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Posted on October 3, 2017 at 12:34 PM by grodericks grodericks
CalPERS Actuarial Valuations, market conditions, employer rates, employee rates, and underfunded status conversations are not helpful unless the Town has a funding policy in place - which it does. The Town pays 100% of its employer obligation toward pensions each year based on published CalPERS annual actuarial evaluations. The CalPERS pension system is designed as a “pay as you go” system with projections calculated based on actuarial assumptions such as length of employment, salary, mortality, and investment projection for return - all of which can fluctuate - changing the Town’s future obligations up and down.
The Town consciously decided not to "over fund" or contribute more funds into the pension plan than required under the actuarial valuations because the Town would rather keep its funds local than overfund at the State level. In other words, maintaining a healthy funded status is good, but giving more funds to the State than absolutely necessary is not - particularly since the funded status is market dependent and excess funds would be better served on local projects.
If, for example, the Town were to fund its underfunded amount entirely, in one year, if the market performed exceptionally well, the Town could be “overfunded” and those funds would no longer be under Town control - once paid, we don’t get them back but our rates stay consistent. They would be earning interest at CalPERS rather than in our local budget. Conversely, if the market performed poorly, we would not have overpaid and lost funds because someone at the State made a poor investment decision. Given the recent market performances, we expect the Town’s underfunded status to drop but we do not expect our annual rates and contributions to be dramatically different.
That said, the Town is conscious of rate fluctuations and via policy commits any excess ERAF funds if needed to help smooth out any fluctuations - we have not had to do this in recent years but it remains an option. ERAF funds (or Educational Revenue Augmentation Funds) are funds that were re-appropriated in the 1990s by the State from local government property tax revenues. These funds trace back to local Town funds. The State uses these funds to pay for its minimum school budget obligations. Excess from these funds (after the State meets its obligation) are returned to the local agencies from whence they originally came. The funds originate from basic Town property taxes returned to the Town after the State deducts its considered share.
Happy to go deeper on this issue with anyone, feel free to give me a call or send me an email.