REPORT TO THE CITY COUNCIL
FROM: CITY OF FRESNO RETIREMENT BOARDS
BY: ROBERT T. THELLER, Retirement Administrator
Retirement Office
SUBJECT
Title
Submission for informational purposes of the Annual Comprehensive Financial Reports (“ACFR”) regarding the Financial Activities of the City of Fresno Retirement Systems for the Fiscal Year Ending June 30, 2023
Body
RECOMMENDATION
The Retirement Boards have reviewed and approved the attached Annual Comprehensive Financial Reports for the fiscal year ended June 30, 2023, and recommend that the City Council receive and accept the reports for informational purposes.
EXECUTIVE SUMMARY
The Retirement Boards are proud to submit the Annual Comprehensive Financial Reports (“ACFR”) for the fiscal year ended June 30, 2023, to the City Council for informational purposes to keep the City Council informed and provide knowledge of the Retirement Systems’ activities during the past fiscal year.
BACKGROUND
ACFR Information
The Retirement Boards, at their meeting on December 13, 2023, approved the attached Annual Comprehensive Financial Reports (“ACFR”) for the fiscal year ended June 30, 2023. At that meeting, the Boards directed the Retirement Administrator to submit each ACFR to the City Council, Mayor, and City Manager and to keep the city informed on the activities of the Retirement Systems.
The Government Finance Officers Association of the United States and Canada (GFOA) awarded a Certificate of Achievement for Excellence in Financial Reporting to the City of Fresno Retirement Systems for each of their Annual Comprehensive Financial Reports for the fiscal year ended June 30, 2022. To receive a Certificate of Achievement award, a government must publish an easily readable and efficiently organized annual comprehensive financial report. These reports must satisfy both generally accepted accounting principles and applicable legal requirements.
The two City of Fresno Retirement Boards, which oversee the administration of the Retirement Systems and combined investments of ~$3.73 billion as of June 30, 2023, respectfully submit the results of their fiscal year 2023 investment earnings and the funding status of the Systems.
The Annual Comprehensive Financial Reports ("ACFR") of the City of Fresno Retirement Systems for the years ended June 30, 2023, and 2022 are submitted herewith. Information contained in these reports provides a complete and accurate review of the year's operations. Responsibility for both the accuracy of the data, and the completeness and fairness of the presentation, rests with the management of the Systems. For a general overview of the Systems’ finances, please refer to Management's Discussion and Analysis letter in the Financial Section of the reports.
In addition to the information in the ACFR reports, we have prepared the attached schedule of summary information on the City’s Retirement Systems. These documents provide Council members with an overview of the Systems. For a summary of major initiatives of the retirement plans, see pages iv and v in the Introductory Section of the attached Financial Reports.
The Financial Reports were prepared as of June 30, 2023, and consist of six sections:
1. The Introductory Section describes the Systems’ management and organizational structure, a summary of the plan provisions and a listing of the professional services providers; and
2. The Financial Section contains the general-purpose financial statements of the Systems and the Independent Auditor’s Opinion Letter; and
3. The Investment Section includes a letter from the Systems’ investment consultant, NEPC, recapping the fiscal year investment results and activities, along with performance and asset allocation information; and
4. The Actuarial Section includes the certification letter produced by the independent actuary, The Segal Company, along with supporting schedules and information; and
5. The Statistical Section which includes trend information and graphs; and
6. The Compliance Section which includes the Independent Auditor’s Internal Control Letter.
For the year ended June 30, 2023, the Boards adopted and implemented all applicable new Government Accounting Standards Board (GASB) pronouncements for the fiscal year ended June 30, 2023, as required by each statement.
Systems’ Funding Status
The City of Fresno Retirement Systems (City of Fresno Employees Retirement System 111.1% and the City of Fresno Fire and Police Retirement System 116.7% as of June 30, 2023, on an actuarial basis) remain as two of the highest funded Public Retirement Systems in the State of California. If measured on a market value of assets basis, the funding status of the City of Fresno Employees Retirement Systems is 111.7 percent, and the City of Fresno Fire and Police Retirement System is 117.3 percent. The Systems have continued to achieve favourable investment returns during volatile investment markets.
Retirement Board Adopted City Actuarial Rates for Fiscal Year 2024
Additionally, the Retirement Boards at their Board meeting November 28, 2023, adopted the following City Normal Pension Contribution rates for Fiscal Year 2023:
City of Fresno Employees Retirement System
The net City contribution rate for fiscal year 2025 of 14.06%, for the Employees System is an increase of 0.68% over the current fiscal year 2024 net rate of 13.38%. The primary reason for this change in the employer rate is a decrease in the surplus offset.
The projected increase in dollars is approximately $1.4 million for fiscal year 2025. The fiscal year 2025 contribution increase of 0.68% in the Employees System will be spread across the various Enterprise Funds, Internal Service Funds and to the General Fund.
Each year we strongly caution the City of Fresno that offsets/savings in City contributions are most likely short-term or temporary in nature given the uncertainty of the investment return environment and in all probability will be eliminated over a few years. As of June 30, 2023, there is an actuarial surplus available to reduce a portion of the City’s and members' COLA contributions for Fiscal Years 2024 as the Employees Retirement System has a Valuation Value of Assets of 111.1% which met the surplus declaration requirement of being in excess of 110% of the actuarial accrued liability.
City of Fresno Fire and Police System
The blended Fire and Police System rate of 23.09% for fiscal year 2025 is an increase of 2.01% from the current fiscal year 2024 City contribution rate of 21.08% and will increase the City’s required payments to the Fire and Police System by approximately $2.9 million from the prior fiscal year estimated contributions. Due to the current surplus funding status, the City of Fresno’s contribution rate of 23.09% is net of 2.27% in surplus credits which amount to approximately $3.3 million in City contribution savings for the fiscal year 2025.
Each year we strongly caution the City of Fresno that these offsets/savings in City contributions are most likely short-term or temporary in nature given the uncertainty of the investment return environment and in all probability will decline and be eliminated over a few years. We suggest that City Management carefully consider the impact of diminishing surplus credits to contributions, and the corresponding direct effect to the General Fund over the next few years.
The net increase in the City’s cost is primarily a result of (i) a smaller surplus offset than in the prior valuation, (ii) a negative balance projected in the City Surplus Reserve for the 2023/2024 fiscal year as compared to a positive balance for the 2022/2023 fiscal year, offset somewhat by (iii) a change in membership demographics among all active (DROP and non-DROP) members.
Investment Return Information
For the fiscal year ended June 30, 2023, the Systems’ annual return is 9.77 percent gross of fees; three-year return is 10.05 percent, five-year return is 7.42 percent and ten-year return is 8.15 percent.
It is of utmost importance to examine the System’s investment returns with a long-term view due to the extreme volatility in the various economies of the world and the global financial markets over the past twenty to twenty-five years rather than a short-term focus which tends to distort the perception of how well the investments have performed. The short and long-term (one, three, five, ten, fifteen, twenty and twenty-year) performance rates demonstrate the extreme volatility of the markets and the Systems’ ability to meet or exceed its current actuarial assumed rate of return of 6.75 percent over longer periods. As of June 30, 2023, the System’s 10-year annualized return is 8.15 percent, and its 25-year annualized return is 6.96 percent.
These investment returns were achieved by the Boards on a risk-controlled basis without the use of higher risk investment vehicles such as hedge funds.
System Membership Activity
Membership activity in the Retirement Systems during the fiscal year resulted in a total net addition of 326 members, the Employees Retirement system active membership increased by 259 members and the Fire and Police Retirement System active membership increased by 67 members for the one-year period ended June 30, 2023.
The number of retirees has also increased slightly with the Systems’ adding a net total of 92 retirees for a total combined retired membership of 3,413 on June 30, 2023.
ENVIRONMENTAL FINDINGS
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LOCAL PREFERENCE
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FISCAL IMPACT
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Attachments:
1. Summary Highlights for Fiscal Year 2023
2. Annual Comprehensive Financial Reports for the Employees and Fire and Police Retirement Systems for the years ending June 30, 2023, and 2022.