City of Culver City, California
Agenda Item Report
Meeting Date: 06/28/2010 Item Number: C-10
CITY COUNCIL AGENDA ITEM: Approval of a Professional Services Agreement
with Bartel Associates, LLC for Actuarial Services.
Contact Person/Dept.: Jeff Muir Phone Number: (310) 253-5865
Fiscal Impact: Yes [X] No [] General Fund: Yes [X] No []
Public Hearing: [] Action Item: [] Attachments: [X]
Commission Action Required: Yes [] No [X] Date: _______________
Public Notification: (E-Mail) Meetings and Agendas – City Council (06/23/10); (E-Mail)
Bartel Associates, LLC (06/23/10)
Department Approval:
Jeff Muir (06/11/10)
City Attorney Approval:
Carol Schwab (by H. Baker) (06/16/10)
Chief Financial Officer Approval:
Jeff Muir (06/11/10)
City Manager Approval:
P. Lamont Ewell (06/23/10)
RECOMMENDATION:
Staff recommends the City Council approve a professional services agreement with
Bartel Associates, LLC for Actuarial Services.
BACKGROUND:
The stock market and poor investment decisions have greatly impacted the value of
assets held by CalPERS for the payment of current and future retirement benefits.
As of June 8, 2010, the fund had $198.3 billion in assets, down 24% from a peak of
$260.4 billion on Oct. 31, 2007. Additionally, CalPERS is revisiting current actuarial
assumptions about investment earnings (and will likely lower the assumption) and
the expected lifespan of annuitants (requiring longer payout timeframes).
Given these facts, it is expected that CalPERS will need to either (1) increase
revenues to the Fund, or (2) decrease expenditures (i.e. reduce benefits) from the
Fund (or both). Since a reduction in benefit levels is very difficult to implement,
CalPERS will most likely seek to increase Fund revenues. Revenue can be
increased by improving investment earnings above target return rates (which since
2007 has proven difficult to achieve) or (a much more likely scenario) increase
employer contribution rates. In order to remain actuarially sound and meet benefit
payment requirements, CalPERS has increased, and will likely continue to increase
the required contributions from employers.
Under prior CalPERS requirements, such increases would have been immediately
implemented in the Fiscal Year 2011/2012 rates. Given the state of the economy City of Culver City, California
Agenda Item Report
and fiscal hardship faced by municipalities and the State of California, CalPERS
implemented a modified smoothing policy to gradually increase the employer
contribution rates. On August 25, 2009, CalPERS released Circular Letter 200-056-
09 entitled: “Impact of Economic Environment on Employer Rates and New Board
Approved Smoothing Modifications.” This letter provided information that would
allow an agency to estimate the projected increases that would be implemented from
Fiscal Year 2011/2012 through 2014/2015.
DISCUSSION:
While staff has used this CalPERS Circular to estimate the future effect of the rate
increases, it is recommended than an actuary be engaged to provide a formal report
to the City Council.
The Chief Financial Officer contacted Bartel Associates, LLC, a highly regarded
actuarial consulting firm, to provide the professional services necessary to create a
report explaining what has happened to City contribution rates, including what
options the City has and where future rates will likely go through the 2015/2016
Fiscal Year. Several years ago, Bartel Associates, LLC provided actuarial services
to the City regarding preliminary retiree medical cost information as the City
prepared to implement GASB Statement No. 45.
Pursuant to Section 3.07.070 of the Culver City Municipal Code, because this is a
professional services agreement it is exempt from the formal bidding process. A
contract term of one year is recommended, although the report should be completed
within one to two months.
FISCAL ANALYSIS:
The base fee estimate is not-to-exceed $7,000. It is recommended a $1,000
contingency also be authorized in case an additional on-site presentation is required
or there are minor work scope changes requested by the Chief Financial Officer.
The total not-to-exceed authorization request is $8,000. Sufficient funds for this
agreement are available in the Fiscal Year 2009/2010 Finance Department budget.
ATTACHMENTS:
CalPERS Circular Letter 200-056-09.
MOTION:
That the City Council:
City of Culver City, California
Agenda Item Report
1) Approve a professional services agreement with Bartel Associates, LLC to
provide actuarial services in an amount not to exceed $8,000; and,
2) Authorize the City Attorney to review/prepare the necessary documents; and,
3) Authorize the City Manager to execute such documents on behalf of the City.
MEETING DATE: 06/28/2010
AGENDA ITEM: Award of a Professional Services Agreement to
Bartel Associates, LLC for Actuarial Services.
ATTACHMENTS
1. CalPERS Circular 200-056-09 1-4
California Public Employees’ Retirement System
www.calpers.ca.gov
P.O. Box 942709 Date: August 25, 2009
Sacramento, CA 94229-2709 Reference No.:
888 CalPERS (or 888-225-7377)
Telecommunications Device for the Deaf Circular Letter No.: 200-056-09
No Voice (916) 795-3240 Distribution: I, IA, IIB, VI
www.calpers.ca.gov Special:
Circular Letter
TO: ALL PUBLIC AGENCIES
SUBJECT: IMPACT OF ECONOMIC ENVIRONMENT ON EMPLOYER
RATES AND NEW BOARD APPROVED SMOOTHING
MODIFICATIONS
ATTENTION: FINANCE DIRECTORS, HUMAN RESOURCE DIRECTORS,
PUBLIC AGENCY DECISION MAKERS
CalPERS is sending this circular letter as a result of the CalPERS Board of
Administration’s decision at its June meeting to take steps to mitigate the impact of
recent investment market declines on our public agencies’ employer contribution rates.
BACKGROUND
As you are no doubt aware the past 18 months have seen significant investment market
volatility and asset value declines for all investors, CalPERS included. In an effort to
provide an early warning of potential employer rate increases CalPERS issued Circular
Letter 310-050-08 on October 6, 2008 in order to inform public agencies of the
CalPERS investment policy and strategy during the market decline. That Circular Letter
also addressed the impact of financial market volatility on employer contribution rates
and on the security of retiree benefits. The dramatic projected increase in employer
contribution rates prompted CalPERS to examine our current approach and provide
alternatives for consideration that might phase in the impact of investment losses while
also allowing some time for the economy to recover.
Although our investment horizon is long term we recognize that investment returns over
the short term fluctuate and lead to volatile employer contribution rates. To counter this,
CalPERS employs a rate smoothing approach which spreads investment returns over a
15 year period. In addition excess returns or shortfalls and other gains and losses to our
pension plans are paid for over a 30 year period which resets annually. We do this
because we expect these deviations from the long term average to cancel each other
out over time.
Circular Letter #200-056-09 -2- August 25, 2009
California Public Employees’ Retirement System
www.calpers.ca.gov
FISCAL YEAR 2008/2009 INVESTMENT RESULTS
CalPERS has released preliminary (net of fees) investment returns for the 2008/2009
fiscal year of negative 23.4%. The final return for the year will not be known until
October when our final Real Estate and Alternative Investment Management (AIM)
investment returns are available. Both the Real Estate and AIM returns lag one quarter
as is industry standard. Such an extraordinary one-time event has put enormous strains
on our economy, businesses, individuals, and local governments. While our smoothing
approach works well during normal economic cycles and has produced very stable
employer contribution rates, such a unique event calls for a deviation from the usual
approach.
Rest assured that, despite the downturn, retirement benefits are secure and CalPERS
has more than enough assets on hand to pay benefits well into the future. CalPERS
continues to manage a well diversified portfolio and maintain a prudent, long term
investment strategy in order to ensure the financial security for those we serve.
WHAT IS CALPERS GOING TO DO?
To deal with this one time event the CalPERS Board has approved an enhancement to
our current smoothing methodology.
• Use a 3-year phase in of the 2008 – 2009 investment loss and allow some time
for the economy to recover. This phased in approach will be achieved by
temporarily relaxing the constraints on the smoothed value of assets around the
actual market value. This corridor which constrains the smoothed value of assets
will be allowed to expand and then contract with the following conditions.
1. Increase the corridor limits for the actuarial value of assets from 80%-120% of
market value to 60%-140% of market value on June 30, 2009 which impacts
the 2011 – 2012 contribution rate
2. Reduce the corridor limits for the actuarial value of assets to 70%-130% of
market value on June 30, 2010 which impacts the 2012 – 2013 contribution
rate
3. Return to the 80%-120% of market value corridor limits for the actuarial value
of assets on June 30, 2011 and thereafter which impacts the 2013 – 2014
and fiscal years beyond contribution rates
• Isolate the asset loss outside of the 80% - 120% corridor and pay for it with a
disciplined fixed and certain 30 year amortization schedule. It is prudent for
2008-2009 Fiscal Year investment losses to be subject to a more stringent
funding schedule and that they should be paid for in full at the end of the 30
years. In this way we will not rely on future investment returns to pay for 2008-
2009 investment losses. Circular Letter #200-056-09 -3- August 25, 2009
California Public Employees’ Retirement System
www.calpers.ca.gov
HOW WILL THIS AFFECT YOUR AGENCY?
Below we provide a table that can be used to gauge your agency’s expected increase in
employer contribution rate under the new smoothing approach due to the recent
investment losses. (Note that the increase in employer contribution rates below would
be added to your current rate.)
The illustrated rates are for a generic public agency based on its volatility index. The
volatility index (VI) is the agency’s assets divided by payroll and provides a measure of
how sensitive an agency’s contribution rate will be due to investment returns. (For
pooled plans the VI is the volatility index of the entire pool). Your agency’s volatility
index is provided in your annual actuarial report but a rule of thumb is that a typical
miscellaneous plan has a volatility of between 2.5 and 5, an AB616 formula (2.5% @
55, 2.7% @ 55 and 3% @ 60) miscellaneous plan between 4 and 6 and that of a safety
plan between 5 and 10. The chart below shows the projected increase in employer
contribution rates for fiscal years 2011-2012 through 2014-2015 assuming CalPERS
earns 7.75% after 2008-2009. As an extreme example we have included a plan with a
volatility index of 15.
Projected Increase in Employer Contribution Rate for Public Agencies
Fiscal Year VI of 4 VI of 6 VI of 8 VI of 10 VI of 15
2011 - 2012 1.0% 1.5% 1.9% 2.4% 3.7%
2012 - 2013 1.6% 2.5% 3.3% 4.1% 6.1%
2013 - 2014 1.7% 2.6% 3.4% 4.3% 6.4%
2014 - 2015 0.2% 0.3% 0.4% 0.6% 0.8%
Again, these increases are cumulative. For example, suppose your agency’s plan has a
volatility index of 4. Referring to the table above, under the VI of 4 column, you can
expect to see a 1.0% of payroll increase in your current employer contribution rate for
FY 2011-2012, an additional 1.6% increase in FY 2012-2013, another 1.7% increase in
FY 2013-2014. The cumulative expected increase in your employer contribution rate at
the end of the three fiscal years is the sum of these individual increases or 4.3% in this
case. Because of our 15 year smoothing method, additional losses will continue to be
recognized, but not as severely as the first three years. Without future investment
gains, your rate will continue to increase by about .2% per year for 15 years.
As identified above, preliminary investment returns do not include the quarter lag for
Real Estate and Alternative Investment Management (AIM). However, we have built
additional conservatism into the chart above to reflect additional losses which we
anticipate will be incorporated into the final return. We have used a negative 28%
return to generate the chart above.
Circular Letter #200-056-09 -4- August 25, 2009
California Public Employees’ Retirement System
www.calpers.ca.gov
Please be aware these are only estimates and we do not know the final return on
investments. Your employer rate will also differ due to your own demographic
experience or if you are in a pool, due to the pool’s demographic experience.
As of the most recent actuarial valuation there are only three public agencies with
volatility indexes greater than 15. If your particular agency has a volatility index greater
than 15 or if you have other questions you may want to contact your CalPERS plan
actuary.
In short the new method will provide short-term relief to local government and school
employers while strengthening the long-term financial health of the pension fund.
If you wish to discuss these issues further, please contact your CalPERS actuary at
888 CalPERS or (888-225-7377).
Ronald L. Seeling, Chief Actuary
Actuarial & Employer Services Branch