webinar: cclc program update pension rate …

Community College League of California ▎ 1

October 18, 2016

WEBINAR: CCLC PROGRAM UPDATE PENSION RATE STABILIZATION PROGRAM


The PARS-CCLC Pension Rate Stabilization Program (PRSP) is a first-of-its kind, IRS-approved trust program which is designed to pre-fund pension obligations.

Offered to community college districts in partnership with the Community College League of California, this presentation will address:

—  Background on Program

—  Reasons to Pre-fund Pension

—  PRSP Program Structure

—  Investments

—  Advantages

Webinar Topics


Background on PRSP •  Community colleges dealing with contribution rate impacts (STRS/PERS) on

their budgets •  The Chancellor’s office recommended that colleges plan ahead for long term

ongoing liabilities such as for pension and OPEB by setting funds aside •  New GASB 68 specifies that public agencies must disclose Net Pension

Liability on financial statements starting in FY 2014/15

•  Community College League surveys members on the issue, significant interest in concept of trust to fund future pension costs - May 2015

•  The league joins with PARS which was developing first-in-nation multiple

employer trust •  CCLC PARS Pension Rate Stabilization Program launched summer of 2015


Background on PRSP

•  PARS receives first IRS Private Letter Ruling of concept for multiple employer trust – June 2015 approval

•  California water district obtains the first single employer trust IRS Private

Letter Ruling •  First public agencies begin to fund into these trusts – Spring 2015 •  CalPERS also does large scale survey to assess interest and concerns

•  Over 50 colleges, schools, cities, counties and special districts in CA have joined the trust and growing quickly – as of October 2016

•  Fastest growing retirement-related program in California


Community College District’s PRSP

Community College League

of California

PARS Trust Administrator

& Consultant U.S. Bank

Trustee/Custodian

Investment Manager

PARS PRSP Providers


Fiscal Year CalSTRS

2013-2014 8.25%

2014-2015 8.88%

2015-2016 10.73%

2016-2017 12.58%

2017-2018 14.43%

2018-2019 16.28%

2019-2020 18.13%

2020-2021 19.10%

Why should CCDs Prefund Pension?

STRS rate increases through 2020-21:


Fiscal Year CalPERS

2013-2014 11.44%

2014-2015 11.77%

2015-2016 11.85%

2016-2017 13.05%

2017-2018 16.60%

2018-2019 18.20%

2019-2020 19.90%

2020-2021 20.40%

Why should CCDs Prefund Pension?

PERS rate increases through 2020-21:


•  The burden of the solution is clearly on the employers

•  As intended under AB 1469, of the 2013 CalSTRS unfunded liability of $74 billion: •  $47 billion – or 63% – will be funded

by employers •  $20 billion – or 27% – will be funded

by employees •  $8 billion – or 10% – will be funded

by the state

•  No specific funds are provided for this cost increase

CalSTRS funding burden

0%

5%

10%

15%

20%

2013

-14

2014

-15

2015

-16

2016

-17

2017

-18

2018

-19

2019

-20

2020

-21

Contribution Rates

•  Unfunded liability increased from $22.5B in 2008 to $70.5B in 2012.

•  AB 1469 was passed in 2013 to increase the “shared” contributions by the state, employers and employees by $5.5 billion from the existing $2.2 billion, beginning as of July 1, 2014 and to be phased in over seven years through 2020-21.


CalPERS employer rate increases •  The employer contribution to CalPERS was expected to increase to 13.05% in 2016-17

from 11.847% in 2015-16

•  The actual employer contribution rate for 2016-17 is higher than anticipated, at 13.888%

*CalPERS-provided estimates, April 2016

Actual Estimated

2015-16 2016-17 2017-18 2018-19 2019-20 2020-21

11.847% 13.888% 15.5% 17.1%* 18.6%* 19.8%*


Annual pension costs increase from $11.5 million to $17.6 million in 4 years

*  Assuming Academic Salaries (including Certificated Managers) totaling $62.7 million do not change year over year *  Assuming Classified Salaries (including Classified Managers) totaling $27.7 million do not change year over year *  Based off Total 2016-17 Estimated Actual Salaries including Restricted and Unrestricted Staff from the 2016-17 Adopted Budget.

$7,888,361 $9,048,414 $10,208,467 $11,368,520 $11,976,764

$3,616,653

$4,600,494 $5,043,915

$5,515,050 $5,653,619

$0

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

$14,000,000

$16,000,000

$18,000,000

$20,000,000

2016-2017 2017-2018 2018-2019 2019-2020 2020-2021

PERS

STRS

How do rate increases affect your district?


Three options for districts

Set aside reserve funds 2

Fund into Pension Rate Stabilization (PRSP) Account 3

1 Pay-as-you-go


Reserve account vs. PRSP

Reserve Account PRSP Trust

General fund investing restrictions Govt. Code Section 53216

Fixed income only Fixed Income or diversified

Investments not tailored for long term Can be tailored for short or long term

Revocable Irrevocable

Accessed for other uses Dedicated solely to pension costs

Not free from creditors Exclusive benefit/free from creditors

No corporate trustee Corporate trustee to mitigate fiduciary risk

No impact on GASB 68 Impact on GASB 68


Structure of the PRSP trust

•  IRC SECTION 115 - A governmental trust designed specifically to be used for pension funding whereby any income derived is tax exempt

•  IRREVOCABLE - To comply with GASB rules, trust was set up as irrevocable which means that once contributions are placed into trust, assets can only be used for retirement plan purposes

•  MULTIPLE EMPLOYER - Based on proprietary model that PARS has used since 1990

o  Separate accounts - Program is aggregation of separate accounts with

centralized administration and pooled investments

o  No risk sharing - Each employers contributions provide benefits only for employees of that employer. There is no cross-liability or joint liability among participating public agencies and no sharing of assets


The PARS PRSP Trust offers a variety of services:

Consulting Document Preparation

Investment Management Investment Fiduciary

Trustee Services Custodian Services

Ongoing Compliance Monitoring Disbursement Processing

Funding Processing Contribution Processing

Comprehensive Services


Approaches to pre-funding

•  Leave the funds to accumulate over years without anticipated short term disbursement

•  Rainy day use: Allow the assets to grow over a period of years, but make disbursements during tough economic or budgetary times

•  Annual rate increases payback: Make disbursements to cover only the rate increase amounts

•  Total annual pension costs: Make disbursements to cover annual pension costs

•  Fixed income if short term need for funds

•  Diversified if longer term need for greater long term returns

•  Conservative portfolio with limited equity exposure most common


1 Address Long-Term Costs STRS/PERS costs are a long term burden beyond 2020 and prudent diversified investment planning is to current and future management of obligations.

2 Deal with GASB 68 Liability GASB 68 now requires CCDs to report their net pension liability on their financial statements

3 Protect from Diversion Funds are protected from diversion to other uses and curtails stakeholder pressure to use funds in other ways

4 Have a Rainy Day Fund Assets can be used as an emergency source of funds for pension-related costs when District revenues are impaired based on economic or other conditions

Why prefund pension obligations?


Why prefund pension obligations?

5 Stabilize Costs When contribution rates increase, assets can be transferred from the program to CalPERS/CalSTRS, which can help to pay large contribution increases

6 Lower Net Pension Liability Contributions placed into an exclusive benefit trust are considered assets that offset an unfunded net pension liability (NPL) under GASB 68

7 Achieve Better Returns Prefunding with PRSP enables diversified investing that may achieve greater returns than LAIF or County Treasury Pools

8 Strengthen Credit Rating & Accreditation Credit rating agencies and accreditation may look more favorably upon districts who take steps to reduce liabilities


$5,500,000

$5,750,000

$6,000,000

$6,250,000

$6,500,000

$6,750,000

1 Year 2 Year 3 Year

County Treasury Pool (0.77% return)

Vanguard Fixed Income (4.09% return)

U.S. Bank Fixed Income (3.33% return)

Graph showing asset accumulation for sample CCD after 3 years of funding

Note: Ending balances for Vanguard and U.S. Bank strategies take into account PARS PRSP program fees. Portfolio returns are based on 3-year return as of June 30, 2016.

Funding with pars vs. laif/county treasury pool


Graph showing asset accumulation for sample CCD after 3 years of funding

Note: Ending balances for Vanguard and U.S. Bank strategies take into account PARS PRSP program fees. Portfolio returns are based on 3-year return as of June 30, 2016.

Funding with pars vs. laif/county treasury pool

$5,500,000

$5,750,000

$6,000,000

$6,250,000

$6,500,000

$6,750,000

1 Year 2 Year 3 Year

County Treasury Pool (0.77% return)

Vanguard Conservative (6.21% return)

U.S. Bank Conservative Income (4.07% return)


1. Active Managed Portfolios

U.S. Bank, the program trustee, when acting on a discretionary basis, offers managed portfolios and provides oversight of the investment process. Portfolios have been designed exclusively for the PARS PSRP.

Investment Option A: Investment Option B:

This non-advisory approach offers very low costs with portfolios comprised of institutional class, index-based, mutual funds and the following target asset allocations:

U.S. Bank Vanguard

(a) Conservative Income (b) Income (c) Balanced (d) Growth

2. Low-Cost Index/ETF Portfolios

(a) Conservative Income (b) Income (c) Balanced (d) Growth

3. Fixed Income Portfolio

4. Customized Approach*

(a) Fixed Income (b) Conservative (c) Balanced (d) Growth

Portfolios

* Available according to asset size


1 District contacts PARS or CCLC to schedule individual follow-up meeting (or request resolution if ready to proceed).

2 PARS and CCLC meet with District staff to further discuss specific plan and funding.

3 PARS provides plan and trust documents for review.

4 The District’s Board formally approves joining the PRSP by adopting a resolution.

5 District staff finalizes investment selection.

6 Documents are signed by the District’s designated Plan Administrator and returned to PARS.

7 The District’s account is set up within a week. Once ready, the District can then send its first contribution to the trust.

Steps to Implementation


•  Ready-to-use irrevocable multiple employer trust and investment program

•  IRS Private Letter Ruling on multiple employer basis (obtained June 2015)

•  “Turn-key” comprehensive approach so costs and burdens are not shifted to the District

•  No start up costs or termination costs/restrictions

•  Local control that allows each District to determine its own funding schedules

•  Fully vetted signature-ready documents for streamlined implementation

•  Economies of scale decrease fees as assets grow

•  Flexible investment options

•  Regular reporting and ongoing support that includes monthly statements and in-person client reviews

•  Partnership with CCLC to help meet the needs of Districts

•  Local support & individualized attention from California-based services team

Key Advantages of PARS-CCLC PRSP


Maureen Toal Senior Vice President, Consulting

[email protected]

(800) 540-6369 ext. 135

Contacts

Natasha Davidson Consultant, Retirement Plans

[email protected]

(800) 540-6369 ext. 145

Elaine Reodica Director of Corporate Partners &

Strategic Initiatives

[email protected]

(916) 245-5027