly $12.6m.
The net result was that as of June 30, 2021 the Misc Plan’s unfunded pension liability decreased to $15.5m from $35.9m which is a 57% decrease in just two years!
More importantly, if you look at the new FY 21 amortization table which is attached, CALPERs is now projecting that the Misc Plan’s unfunded liability could be fully amortized by 2032 (10 years sooner) with a total payment of only $16.7m (of which interest expense would be only $3.9m). The total reduction in amortization payments went from $53.4m to $16.7m, which is a $36.7m total savings!
In summary, the incremental $10.4m ADP has saved the Town a total of $18.7m in total interest expense while decreasing the amortization period by approximately 50%. This translates into a gross Money on Money return of 180% on the $10.4m ADP investment.
I want to close by saying this only happened because of the LGCA’s hard work in educating the Council on the benefits of making a large ADP along with the strong support of the Finance Commission. This shows that better decisions can be made when knowledgeable members of the public are allowed to participate in critical financial decisions.
Let’s build on the success we have achieved in addressing the unfunded pension liability as we now wrestle with the annual operating deficits.