The City contracts with the California Public Employees Retirement System (CalPERS or “PERS”) to offer a defined benefit retirement plan to full-time City employees.  The City’s relationship with CalPERS dates back to 1958.  Defined Benefit Plans (DBPs) are pension plans in which an employee receives fixed benefits that are based on length of service and salary earned at the time of retirement. 

Benefit formulas vary by Classification (“Miscellaneous” or “Public Safety”) and by the date an employee entered into CalPERS membership (“Classic” or “PEPRA”, if 2013 or later).  In a defined benefit plan, an employer promises future benefit payments based on an agreed upon formula (for example, 2.5 percent of salary x the number of years of service = amount of pension payments) during retirement.

1. City Normal Cost: CalPERS establishes an employer rate which the City must pay for each participating employee.  The normal cost is an estimated percentage of salary based on the employee pool (age, salary, investment returns, etc) and is determined by periodic actuarial valuations under state law. 
2. Employee Contribution: Employees also contribute toward pension related costs (including any cost sharing agreements).  The percentage varies depending on the pension formula.  It is subject to the City's negotiated memorandums of understanding with applicable employee groups.
3. Unfunded Accrued Liability (UAL): Historically, more than 60% of all funds paid to CalPERS retirees comes from investment earnings.  When actual investment returns are below an assumed rate of return (currently 6.8%) an unfunded accrued liability (UAL) is created and future required contributions are necessary to amortize the UAL. Conversely, when actual investment returns are above the assumed rate of return, a negative UAL is generated and is amortized by a reduction in the employer normal contribution rate and the future required contributions will decrease.

Source: https://www.calpers.ca.gov/page/about/organization/facts-at-a-glance/pension-buck

In the late 1990's and early 2000's CalPERS was realizing significant success with its investment returns. As of 1999 their investment returns averaged 13.5 percent for a decade, and plan funding was often more than 100 percent for most plans.  Funded status in excess of 100 percent is referred to as "super-funded." However, during the Great Recession and resulting downturn in the economy, investment returns were impacted negatively nationwide, including CalPERS investments, decreasing the City’s total plan assets and creating an unfunded liability. 

In addition to the investment losses, adjustments have been made to demographic assumptions such as retirement rates, and the expectation that retired employees are living longer, contributing to the increasing costs.

The City has taken several steps to address the UAL pension costs. These have included:

Lower Benefits for Employees. Taking advantage of state legislation, two new lower benefit tiers have been established with CalPERS: Tier 2 Employees hired in 2011-12 (depending on employee group) are required to pay the full employee contribution upon hiring.  Tier 3 was created in 2013 as a result of the California Public Employees' Pension Reform Act (PEPRA) and establishes a reduced tier of benefits for new CalPERS employees. The employee share for PEPRA employees is higher than that for Tier 1 and Tier 2 employees.

Employee Cost Sharing. In 2018, to help address the long-term budget impacts resulting from CalPERS pension liabilities, the Firefighters Association, Police Officers Association, and Maintenance & Operations bargaining units agreed to share in the costs of the employer's CalPERS contribution. Before the agreements, Classic CalPERS Safety members contributed 9%, and Classic CalPERS Miscellaneous members contributed 8% of their salary towards the employee's retirement benefit. The amount increased by 1% each year until the additional contribution reached 3% for each group. Classic CalPERS Safety members are currently contributing 12%, and Classic CalPERS Miscellaneous members contribute 11% towards their CalPERS retirement benefit.

Prepayments to CalPERS. Since FY2017/18 the City has prepaid the annual Unfunded Accrued Liability payment at the beginning of each fiscal year to save 3.5% ($800,000/year).

• The Successor Agency Loan Repayment.
• Proceeds from the sale of City property belonging to the General Fund.
• Any General Fund surplus realized at the end of each fiscal year.

Every Year. Implement operational efficiencies, where possible, to minimize costs and impact to service levels as CalPERS costs increase.

According to CalPERS's June 2020 Actuarial Reports, the total estimated cost for the City of Escondido to leave CalPERS exceeds $1 billion.  Additional information can be found in the City’s CalPERS Annual Valuation Reports for the Miscellaneous Plan and Safety Plan as of June 2020 under the title “Hypothetical Termination Liability.”

• The “California Rule”, a term defined by California case law, does not allow public agencies to reduce the benefits of retired or current members.
• By State law, the City can only offer retirement benefits that PERS itself allows the City to offer.  All full-time employees MUST be placed in the PERS system and offered a defined benefit pension as the law stands today.
• In order to offer a new retirement benefit for employees, the public agency will need to make the full exit payment to CalPERS (estimated to be more than $1 billion) while also funding the replacement benefit program. This means that CalPERS would not be offered to current and new employees and instead those employees would be part of a defined contribution retirement plan, like a 401K plan.

Actuarial Report – An actuarial valuation is a type of appraisal which requires making economic and demographic assumptions in order to estimate future liabilities. The assumptions are typically based on a mix of statistical studies and experienced judgment.

California Rule – The California Rule is the result of a 1955 court case (Allen v. City of Long Beach) that concludes that an employee’s pension benefit as of the date of hire constitutes a contractual obligation. The California Supreme Court ruled that “Changes in a pension plan which result in a disadvantage to employees should be accompanied by comparable new advantages”. The 1955 ruling is currently being contested.

Defined Benefit Plan (DBP) – A type of pension plan in which an employer promises a specified monthly benefit upon retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age.

Defined Contribution Plan (DCP) – A type of retirement plan in which a certain amount or percentage of money is set aside each year by a company (or employee) for the benefit of each of its employees. Benefits directly depend upon individual investment returns.

Discount Rate – Also known as the expected rate of return or the assumed rate of return. It is the estimated long-term average return expected to be earned on investments.

Employee Contribution – The portion of Normal Cost required to be paid by the employee, subject to the local agencies negotiated memorandums of understanding with applicable employee groups.

Employer Contribution – The employer must pay the portion of the Normal Cost, determined by periodic actuarial valuations under state law and based on the agency's benefit formulas and employee groups covered.

Funded Ratio – Percentage of assets available today to pay all of the pension benefits promised to employees.

Normal Costs – The annual cost of service accrual for the upcoming fiscal year for active employees. The Normal Cost should be view as the long-term contribution rate for existing employees.

Pension Obligation Bond (POB) – is a taxable bond that some state and local governments have issued as part of an overall strategy to fund the unfunded portion of their pension liabilities by creating debt.

PEPRA - Public Employees’ Pension Reform Act of 2013 – A pension reform bill that went into effect January 1, 2013. The bill impacts new public employees and establishes a limit on the amount of compensation that can be used to calculate a retirement benefit.

Super-funded – A term used to describe periods in which total available CalPERS assets exceed the total CalPERS liability.

Unfunded Accrued Liability (UAL) – Portion of the plan’s unfunded liability that is not funded by the plan’s asset value.