FY 2022-23 Adopted Policy Budget
OVERVIEW OF LONG-TERM LIABILITIES
The City of Oakland (City) has three defined benefit retirement plans:
- California Public Employees’ Retirement System (CalPERS) Public Safety Retirement Plan;
- CalPERS Miscellaneous (civilian) Retirement Plan; and
- Oakland Police and Fire Retirement System (PFRS)
The City also has programs in place to partially pay health insurance premiums for certain classes of retirees from City employment. City retirees are eligible for retiree health benefits if they meet certain requirements relating to age and service. The retiree health benefits are described in the labor agreements between the City and unions, and in City resolutions.
The table below shows a summary of the long-term unfunded liabilities for the City.
Unfunded Pension Liability for PFRS– Closed Retirement Plans
The Police and Fire Retirement System (PFRS) is a closed pension system that provides pension, disability, and beneficiary payments to retired Police and Fire sworn officers hired prior to July 1, 1976. As of July 1, 2021, PFRS covered no active employees and 723 retired employees and beneficiaries. An actuarial valuation of PFRS is conducted at least every two years. The most recent actuarial valuation was based on data as of July 1, 2021.
Unfunded Pension Liability for CalPERS – Active Retirement Plan
The City has active defined benefit pension plans for Safety and Miscellaneous employees through CalPERS. These plans are funded on an actuarial determined basis each year pursuant to CalPERS requirements. The CalPERS Board of Administration has taken several actions in recent years that have increased both the City’s unfunded liabilities and annual required contributions, which are captured in this two-year budget.
- In March 2018, CalPERS adopted a new amortization policy beginning with the June 30, 2019, actuarial valuation. The new policy shortens the period over which unfunded liabilities are amortized from 30 years to 20 years and requires that payments be calculated as a level dollar. The change is factored into unfunded liabilities established on or after June 30, 2019, for contributions beginning in Fiscal Year (FY) 2020-21.
- Beginning with FY 2017-18, CalPERS began collecting employer contributions toward the plan’s unfunded liability as fixed dollar amount instead of the prior method of a contribution rate expressed as a percentage. This change addresses potential funding issues that could arise from a declining payroll or reduction in the number of active members in the plan.
- In December 2016, CalPERS lowered the discount rate (assumed rate of return on assets) from 7.50% to 7.00% using a three-year phase-in beginning with the June 30, 2016, actuarial valuation. The employer contributions for FY 2019-20 were determined using a discount rate of 7.25%. Beginning FY 2020-21, employer contributions are calculated using a 7.00% discount rate.
Other Post-Employment Benefits (OPEB)
The City historically funded its retiree medical benefits (also known as “Other Post-Employment Benefits” or “OPEB”) on a pay-as-you-go basis, meaning funding was not set aside as benefits were earned. Rather, the City paid OPEB costs for existing retirees when the monthly premiums became due.
Recognizing the growing OPEB funding challenges across the local government sector, the Government Accounting Standards Board (GASB) issued new standards (GASB 74/75) that require local governments to report unfunded OPEB liabilities in their audited financial statements beginning with the fiscal year ending June 30, 2018.
In FY 2018-19, the City reached agreement with its sworn public safety unions to cap retiree medical benefits for existing employees and retirees effective January 1, 2020, and implement new, lower-cost tiers for employees hired after January 1, 2019.
In addition, the City Council also approved the City’s OPEB Funding Policy on February 26, 2019 (Resolution No. 87551 C.M.S.) authorizing the set aside of 2.5% of payroll (approximately $10 million per year) into the City’s OPEB Trust each year. These reforms were expected to provide significant long-term relief to the City's retiree medical program. However, due to adverse financial conditions caused by COVID-19 crisis, the City Council authorized the suspension of contributions into the OPEB Trust for Fiscal Years 2019-20 and 2020-21. As provided for in the Adopted Budget for FY 2021-23, the City will resume contributions consistent with policy requirements.
Compensated Absences – Accrued Vacation, Sick Leave, and Compensatory Time
The City’s policy and its agreements with employee groups permit employees to accumulate earned, but unused, vested vacation, sick leave, and other compensatory time. All earned compensatory time is accrued when incurred in the government-wide financial statements and the proprietary fund financial statements. A liability for these amounts is reported in the governmental funds only if they are due and payable. As of June 30, 2021, the current liability was $58 million.