Consideration and Adoption of Ordinance No. 2020-15:  An ordinance of the City Council of the City of Flagstaff, adopting a Public Safety Personnel Retirement System Contingency Reserve Fund Policy; providing for repeal of conflicting ordinances, severability, and establishing an effective date.

The City is considering issuing Certificates of Participation debt to fund our Public Safety Personnel Retirement System (PSPRS) unfunded liability for our Police and Fire plans.  Our goal is to fund our plans at or near 100%.  The City will also be setting up PSPRS Contingency Reserve Funds (CRF) to help manage and mitigate future risks associated with pension plans.  Staff is recommending that the Council adopt a policy to assure we are managing the reserve funds while there is outstanding debt.  

The Background section of this staff summary has been updated with the dollar amounts for the Market and Actuarial reserve amounts.   The PSPSR Contingency Reserve Fund Policy has also been updated with these figures. 

A PSPRS Contingency Reserve Fund provides the City with an improved financial stability for the organization as it will assist in mitigating financial impacts related to changes in the PSPRS plans for market changes and actuarial adjustments in the future. 

The City will be issuing debt to set up the PSPRS Contingency Reserve Fund.  The City could choose not to set up the PSPRS Contingency Reserve Fund and manage the risks in the future years as they occur or look to other funding sources to set up the funds. 

Strategic Plan for Team Flagstaff

• Foster a resilient and economically prosperous city: Enhance the organization's fiscal stability and resourcefulness. 

Key Community Results

• High Performing Governance: Enhance the organization's fiscal stability and increase efficiency and effectiveness
• High Performing Governance: Implement innovative local government programs, new ideas and pest practices; be recognized as a model for others to follow

On April 23, 2020, at the April Council Budget Retreat, staff presented the consideration for issuing Certificate of Participation debt to address the unfunded actuarial accrued liability of the Police and Fire PSPRS plans.  Council provided direction to move forward with this debt issuance. 

• Approve the Ordinance as written to adopt a PSPRS Contingency Reserve Fund Policy. 
• Recommend changes to the Ordinance modifying PSPRS Contingency Reserve Fund Policy. 
• Do not approve the PSPRS Contingency Reserve Fund Policy and provide staff direction. 

Council will be considering the approval of an ordinance to authorize the issuance of Certificates of Participation debt to provide funding of our PSPRS Plan.  As part of that authorization is the consideration of issuing the debt to include funding for a PSPRS Contingency Reserve Fund to assist in mitigating risks associated with pension plans.  

Market Risk. All pension plans are subject to changes in market conditions and year-over-year investment return performance. The assumed earnings rate of return should ideally approximate a plan’s long-term historical average returns.  While this is the long-term average, any given year there may be economic reasons that the market greatly underperforms.  Staff is recommending a $X,XXX,XXX $2,836,000 initial deposit for the Police plan, and a $X,XXX,XXX $3,170,000 initial deposit for the Fire plan for the market risk component.  This calculation is based on a 10% market decline in a given year and will assist in managing three years of a potential new unfunded actuarial liability.  

Actuarial Risk. Actuarial risk is inherent to all pension funds, and all projections of future contributions and payouts.  Any retirement system’s independent actuaries calculate projections for plan assets and liabilities, and these projections are premised on a variety of assumptions such as investment returns, payroll increase, COLA, mortality, early retirement, and benefit payments. Annual employer contributions are calculated based on these assumptions. Staff is recommending a PSPRS Contingency Reserve Fund to mitigate the assumed earning rate changes, changes in payroll growth, and changes in mortality tables.  Currently, the PSPRS plans have an assumed earnings rate of 7.3% which was reduced from 7.4% for the June 30, 2019, actuarial plans.  Staff is recommending a $X,XXX,XXX $4,014,000 initial deposit for the Police plan, and a $X,XXX,XXX $4,219,000 initial deposit for the Fire plan for the actuarial risk component.  

Staff is recommending that the Council adopt, by ordinance, a PSPRS Contingency Reserve Fund Policy.  This policy creates an assurance that the Contingency Reserve Funds are managed under the guidelines set forth to provide the best financial practices and impacts related to changes in the PSPRS plans for market changes and actuarial adjustments in the future. 

Inform