REPORT TO THE CITY COUNCIL
FROM: CITY OF FRESNO RETIREMENT BOARDS
BY: ROBERT T. THELLER, Retirement Administrator
City of Fresno 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, 2024
Body
RECOMMENDATION
The Retirement Boards have reviewed and approved the attached Annual Comprehensive Financial Reports for the fiscal year ended June 30, 2024, and recommend that the City Council receive and accept the reports for informational purposes.
EXECUTIVE SUMMARY
The Retirement Boards are pleased to submit the Annual Comprehensive Financial Reports (“ACFR”) for the fiscal year ended June 30, 2024, 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 11, 2024, approved the attached Annual Comprehensive Financial Reports (“ACFR”) for the fiscal year ended June 30, 2024. 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, 2023. 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 ~$4.02 billion as of June 30, 2024, respectfully submit the results of their fiscal year 2024 investment earnings and the actuarial funding status of the Systems.
The Annual Comprehensive Financial Reports ("ACFR") of the City of Fresno Retirement Systems for the years ended June 30, 2024, and 2023 are submitted herewith. Information contained within 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 ACFR reports.
In addition to the information in the ACFR reports, we have prepared the attached ACFR Highlights which summarizes 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, refer to pages iv and v in the Introductory Section of the attached ACFR Reports.
The ACFR Reports were prepared as of June 30, 2024, 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.
2. The Financial Section contains the general-purpose financial statements of the Systems and the Independent Auditor’s Opinion Letter.
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.
4. The Actuarial Section includes the certification letter produced by the independent actuary, The Segal Company, along with supporting schedules and information.
5. The Statistical Section which includes trend information and graphs.
6. The Compliance Section which includes the Independent Auditor’s Internal Control Letter.
For the year ended June 30, 2024, the Boards adopted and implemented all applicable new Government Accounting Standards Board (GASB) pronouncements for the fiscal year ended June 30, 2024, as required by each statement.
Systems’ Funding Status
It is important to note that the projected FY2026 contribution rates included as part of the FY2024 Actuarial Report do not reflect the City’s current decision to not contribute the full actuarially determined contribution rate for fiscal year 2025 to either the Employees Retirement System or the Fire and Police Retirement System. This contribution rate is derived from each System’s ’s “normal cost,” which is the amount the Retirement Systems’ actuary has determined is necessary to fund the retirement benefits that members are currently accruing for a single year of service, under the terms of the City of Fresno Municipal Code. It is designed to fund the system to 100% of its funding needs and not above that level. The FY2024 Actuarial Report also does not include the City’s ’s decision to not implement the updated contribution rates for the active members (current City employees) of the Employees Retirement System. The actuarially determined contribution rate may be lower than the System’s normal cost if there is sufficient surplus as defined by the City of Fresno Municipal Code.
The City’s decision to not contribute the full actuarially determined employer contribution rates to either the Employees Retirement System or the Fire and Police Retirement System, as well as the Employees Retirement System member contribution rates for FY2025, will affect each System's future funding status.
Furthermore, as previously noted, as of June 30, 2024, the Employees Retirement System had a Valuation Value of Assets of 109.8%, which did not meet the surplus declaration requirement of exceeding 110% of the actuarial accrued liability to lower the member and employer contribution rates below the normal cost.
If measured on a market value of assets basis, the funding status of the City of Fresno Employees Retirement Systems is 112.8%, and the City of Fresno Fire and Police Retirement System is 118%. The Systems have continued to achieve favorable investment returns during volatile investment markets.
Retirement Board Adopted City Actuarially Determined Rates for Fiscal Year 2026
The Retirement Boards, at their Board meetings on November 26, 2024, adopted the following actuarially determined City Contribution rates for Fiscal Year 2026:
Not Implemented
ACFR Current Adopted
System FY 2024 FY 2025 FY 2026
Employees Retirement System 13.38% 14.06% 13.94%
Actual/Est. City Contributions (In Thousands) $28,621 $34,520 $34,214
Fire and Police Retirement System (Blended Tiers) 21.08% 23.09% 23.31%
Actual/Est. City Contributions (In Thousands) $30,635 $37,546 $37,913
City of Fresno Employees Retirement System
The actuarially determined employer contribution rate for fiscal year 2026 is 13.94%, a decrease of 0.12% from the fiscal year 2025 actuarially determined contribution rate of 14.06%. The fiscal year 2025 actuarially determined contribution rate was net of applicable surplus credits, due to the Employees Retirement System’s 111.1% surplus status as of June 30, 2023. The fiscal year 2026 actuarially determined contribution rate did not include any surplus credits, as the System’s funded status of 109.8% as of June 30, 2024, did not meet the surplus declaration requirement of assets on an actuarial basis exceeding 110% of the actuarial accrued liability.
The decrease in actuarially determined contribution rates is primarily due to a change in membership demographics among all active (DROP and non-DROP) members.
The City’s fiscal year 2025 implemented rate of 13.38% is 0.68% below the actuarially determined contribution rate of 14.06%.
City of Fresno Fire and Police System
The blended Fire and Police System rate of 23.31% for fiscal year 2026 is an increase of 0.22% from the actuarially determined contribution rate of 23.09% for fiscal year 2025. Due to the current surplus funding status, the fiscal year 2026 actuarially determined contribution rate of 23.31% is net of 1.93% in surplus credits which amount to approximately $3.1 million in City contribution savings for the fiscal year 2026.
The actuarially determined contribution rate for fiscal year 2026 (23.31%) represents an increase of 2.23% when compared to the City's implemented contribution rate for fiscal year 2025 of 21.08%. The implemented rate is 2.01% below the actuarially determined rate of 23.09% This increase in the actuarially determined contribution rate from the previous year’s actuarially determined contribution rate is primarily due to a decrease in the surplus available to pay a portion of the employer rate, partially offset by changes in membership demographics among all active (DROP and non-DROP) members.
We strongly caution the City of Fresno that the projected surplus offsets/savings in City contributions, due to the System’s current funding status, might be short-term or temporary. This is due to the uncertainty of the investment return environment, which may cause the funded status to decline below the 110% required for a surplus declaration. This concern is heightened by the City’s current decision to deviate from the actuarially determined contribution rate. The long-term consequences of diminishing surplus credits and the City making actual contributions below the actuarially determined contribution rates will likely lead to increased contribution rates in the future, directly impacting the General Fund.
Investment Return Information
For the fiscal year ended June 30, 2024, the Systems’ annual return is 10.59% gross of fees; three-year return is 4.06%, five-year return is 8.42%, and ten-year return is 7.49%.
It is of utmost importance to examine the Systems’ 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 (and anticipated continued volatility) 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-five 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% over longer periods. As of June 30, 2024, the Systems’ 20-year annualized return is 7.57%, and its 25-year annualized return is 6.89%.
Investment returns achieved by the Boards on a risk-controlled basis without the use of higher risk investment vehicles such as hedge funds. See Attachment 1 - Fiscal Year Total Fund Annual Returns.
System Membership Activity
Membership activity in the Retirement Systems during the fiscal year resulted in a total net addition of 296 members; the Employees Retirement System active membership increased by 273 members and the Fire and Police Retirement System active membership increased by 23 members for the one-year period ended June 30, 2024.
The number of retirees has also increased slightly with the Systems’ adding a net total of 110 retirees for a total combined retired membership of 3,523 on June 30, 2024. See Attachment 2 - History of the Systems Active Members and Retirees.
ENVIRONMENTAL FINDINGS
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LOCAL PREFERENCE
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FISCAL IMPACT
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Attachments:
1. Fiscal Year Total Fund Annual Returns
2. History of Employees Systems Active Members and Retirees
3. History of Fire and Police System Active Members and Retirees
4. ACFR Highlights 06302024
5. Employees Retirement System ACFR FY 2024
6. Fire and Police Retirement System ACFR FY 2024