|
DATE: |
February 11, 2025 |
03 |
SUBJECT
Title
EMPLOYER AND EMPLOYEE RETIREMENT CONTRIBUTION RATES FOR FISCAL YEAR 2025-26 (DISTRICTS: ALL)
Body
OVERVIEW
California Government Code Section 31454 requires the Board of Supervisors to adjust the rates of San Diego County’s employer and employee retirement contributions based on recommendations of the San Diego County Employees Retirement Association (SDCERA) Board of Retirement (Retirement Board). The Retirement Board approved the employer and employee contribution rates recommended by its actuary, The Segal Group, Inc., for Fiscal Year (FY) 2025-26 on November 21, 2024.
While the employer contribution rates are different for Safety and General members, the aggregate employer rate (or weighted average rate) approved by the Retirement Board for FY 2025-26 is 48.16% of payroll, which is a decrease from the FY 2024-25 aggregate employer rate of 50.17%. The decrease in the employer contribution rate results most significantly from the effect of amortizing the retirement fund’s Unfunded Actuarial Accrued Liability (UAAL) over a larger than expected projected total payroll. Since the County’s projected total payroll increased significantly over the past year, the average recommended employer contribution percentage decreases even while the projected employer contribution amount in dollars increases.
The average employee (i.e. member) rate as a percentage of payroll decreased from 11.92% to 11.58%, primarily due to changes in active member demographics among retirement tiers.
Approval of today’s recommendation would adopt employer and employee retirement contribution rates for inclusion in the Chief Administrative Officer Recommended Operational Plan (i.e. budget) for FY 2025-26.
RECOMMENDATION
SAN DIEGO COUNTY EMPLOYEES RETIREMENT ASSOCIATION BOARD OF RETIREMENT and CHIEF ADMINISTRATIVE OFFICER
Adopt the San Diego County employer and employee retirement contribution rates for FY 2025-26 as recommended by the SDCERA actuary and approved by the Retirement Board on November 21, 2024.
EQUITY IMPACT STATEMENT
Approval of this recommendation will implement the County’s contribution rates for the normal cost and UAAL that will be funded in the FY 2025-26 Operational Plan to meet the County’s obligation to provide a defined benefit pension plan for permanent employees. SDCERA’s retirement benefits support a broad community of diverse employees and retirees, providing long-term financial support well after active employment with the County concludes.
SUSTAINABILITY IMPACT STATEMENT
Benefits provided by a secure and stable retirement fund help ensure the County can compete to attract and retain an appropriately sized, skilled and diverse workforce to design and implement policies, programs and services that ensure equitable and sustainable opportunities.
FISCAL IMPACT
If the recommendation to adopt the rates of employer retirement contributions is approved, the estimated total annual employer retirement contribution costs for the County and all participating employers will be approximately $896.3 million for FY 2025-26, an increase of approximately $53.5 million from the FY 2024-25 estimated total employer contribution.
The County is obligated to fund approximately 94% of the total annual employer retirement contribution, which is estimated at $842.5 million in FY 2025-26, an increase of approximately $50.3 million from the County’s share of estimated annual employer retirement contributions in the prior fiscal year. Other participating employers are obligated to make the remaining 6% of contributions to SDCERA. These employers include San Diego Superior Court, San Dieguito River Valley Joint Powers Authority, Local Agency Formation Commission and San Diego County Office of Education. The County’s actual cost of retirement will differ from this estimate due to the application of the contribution rates to the County’s actual biweekly payroll instead of the SDCERA actuary’s assumed payroll. The funding source is a combination of program specific revenues and General Purpose Revenue. No additional staff years are required.
BUSINESS IMPACT STATEMENT
N/A
Details
ADVISORY BOARD STATEMENT
N/A
BACKGROUND
Under Section 31453 of the California Government Code, an actuarial valuation of the County’s retirement fund is required to be made at intervals not to exceed three years. It also calls for the Retirement Board to recommend to the Board of Supervisors changes in rates of interest and contribution rates. The actuarial valuation must be completed by an actuary, covering the mortality, service, and compensation experience of the members and beneficiaries, and shall evaluate the assets and liabilities of the retirement fund. It is SDCERA’s practice to conduct an actuarial valuation annually. Today’s recommendation complies with this section of the Government Code.
By statute, members and employers are required to contribute a percentage of their covered compensation and salary to SDCERA. Rates are recommended by an actuary through the actuarial valuation that incorporates actuarial assumptions about the future. The Retirement Board approved the employer and employee contribution rates for FY 2025-26 on November 21, 2024, as recommended by its actuary, The Segal Group, Inc.
The employer rates provide for both the normal cost and the amortization of any UAAL of the retirement fund. The normal cost expressed as a percentage of payroll represents the annual contribution rate that, if paid annually from a member’s first year of membership through their year of retirement, would accumulate to the amount necessary to fully fund the member’s retirement-related benefits. The UAAL component expressed as a percentage of payroll represents the actuarial accrued liability of the plan in excess of the actuarial value of the plan assets, amortized over a 20-year period.
The County of San Diego is one of the employers that participate in SDCERA. Other participating employers include San Diego Superior Court, San Dieguito River Valley Joint Powers Authority, Local Agency Formation Commission and San Diego County Office of Education.
The following table compares the results of SDCERA’s June 30, 2023, valuation to the latest June 30, 2024, actuarial valuation, and identifies the major components affecting the change in valuation as reported. Components affecting the increase in the retirement fund’s UAAL over the past year include:
• The effect of current year normal costs, employee and employer contributions and interest earned (column b).
• Changes in investment returns (column c). The retirement fund experienced an investment return of 6.05% on a valuation value basis during the year ended June 30, 2024, recognizing this year’s investment gain and a portion of prior years’ investment gains and losses. Since the actual return for the year was less than the retirement fund’s assumed rate of return of 6.50%, there was an actuarial loss with regard to investments. This was balanced by SDCERA’s practice of actuarial “smoothing” of the retirement fund’s investment gains and losses over multiple years.
• The impact of non-investment experience (column d). This results most significantly from higher-than-expected individual salary increases, and somewhat due to Cost of Living Adjustments (COLA) increases that were greater than expected, lower than expected contributions, and changes in demographics. This was offset somewhat by an additional contribution from the County toward the UAAL.
|
|
Valuation Results: June 30, 2023, compared to June 30, 2024 (in millions) |
|
|
June 30, 2023 |
Current Year Normal Costs, Contributions and Interest |
Less than Expected Investment Returns |
Non-Investment Experience |
June 30, 2024 |
|
|
(a) |
(b) |
(c) |
(d) |
(a)+(b)+(c) +(d) |
|
UAAL(1) |
$5,115.7 |
$(291.7) |
$74.9 |
$202.9 |
$5,101.8 |
|
Source: SDCERA Actuarial Valuation and Review as of June 30, 2024, pg. 33 (1)Unfunded Actuarial Accrued Liability (UAAL) |
The following table compares the FY 2025-26 recommended employer retirement contribution rates for General and Safety members for all Tiers, as approved by the Retirement Board on November 21, 2024, with the FY 2024-25 rates adopted by the Board of Supervisors on February 27, 2024 (6). As indicated, the aggregate employer rate (or weighted average rate) decreases from prior year. This results most significantly from the effect of amortizing the retirement fund’s UAAL over a larger than expected projected total payroll. Since the County’s projected total payroll increased significantly over the past year, the average recommended employer contribution percentage decreases while the projected employer contribution amount in dollars increases.
|
Employer Contribution Rates Comparison |
|
Contributions for: |
FY 2024-25a |
FY 2025-26b |
|
General Tier 1, A-D |
Normal Cost |
12.21% |
11.68% |
|
|
UAALc |
30.97% |
29.51% |
|
|
Total |
43.18% |
41.19% |
|
Safety Tier A-D |
Normal Cost |
21.49% |
20.90% |
|
|
UAALc |
56.56% |
54.51% |
|
|
Total |
78.05% |
75.41% |
|
Aggregate Rate |
50.17% |
48.16% |
|
aSDCERA Actuarial Valuation and Review as of June 30, 2023, pgs. 37-38 bSDCERA Actuarial Valuation and Review as of June 30, 2024, pgs. 35-36 cUnfunded Actuarial Accrued Liability (UAAL) |
The following table compares the FY 2025-26 recommended average member retirement contribution rates for General and Safety members for all Tiers, as approved by the Retirement Board on November 21, 2024, with the FY 2024-25 rates adopted by the Board of Supervisors on February 27, 2024 (6).
|
Average Member Contribution Rates Comparison |
|
Tier |
FY 2024-25a |
FY 2025-26b |
|
General Tier 1 |
12.42% |
11.82% |
|
General Tier A |
14.21% |
14.08% |
|
General Tier B |
11.34% |
11.31% |
|
General Tier C |
10.04% |
10.00% |
|
General Tier D |
7.32% |
7.35% |
|
Safety Tier A |
17.78% |
17.63% |
|
Safety Tier B |
14.47% |
14.44% |
|
Safety Tier C |
16.37% |
16.27% |
|
Safety Tier D |
15.72% |
15.69% |
|
Aggregate Rate |
11.92% |
11.58% |
|
aSDCERA Actuarial Valuation and Review as of June 30, 2023, pg. 12 bSDCERA Actuarial Valuation and Review as of June 30, 2024, pg. 12 |
Attachment A provides the detail and history of employer contribution rates since FY 2016-17. Attachment B details the recommended FY 2025-26 employee (i.e. member) contribution rates by Tier. Attachment C provides the recommended FY 2025-26 employer contribution rates by Tier.
The County has aggressively managed its retirement-related costs through a combination of issuing pension obligation bonds (POB), making voluntary additional contributions to SDCERA to address the UAAL of the Retirement Fund, and other actions. The County has taken advantage of past decreases in retirement contribution rates along with available resources to accelerate the pay down of the POB. Approximately $264.0 million of POB principal has been prepaid to date.
The County’s POB principal outstanding was $211.2 million as of June 30, 2024. To support the debt service costs of the County’s POB, the County set aside a total of $383.0 million in General Fund fund balance from FY 2016-17 through FY 2019-20. This fund balance serves as an alternative funding source for a portion of existing POB costs that was previously supported by General Purpose Revenue. Beginning in FY 2017-18, portions of this fund balance have been and will be appropriated over a ten-year period until exhausted, through final maturity of the POB which will be in FY 2026-27. Appropriations for this purpose total $42.8 million in FY 2024-25 and $42.8 million annually through final maturity of the POB.
Further, additional voluntary payments have been made in the past to SDCERA to manage increases in retirement costs and to mitigate fluctuations in the employer contribution rates. The following table details the history of the County’s additional voluntary payments to SDCERA since FY 2004-05.
|
Additional Voluntary Payments to SDCERA (in millions) |
|
Fiscal Year |
Amount |
|
2004-05 |
$24.9 |
|
2005-06 |
$40.0 |
|
2006-07 |
$26.9 |
|
2010-11 |
$29.6 |
|
2012-13 |
$14.2 |
|
2017-18 |
$22.5 |
|
2018-19 |
$13.8 |
|
2019-20 |
$10.0 |
|
2020-21 |
$0.0 |
|
2021-22 |
$0.0 |
|
2022-23 |
$8.8 |
|
2023-24 |
$31.1 |
|
2024-25 |
$0.0 |
|
Total |
$221.8 |
LINKAGE TO THE COUNTY OF SAN DIEGO STRATEGIC PLAN
Today’s proposed action supports the Strategic Initiatives of Sustainability, Equity, Empower, Community, and Justice in the County of San Diego’s FYs 2025-30 Strategic Plan by working towards a fully funded, defined benefit pension plan for all eligible employees.
Respectfully submitted,
ebony n. shelton
Chief Administrative Officer
ATTACHMENTS
Attachment A: History of San Diego County Employees Retirement Association Employer Contribution Rates
Attachment B: San Diego County Employees Retirement Association Member Contribution Rates for Fiscal Year 2025-26
Attachment C: San Diego County Employees Retirement Association Employer Contribution Rates for Fiscal Year 2025-26