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Benicia leverages forecasting software and federal financing tool to pay down and plan for pension liabilities

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GovInvest Customer Case Study

Benicia is one of the many cities in California that provides retirement benefits to public workers by participating in the California Public Employees Retirement System (CalPERS). Like many public agencies, city officials are developing a plan to mitigate the potential budget impacts of rising annual pension contributions over the next decade.

As of fiscal year 2020, Benicia’s share of CalPERS’ unfunded liability was nearly $70 million and annual employer contributions totaled $6.9 million. For the Bay Area city of 27,131, this yearly contribution accounts for roughly 14% of its $50 million general fund revenues.

That number is expected to increase over the next few years. For the past two decades, employer contribution requirements have grown in order to pay down the CalPERS’ unfunded liability caused by several factors, including two recessions, benefit enhancements, and changes to actuarial methods and assumptions. For Benicia, annual required contributions doubled in just the past five years and are projected to exceed $14 million by 2031 — 28% of their current budget.

To meet the city’s pension obligations, local officials are working with GovInvest, a cloud-based financial forecasting software, to find ways to best utilize nearly $6 million that has already been set aside to manage the impacts of rising pension obligations.

Complementing retirement investments and decisions with cloud-based financial forecasting

In 2019, faced with rising contribution requirements and recognizing the city had little control over annual pension costs payable to CalPERS, the Benicia city council established a Section 115 Trust. The trust, administered by Public Agency Retirement Services, is a way to set aside money for future pension contributions.

Named after the section of the federal Internal Revenue Code authorizing its use, the trust is separate from CalPERS and has no direct impact on Benicia’s reported pension liability or the size of its annual required contribution. However, it allows the city to build up a fund balance through contributions and investment returns that can be used to help cover the cost of future pension payments to CalPERS.

“Past city leadership had the good foresight to establish a Section 115 Trust, and funded it when they could,” Benicia Finance Director Bret Prebula said. “Now, given the size of the pension challenge, we’re starting the process of developing a more detailed and strategic plan for how the city should manage the $5.9 million trust funds moving forward in order to ensure budget sustainability and service continuity.”

Some of the key considerations for this plan include the size and timing of any additional contributions to the trust, how to invest the funds, and when to begin withdrawing the proceeds to make pension contributions. Forward-looking financial analysis is essential to understanding the interaction between these factors over time. A comprehensive analysis can reveal budgetary tradeoffs and ultimately identify potential solutions that strike a reasonable balance between funding the trust, making required pension contributions, and providing essential government services to residents.

To support the trust, Benicia is using the GovInvest to accurately analyze policy options and present results in an easy-to-follow visual format that simplifies complex information and increases transparency. GovInvest dramatically reduces the costs, time spent, and headaches associated with government financial forecasting through powerful software and dedicated public finance advisors, allowing the city to prepare for the changing economy, workforce, and policy.

“Crafting a thoughtful set of policy options for the council’s consideration is going to require a significant amount of analysis, much of which just wouldn’t be feasible in Excel,” Prebula said. “I knew from past experience that using GovInvest for this project will allow me to spend more time advising council members on how to interpret results and less time updating spreadsheets.”

Crafting investment policies for the future

Benicia’s Trust is less than three years old, putting it in the “growth stage” where the main goal is to increase the asset base. Because of this, now is the right time to develop an official policy around future deposits, investments, and withdrawals. With pension contribution increases on the horizon, a policy that effectively balances pension obligations and other budget priorities will provide city leaders with helpful guidelines for managing the trust over the long term.

In April 2022, Benicia officials made revisions to its undesignated fund balance reserve policy — the balance available for legal appropriation and expenditure — to achieve long-term financial planning objectives, including annually allocating 10% of all unassigned fund balance to a pension designation.

This new pension designation allows funds to be utilized in the most prudent manner to offset the city’s ongoing pension liability. This includes, but is not limited to, increasing the funding within the city’s Section 115 Trust, paying the annual CalPERS payment in years of financial hardship, and other pension-related funding strategies yet to be determined.

City staff anticipate that additional policy discussions with the city council will occur on the funding and use plans for the 115 Trust in the future. With GovInvest, Benicia officials will be able to leverage real-time projections that help them make better-informed decisions and manage the city’s debt for years to come.