HomeMy WebLinkAbout02-17-2015 B2 City's Long Term CostsCity of San Luis Obispo, Council Agenda Report, Meeting Date, Item Number
FROM: Wayne Padilla, Director of Finance & Information Technology
Jason Stilwell, Interim Director of Information Technology & Financial Planning
SUBJECT: ADDRESSING THE CITY’S LONG-TERM COSTS
RECOMMENDATION
Based on the information in this report and previously provided about the City’s major long-term
cost liabilities, provide policy guidance on prioritizing the City’s underfunded liabilities for
accelerated payments. Specific recommendations include the following:
1. Give priority consideration to accelerated payments to the unfunded pension liability,
Other Post Employment Benefit (OPEB) liability, roads infrastructure, and equipment
replacement funds (in that order).
2. Return at Strategic Budget Direction with recommendations to allocate portions of
available one-time resources to make prepayment to certain long-term liabilities of the
City based on the prioritization adopted by the City Council.
3. Develop a Budget Policy for incorporation in the 2015-17 Financial Plan that reflects this
policy direction regarding the use of one-time resources.
REPORT IN BRIEF
The City balances payment of long-term costs with the need to maintain and/or expand current
services. Included in the 2013-15 Major City Goal for Fiscal Health was direction to staff to
prepare an analysis regarding the City’s ability to prepay its unfunded pension liabilities. On
December 16, 2014 the City Council received a white paper report on the subject and directed
staff to develop a new budget policy addressing the City’s unfunded liabilities. This action
included direction to return to the City Council in Winter 2015 with further analysis of whether
additional funding should be allocated to unfunded liabilities during the 2015-17 Financial Plan.
Staff analyzed the City’s long term costs and evaluated the City’s ability to further prepay these
liabilities. The City is currently making payments toward its long-term costs via the base budget.
The City has the ability to make accelerated payments using year-end surplus above policy
targets to prepay certain longer term costs associated with unfunded liabilities as well as deferred
infrastructure maintenance and equipment replacement. At this time based on the analysis, staff
recommends any prepayment be directed to the City’s pension liability, Other Post Employment
Benefit (OPEB) liability, deferred road maintenance, and equipment replacement, in that order as
resources are available.
If Council agrees with the recommendation of prepayment of certain long-term liabilities, staff
will return at Strategic Budget Direction with specific recommendations about proposed
allocations for this purpose. Staff anticipates including a policy statement of prepayment of the
2/17/15
B2
B2-1
Addressing City’s Long-term costs Page 2
City’s liabilities in the 2015-17 Financial Plan for the Council’s consideration in June based on
this Council direction.
DISCUSSION
Background
Formal statements of key budget and fiscal policies provide the foundation for assuring long
term fiscal health by establishing a clear framework for effective and prudent financial decision
making. At the outset of each biannual financial planning cycle the policies are reviewed and
brought to the City Council for update. The City Council adopted revisions to the policies in
December 2014 and directed staff to conduct further analysis on the best way to address the
City’s unfunded liabilities. Subsequently the City Council held its Major City Goal setting
session on January 24, 2015 adopting an Other Important Objective to implement the City’s
Fiscal Responsibility Philosophy with a focus on the reduction of unfunded liabilities.
The City has a variety of long-term cost liabilities. Liabilities are present obligations arising
from past transactions that an agency is required to pay from existing resources. These liabilities
include long-term bonds, insurance funding, and pension liabilities, as examples. Unfunded
liabilities are typically associated with programs that have long range funding horizons and
represent the difference between the estimated cost of future benefits and the assets that have
been set aside to pay for them. Generally, an organization manages a balance between funding a
portion of both types of liabilities and its existing operating programs.
While much of the focus in recent years has been placed on unfunded pension liabilities, the City
has other underfunded liabilities that are described below. The most significant of these liabilities
are represented (Figures 1) along with the funded status of each one (Figure 2). The funded
status of a program is defined as the ratio of assets to the accrued liabilities.
The funded ratio of a pension plan equals a value of assets in the plan divided by a measure of
the pension obligation. A prudent funding status is between 70% - 100% depending on plan
factors. The Fitch Rating Agency recently stated that a 70% funded status or above is adequate
and under 60% is weak. The Government Finance Officers Association calls for a funding policy
targeting a 100% or more funded ratio (full funding).1 The California Public Employees'
Retirement System (CalPERS) states its desired goal is 100% funding, in which assets on hand
are equal to the desired level of assets needed to pay pension benefits.2 According to the
American Academy of Actuaries, actuarial funding methods generally are designed with a target
of 100% funding. If the funded ratio is less than 100%, contribution patterns are structured with
the objective of attaining a funded ratio of 100% over a reasonable period of time.3
1 “Sustainable Funding Practices of Defined Benefit Pension Plans” approved by the GFOA Executive Board
October 2009.
2 CalPERS External Affairs Branch. “CalPERS Takes Steps to Address Funding Level Risk” April 16, 2013
3 American Academy of Actuaries. “Issue Brief,” July 2012.
B2-2
Addressing City’s Long-term costs Page 3
The City has two pension plans, one for safety employees and one for miscellaneous employees.
The miscellaneous employee pension plan is 62% funded with an unfunded liability of $62
million. The safety plan (both pooled and side fund portions) is 65% funded with an unfunded
liability of $54 million. The City’s combined unfunded pension liability was $115,612,000 as of
June 30, 2013, based on the most recent actuarial valuation report. The City has a safety side
fund with a distinct amortization period (approximately $24 million on an amortization schedule
through 2034). On April 17, 2013 CalPERS changed its amortization and rate smoothing
policies to address unfunded accrued actuarial liabilities (UAL). Beginning with the 2015-16
rates, CalPERS will employ an amortization and smoothing policy that will pay for all gains and
losses over a fixed 30-year period with the increases or decreases in the rate spread directly over
a five-year period. The adjustment in rates is intended to pay down the unfunded liability over
the next thirty years. This combined with pension reforms are strategies to address the unfunded
liability component. For the pension obligation, the discount factor is 7.5%. This means that
the obligations grow each year with the addition of the interest cost. On the other hand, the
average annual interest yield of the City’s investment portfolio is .77% based on market value as
of December 31, 2014. This interest return disparity creates an environment in which the use of
available excess funds to pay down higher interest debt generates a greater overall return
compared to an environment where the City is earning interest at a rate that is comparable to or
in excess of that which is owed on the debt. Given the discount rate for actuarial retirement
liabilities, the City should consider prepaying as funds are available.
Other Post Employment Benefits (OPEB) include medical benefits the City has committed to
provide certain retirees. The City joined CalPERS to provide group health insurance coverage to
employees and annuitants in 1993. The City subsequently began prefunding retiree medical
costs through the California Employers’ Retiree Benefit Trust (CERBT) during the 2008-09
Fiscal Year. The City is required to pay an annual contribution based on the results of the bi-
annual actuarial report. Through this contribution, the City provides an amount equal to $122
per month for retirees who qualify for post employment health insurance and opt to purchase
their insurance through the City’s health insurance program. Excess health insurance premium
costs above that amount are paid by the retiree. The plan has an unfunded liability of $4,427,000
as of June 30, 2013 with a funded level of 36%. OPEB has what is known as an implied or
implicit rate subsidy. The implicit rate subsidy results from the fact that retiree healthcare costs
‐$70,000
‐$60,000
‐$50,000
‐$40,000
‐$30,000
‐$20,000
‐$10,000
$0
Negative Funded Status $ (thousands)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Funded Status %
Figure 2: Blue bars approaching 100% indicate a liability is
funded; 80% to 100% is a prudent target.
Figure 1: Red bars indicate the dollar amount of the unfunded
liability; smaller red bars are a positive indicator.
B2-3
Addressing City’s Long-term costs Page 4
tend to cost more than active member healthcare while both subgroups pay the same per capita
premium for their benefits. New accounting standards require recognition of the implied subsidy
as a component of the ARC payment beginning with the next valuation that will be prepared for
the period ending June 30, 2015. The addition of the implied subsidy is estimated to increase the
City’s OPEB unfunded liability to $9,479,000 dropping the funded status to 18%. It is also
expected that the unfunded liability, including the implicit subsidy component will be placed on
the City’s balance sheet starting with the 2016-17 fiscal year and the ARC will also be increased
by approximately $380,000 per year beginning in 2016-17. The increase in the ARC is included
in the five year financial forecast.
The level of deferred maintenance of the City’s infrastructure assets increased during the
economic downturn. An update of the status of the City’s investment in its infrastructure was
recently completed for the revenue measure advisory committee (Attachment 1). It
demonstrated a need to further invest in the City’s roads, facilities, storm pipes and equipment.
This is an important set of data to track as it is much less expensive to provide ongoing
maintenance to the City’s infrastructure than it is to delay the maintenance and face the cost of
reconstruction. Over time, the costs to maintain infrastructure will significantly increase. For
example, it is less expensive to slurry seal a street routinely than it would be to defer such
preventative maintenance until the road needs to be reconstructed. While the City is in a position
to increase funding for these needs through the Capital Improvement Plan budget, it seems
prudent to analyze the value of dedicating one-time resources for this purpose.
The City is a member of the California Joint Powers Insurance Authority (CJPIA) to pool risk
and gain liability protection for the City from losses and lawsuits. The programs of this self-
insurance risk pool are reviewed annually. The most recent annual review resulted in
retrospective adjustments of $1.4 million for workers’ compensation and general liability claims
experience. This increase represents an unfunded liability and was presented to the City Council
in December 2014 as part of the Five-year Fiscal Forecast. The Forecast anticipates funding the
retrospective adjustment and creating a designated reserve to cover future retrospective
adjustments. The reserve amount will be reviewed annually in concert with CJPIA’s
retrospective adjustment reports. Figures 1 and 2 assume the upcoming Financial Plan provides
funding to CJPIA as projected in the Five-year Fiscal Forecast. As a result, this analysis does
not further evaluate dedicating resources for this purpose.
Addressing the City’s Liabilities and Unfunded Liabilities
The primary future costs described above fall into two categories: actuarial liabilities and
deferred maintenance liabilities. All of these future costs are being addressed at least in part.
For example, recent actions taken by CalPERS will increase future contributions to the system
and aim to eliminate the unfunded liability for its pension program over about 30 years. An
additional example is the increased funding in basic infrastructure such as road maintenance in
the Financial Plan. Prepayment against unfunded liabilities may shorten this time period if all
actuarial assumptions hold true. If the assumptions do not hold true, and, as an example,
CalPERS experiences another significant investment loss, prepayment could help hedge the City
against the ensuing cost increases.
B2-4
Addressing City’s Long-term costs Page 5
Direction in relation to any prepayment of the City’s liabilities will provide guidance to staff
ahead of Strategic Budget Direction that is scheduled for April 21, 2015. The information that
follows provides staff’s recommendation for addressing these long term costs based on the order
of recommended priority from highest to lowest. These recommendations are based on analysis
of these obligations and the benefits obtained from making prepayments against those costs
while taking into account the need to balance the use of available resources against other
operating and capital program needs.
Examples of prepayment are provided for illustrative purposes. Although actual prepayment
amounts will vary based on the availability of one-time funding, the amounts depicted provide
context for evaluating the impact of a particular prepayment amount to the amortization of the
liability. Specific dollar amounts are not part of the recommendation. The amount of
recommended prepayment will come to the Council in April.
1. Actuarial Retirement Liabilities
There are three options presented in this category of actuarial retirement liabilities. The options
are presented in recommended priority order. They include prepayment to the CalPERS safety
pooled funds (recommended), prepayment to the City’s OPEB trust (secondary
recommendation), and prepayment to the City’s non-pooled pension plan (not recommended at
this time).
CalPERS safety pooled funds
Staff’s recommendation includes additional prepayment to the CalPERS safety pension pool to
reduce the unfunded pension liability.
Advantages of additional contribution:
7.5% assumed discount rate. The discount rate is generally the same as the
expected rate of return on investments, and is used to calculate the present value
of expected plan payments. The economic advantage to the City results from this
expected rate of return materially exceeding the City’s expected rate of return.
Net pension liabilities will be reported on the balance sheet beginning June 30,
2015. This will provide citizens and other users of these financial reports with a
clearer picture of the size and nature of the financial obligations to current and
former employees for past services rendered. Any prepayment will help reduce
this liability.
Prepayment further aligns current funding of existing and past benefits. An extra
payment amortizes a debt the City had accrued in past years.
Since the safety pooled funds have a distinct amortization table, prepayments
could shorten the term and/or reduce future rates paid.
Payment from and benefit accrued to the General Fund. Safety employees costs
are funded from the General Fund so the General Fund would be the source of
payment and would also benefit from lower future pension costs.
Additional payments are first directed to the side fund per CalPERS policy so the
City gets direct benefit from these payments. The side fund was created in 2003
as a result of CalPERS combining certain agencies. The agencies each had
different funding levels so CalPERS created a side fund to account for the amount
B2-5
Addressing City’s Long-term costs Page 6
the City was underfunded.
Disadvantages of additional contribution:
Market risk could create future additional liability costs if the 7.5% discount rate
is not achieved.
There is a need to balance the funding of other liabilities while maintaining levels
of service.
Contribution to risk pool. CalPERS policy called for contributions in excess of
the employer contribution rate to be included in the asset pool but accounted for
separately for purposes of setting individual employer contribution rates. On May
21, 2014 CalPERS adopted a change in methodology of applying additional
contributions sent by employers to pay a portion of the unfunded accrued liability.
o Although the policy change is advantageous, until the methodology
change is fully implemented the City can reduce its unfunded pension
liability by making additional contributions to the CalPERS safety side
fund which would provide direct results to the City’s unfunded liability.
Example
Prepayment of $1.5 million in 2014-15 and an annual prepayment, as available
from year end savings, of $300,000 for the next 15 years will reduce the
amortization by five years and save the City $10 million.
OPEB
Staff recommends that if the Council desires to select a secondary priority that additional funding
to reducing the City’s retiree health benefit liability be directed to the OPEB liability. This
recommendation could be in addition to a prepayment to the pension liability to the extent funds
are available.
Advantages of additional contribution:
Methodology and data source: CalPERS
B2-6
Addressing City’s Long-term costs Page 7
Payment could be made prior to the liability being a component of the City’s
balance sheet. Reducing the liability now will result in lower reporting amounts.
Recognition of implied subsidy will double this liability and the ARC starting in
2016-17 (estimated annual increase in the ARC is $380,000). Any prepayment
will reduce the ARC thereby saving the City money.
Prepayment balances the current funding of this existing and past benefit rather
than shifting the cost to the future.
The OPEB liability has a distinct amortization table so prepayment could shorten
term and/or reduce rates.
Payments could be from all funds with employees and could be higher than
payments may be if only funded from the General Fund. The benefit of the
prepayment accrues to all funds with employees.
If the priority is to focus on increasing the funded status of the City’s liabilities,
this liability has the lowest funded status of retirement benefit liabilities.
Disadvantages of additional contribution:
7.0% discount rate compared to the 7.5% rate for the pension plans. There is a
half-percent better return on investment in prepaying the pension liability versus
the OPEB liability.
Amortization is based on actual basis which could lead to future retrospective
liabilities. As amortization assumptions change moving forward, such as retiree
demographics, it is possible for the liability costs to increase.
There is a need to balance the funding of other liabilities while maintaining levels
of service.
This liability impacts all funds and full impact to all funds of making accelerated
payments will have to be assessed.
Example:
Prepayment of $1.5 million in 2014-15, if available from year end savings, would
reduce the ARC payment beginning in 2016-17 by $230,000 per year (of which
approximately 79% relates to the General Fund).
CalPERS miscellaneous pension plan
The staff recommendation is to not contribute additional prefunding of this liability at this time
because CalPERS does not have a direct way to specifically attribute these prepayments to the
City. CalPERS is considering making a change to its methodology to further link prepayment to
a City’s liability.
2. Deferred Infrastructure Maintenance Liabilities
There is a sample of high priority infrastructure needs in this section. There are others such as
the signal system, bike facilities, bridges, sidewalks, urban forest, park facilities (bridges, paths,
and other items in the parks,) and culverts which are not included in the storm drain category and
have been unfunded for years. The options are presented in recommended priority order. They
include roads (recommended), equipment (recommended), storm drains (alternate
recommendation), and facilities (not recommended at this time).
B2-7
Addressing City’s Long-term costs Page 8
Roads
The Five Year Financial Forecast anticipates additional funding for street reconstruction and
resurfacing. The staff recommendation includes additional one-time funding to deferred road
maintenance (beyond that which is available in the Capital Improvement Plan budget) only after
the other two priorities are addressed. However, it is relevant to acknowledge the need by
including it in this policy.
Advantages of additional contribution:
Reduce costlier future maintenance or reconstruction costs. It is less expensive to
conduct preventative maintenance than it is to conduct reactive maintenance or
reconstruction.
The City Council has pavement condition goals and this option furthers those
goals.
Additional funding will move toward holding pavement at its current condition.
A steady pavement condition provides longer term sustainability at the most
effective cost.
Lower costs to road users as a result of less vehicle damage.4
Disadvantages of additional contribution:
Does not reduce direct future expenditures as a prepayment of the actuarial
retirement liabilities could.
Example:
Adequate funding represents an additional cost of $1.2 - $2.9 million to maintain
or enhance PCI respectively.
4 For example, TRIP recently found that drivers in Los Angeles spend $2,485 extra each year because of bad roads.
http://www.tripnet.org/index.php. Founded in 1971, TRIP is a private nonprofit organization that researches,
evaluates and distributes economic and technical data on surface transportation issues.
B2-8
Addressing City’s Long-term costs Page 9
Equipment: Vehicles and Information Technology
This is a recommended alternate option primarily as a debt avoidance strategy to avoid financing
costs of equipment replacement. Modest ongoing increases in the Fleet Replacement and IT
Replacement funds coupled with continued replacement evaluation on a case-by-case basis could
provide for ongoing stability of equipment replacement while minimizing or eliminating the need
for financing. Staff is continuing to analyze the replacement schedules to determine if other debt
avoidance strategies exist. If financing costs can be avoided due to acquisition schedules or if
the cost-benefit analysis shows financing is advantageous, this option would not rise to a
recommended option.
Advantages of additional contribution:
Reduce costlier future maintenance or reconstruction costs. It is less expensive to
conduct preventative maintenance on vehicles and other equipment than it is to
conduct reactive maintenance.
Investment in information technology replacement would increase the likelihood
of improved service reliability to the customer and user.
Investment in vehicle replacement would increase the likelihood of improved
vehicle reliability and workforce efficiency.
Reduce likelihood of future equipment financing costs (debt avoidance). The City
reduced the maintenance schedule of equipment during the recent tight budget
years and is now facing a replacement schedule that exceeds pay-as-you-go
funding without additional investment. Debt financing of vehicles could impair
the ability from returning to future cash financing.
Disadvantages of additional contribution:
Investment in equipment does not reduce direct future expenditures as a
prepayment of the actuarial retirement liabilities could.
Storm Pipes
This option addresses the goal statement to maintain deferred maintenance of key city
infrastructure. The City has failed storm drains and additional funding in the range of $2.28
million - $4.98 million annually would provide for replacement, improve flood control, and
reduce costlier future maintenance costs. However, additional contribution does not reduce
direct future expenditures as a prepayment of the actuarial retirement liabilities could. This
option is not recommended for use of additional funding at this time.
Facilities
This option addresses the goal statement to maintain deferred maintenance of key city
infrastructure. Additional funding of $1.4 million annually would better meet best practices for
funding building maintenance and reduce future maintenance costs. However, additional
contribution does not reduce direct future expenditures as a prepayment of the actuarial
retirement liabilities could. This option is not recommended for use of additional funding at this
time.
B2-9
Addressing City’s Long-term costs Page 10
Policy Direction
Staff is developing the Fiscal Year 2015-17 Financial Plan based on direction from the City
Council, adopted policies, Major City Goals and Other Important Objectives, mandates and
operational necessities. Policy guidance on the priorities for accelerated payments of the City’s
liabilities will also direct the recommended use of City resources. The staff recommendation is
to further prefund certain long-term costs of the City and to focus first on additional payments to
the City’s pension costs, OPEB, roads, and equipment in that order as resources are available. If
approved by Council, staff will return with specific recommended allocations at Strategic Budget
Direction. The direction at this time and at Strategic Budget Direction will be the basis of a
policy for the City Council to consider in June as part of the 2015-17 Financial Plan.
Priority Recommend for
additional allocation
Not Recommended at this time
1 CalPERS safety pool CalPERS miscellaneous plan
2 OPEB Facilities
3 Roads Storm Pipes
4 Equipment
FISCAL IMPACT
No fiscal impacts related to the policy direction. Fiscal impacts relating to a change in policy
related to prepayment of the City’s underfunded liabilities, if any, will be described and
calculated in the 2015-17 Financial Plan.
ALTERNATIVES
No change. The City continues to pay its required contributions as calculated by CalPERS, as
required to meet OPEB ARC payments, and for infrastructure investment as approved by the
City Council.
ATTACHMENT
1. January 13, 2014 City of San Luis Obispo Capital Needs Summary
2. December 4, 2014 white paper discussion of the elements of a policy to prepay the City’s
unfunded obligations
T:\Council Agenda Reports\2015\2015-02-17\Unfunded Liabilities (Padilla-Stilwell)\PERS and liabilities CAR 2'17'15.docx
B2-10
MEMORANDUM
Date: January 13, 2014
To: Local Revenue Measure Advisory Committee (RMAC)
From: Daryl Grigsby, Public Works Director
SUBJECT: City of San Luis Obispo Capital Needs Summary
Overview
The RMAC has reviewed and absorbed a great deal of financial, capital, operational and service
delivery information over the last few months. The information below summarizes, in one place,
some of the key points relative to the City’s capital needs.
As the Committee is aware, 40% of Measure Y is expended on ongoing operational needs like
police patrol, fire safety, storm drain cleaning, traffic engineering, open space maintenance, and
other essential services provided by staff. The remaining 60% is spent on capital project needs,
which include infrastructure maintenance and improvement projects. Specifically, Measure Y
has been allocated toward street paving, sidewalk repairs, bike facility maintenance, pool and
park enhancements, facility maintenance, vehicle replacement and other needs. Assuming an
estimated annual Measure Y revenue stream of $6.6 M, approximately $3.9 M generated from
Measure Y revenue is allocated for capital projects each year. This revenue has been important in
providing essential services considering the following factors:
1. The City’s capital needs, like every other city in the State of California, exceed funding
from ongoing sources such as Sales Tax, Property Tax and the State Gas Tax. The needs
also exceed short-term revenue from sales tax measures or other mechanisms. This is not
an alarmist statement, but simply a reality regarding the cost to maintain high quality
infrastructure.
2. The City’s capital needs described below simply maintain what we already have, and do
not address new facilities or capacity. New public assets such as the upcoming Skate
Park, or the many critical facilities outlined in the recently approved Bicycle
Transportation Plan, are not included in this needs summary. The Skate Park is a $2.2 M
project that the City Council identified as a City priority based on citizen input. Measure
Y funding was allocated toward that project. The Measure Y allocation for the Skate
ATTACHMENT 1
B2-11
City Capital Needs Summary
2
Park, or any new facility, is a policy choice the Council determines between ongoing
maintenance needs and responding to public requests for new facilities or services. The
Bicycle Transportation Plan includes $64 M in new projects to be constructed in the
coming years. It is anticipated many of those projects will be eligible for future State and
Federal grants provided there is local contribution.
3. New facilities related to development, such as road widening or new roads, are not
included in the City’s list of infrastructure needs. That is because by policy, new facility
needs resulting from new development are paid for by developers. The Development
Impact Fee program is structured so each new development pays its fair share of the total
cost of needed facilities by contributing to the transportation, surface water, and parks
systems. The Prado Road Interchange, Prado Road extension and connection to Broad
Street, capacity improvements to Tank Farm Road, and other facilities, are funded
through Development Impact Fees.
4. The General Fund responsibility does not include assets owned by the Enterprise Funds.
Therefore, Parking, Transit, Water and Wastewater are not included in this summary.
San Luis Obispo Capital Needs
The City’s General Fund is used for the operations, maintenance and replacement of the
following publicly-owned assets:
Assets Maintained Using General Fund
1. Transportation
a. 133 miles of streets
b. 241 miles of sidewalks
c. 2,400 sidewalk curb ramps
d. 60.9 miles of bike lanes and paths
e. 2,020 street name signs
f. 70 traffic signals
g. 2,300 street lights
h. 18,900 street trees
i. 59 bridges (28 of which are Pedestrian/bike only)
2. Open Space and Recreation
a. 3,601 acres of open space
b. 4 community gardens
c. 28 parks (530 acres)
d. Parks play equipment
e. 47 miles of trails
3. Flood Control
a. 63 miles of storm drain pipe (22% Corrugated Metal Pipe)
b. 2,773 drainage inlets
ATTACHMENT 1
B2-12
City Capital Needs Summary
3
c. 537 storm drain manholes
4. General city assets
a. Buildings
i. 221,176 sq. ft.
ii. Related roof, HVAC, painting, elevators
5. 212 fleet vehicles and information technology equipment
As noted previously, every publicly-owned asset is under-funded at some level. The goal in
managing public infrastructure is not to have every element in perfect condition. Instead, the goal is
twofold:
1. Ensure the infrastructure fulfills the function intended, i.e. roads to safely carry traffic,
bridges to cross creeks, storm drains for managing surface water and eliminating flooding,
parks for recreation, etc.
2. Maintain, rehabilitate, and replace the infrastructure at the most appropriate time in its life;
waiting too long dramatically increases the cost of replacement.
The chart below takes a closer look at five of the 20 infrastructure elements noted above and
analyzes the annual financial need for storm drains, street paving, sidewalk ramps, buildings, and
park play equipment. These five were selected because there is either a Council-adopted policy or
industry-standard replacement cycle that determines the goal annual expenditure. The other 15
public assets also have funding shortfalls. Those shortfalls are not included as they are not based on
Council goals or industry standards. In addition, two of the five selected, Paving and Storm Drains,
represent the largest ongoing General Fund capital need of most local governments.
The chart indicates that for just those five elements of infrastructure the annual average investment
need to meet the goal is $12.5 M or $10.2 M more than the actual annual investment. This need is
based on Council adopted policy or best management practices for the asset.
The alternative annual average investment amount (as indicated in the chart) for the five
infrastructure elements is $6.8 M per year. The alternative amount is less than the goal investment
level and represents a lower standard and/or longer replacement cycle than that delivered by the
goal amount. This alternative total is $4.5 M more than the current annual investment. This amount
allows policymakers to consider alternatives to the goal annual average investment.
ATTACHMENT 1
B2-13
City Capital Needs Summary
4
Source: City of San Luis Obispo Public Works Department
The following sections discuss two of the five identified infrastructure elements – Street Paving and
Storm Pipes – in more detail.
1. Street Paving
One indicator of the quality of overall road infrastructure is the Pavement Condition Index (PCI).
The PCI is a National standard on a 0-100 scale that indicates the quality of a city’s or county’s
pavement. Generally the scale is:
100-70 Good/Excellent
50-70 At Risk
ATTACHMENT 1
B2-14
City Capital Needs Summary
5
25-50 Poor
0-25 Very Poor/Failed
The California Statewide Local Roads Needs Assessment concludes the average California road PCI
is 66. As of 2013, the PCI for San Luis Obispo was 71. Generally, any capital expenditure on roads
that is less than the goal annual average investment will lower that jurisdiction’s road PCI over time.
The $4.4 M goal annual average investment noted in the previous chart would increase San Luis
Obispo’s PCI from 71 to 80 after several years. 80 PCI is a Council goal established in 2009 during
discussions of the Pavement Management Program. That goal was established based on engineering
information that concluded a PCI of 80 is the most cost-effective condition to maintain. The cost per
foot to maintain a higher PCI is less than the cost per foot when the PCI deteriorates, especially
when PCI drops below 60.
The alternative annual average investment of $2.7 M noted in the chart would maintain the City’s
current PCI at 71 over time. Any annual investment less than $2.7 M results in a lower PCI for the
entire road network after several years at that level.
2. Storm Pipes
Most noticeable from the above chart is that the amount needed for Storm Pipes far exceeds the
annual investment. Storm drain replacement investment represents the greatest discrepancy relative
to need. Currently 22% of the City’s storm drain system is Corrugated Metal Pipe (CMP). This pipe
has a 30-50 year life, and in some cases has been in service for over 50 years. There are locations in
the City where the bottom sections of pipe have eroded away due to the friction of sediment and
water velocity. Measure Y has enabled the City to begin an annual investment level. There are many
cities in similar circumstances with no local funds to invest in storm drain replacement. The photo
below indicates a recent example of CMP replacement and shows the existing condition of the pipe.
Sample Photos from Corrugated Metal Pipe Replacement Project
Failed Corrugated Metal Pipe New High Density Polyethylene Pipe
ATTACHMENT 1
B2-15
City Capital Needs Summary
6
Federal Context
Every four years since 1998, the American Society of Civil Engineers (ASCE) produces an
analysis of the state of the Nation’s infrastructure. The ASCE, founded in 1852, utilizes
financial, engineering and operational information to assess the needs and condition of the
public’s infrastructure. An Advisory Council of professionals and stakeholders across the nation
reviews the information and produces a report card by assigning grades to each area of National
infrastructure. The Advisory Council also makes specific recommendations for each
infrastructure element on how to raise the overall condition, and thus the grade. The 2013
America’s Infrastructure Report Card studied the following elements:
1. Aviation
2. Bridges
3. Dams
4. Drinking Water
5. Energy
6. Hazardous Waste
7. Inland Waterways
8. Levees
9. Ports
10. Public Parks and Recreation
11. Rail
12. Roads
13. Schools
14. Solid Waste
15. Transit
16. Wastewater
Staff reviewed the information for #2 Bridges, #10 Public Parks and Recreation, and #12 Roads
since these infrastructure assets are maintained locally by the City of San Luis Obispo’s General
Fund. The grading system is, A=Exceptional, B=Good, C=Mediocre, D=Poor and F=Failing.
Excerpt from America’s Infrastructure Report Card
Asset and Grade Annual Need Annual Investment Annual dollar shortfall
and investment as
percentage of need
Bridges, C+ $20.5 B $12.8 B $7.7 B and 62%
Public Parks and
Recreation, C‐
$34 B $19 B $15 B and 55%
Roads, D $170 B $91 B $79 B and 53%
State Context
Every three years the League of California Cities, the California State Association of Counties, and
other local agencies publish the California Statewide Local Streets and Roads Needs Assessment.
This needs assessment analyzes data from cities and counties to determine infrastructure conditions,
annual investments, and overall needs. The 2013 report includes infrastructure and investment
information from 98 % of the State’s 58 counties and 482 cities. While earlier reports focused
exclusively on roads, the 2013 report included roads and Essential Components (storm drains,
sidewalks, signals, curb ramps, street lights).
ATTACHMENT 1
B2-16
City Capital Needs Summary
7
Summary of California Statewide Local Streets and Roads Needs Assessment
Asset Annual Need Annual Investment Annual dollar
shortfall and
investment as
percentage of need
Streets $3.23 B $1.3 B $1.95 B and 40%
Essential
Components*
$3 B $1.0 B $2.0 B and 33%
Bridges** $430 M $300 M $130 M and 69%
*curb ramps, sidewalks, storm drains, street lights, signals
**San Luis Obispo has 59 bridges. Bridges are rated by Caltrans on a 100 point ‘Sufficiency Rating’ Scale. Any
bridge under 50 is ‘Functionally Obsolete’. Four of the city’s bridges are rated under 50. Grant funding covers 89%
of the cost of ‘Functionally Obsolete’ bridges. The local share for each bridge replacement could range from $300-
500,000 depending on the structure.
Conclusion
Nationally and in the State of California, infrastructure needs exceed available resources. Current
funding sources cover between 33% and 62% of the annual need to maintain roads, bridges and
other public assets. San Luis Obispo is typical of cities in California and across the nation relative to
infrastructure investments. Each year the City Council is faced with difficult choices relative to the
use of General Fund investments. Capital investment has been a City priority, but the fact remains
that many cities in recent times have significantly reduced the General Fund contribution to capital
projects.
ATTACHMENT 1
B2-17
THIS PAGE IS INTENTIONALLY LEFT BLANK
City of San Luis Obispo, Council Agenda Report, Meeting Date, Item Number
FROM: Wayne Padilla, Director of Finance & Information Technology
SUBJECT: WHITE PAPER DISCUSSION OF THE ELEMENTS OF A POLICY TO
PREPAY THE CITY’S UNFUNDED OBLIGATIONS
DATE: DECEMBER 4, 2014
REPORT IN BRIEF
Included in the 2013-15 Major City Goal for Fiscal Health was the direction to staff to prepare a
cost/benefit analysis regarding the City’s ability to prepay its unfunded pension liabilities. This
report discusses what those liabilities are and includes a discussion about the City’s unfunded
liability for its post-retirement insurance program. After review of other agencies’ plans to
prepay their retirement obligation and discussion with the City’s actuary at the California Public
Employees Retirement System, staff is recommending that a policy should be developed that
identifies the unfunded liabilities that should be targeted for prepayment and whether the
prepayment of unfunded liabilities should include a specific pay off target deadline. The policy
should also consider whether excess reserve amounts above the mandatory 20% reserve level
and/or a portion of any excess revenues that are confirmed as available following the close of
each fiscal year should be used as the source for the prepayment.
DISCUSSION
Background
A component of the work program supporting Council’s Major City Goal of Fiscal Health in the
2013-15 Financial Plan directed staff to prepare a cost/benefit analysis regarding the City’s
ability to make payments on the CalPERS Tier 1 safety side fund, other pension obligations, or
to offset ongoing CalPERS employer rate increases, and to present the analysis with
recommendations to the City Council. A report providing this analysis was presented to the City
Council on April 15, 2014. At that time the Council approved staff’s recommendation to utilize
excess General Fund reserve amounts to prepay the retrospective deposit obligation in the
amount of $2.065 million that was owed to the CJPIA for the liability insurance program because
the immediate savings were larger than that which would have been obtained if the amount had
been used to prepay a portion of the Safety Side Fund liability. Council also authorized a
prepayment in the amount of $935,000 to be applied against the Safety Side Fund liability owed
to CalPERS.
At that time a commitment was made to return to the City Council with a recommendation for
how the City’s unfunded liabilities can be paid down over time. This report provides
information regarding the steps taken by other public agencies as they addressed their own
unfunded retirement liabilities and discusses the advantages of making prepayments against the
City’s unfunded liabilities. Also discussed is a strategy for a sustainable method of making
future prepayments that can be developed into a formal policy for future adoption by the City
Council.
ATTACHMENT 2
B2-18
Page 2
The Retirement Benefit Program
The City provides retirement benefits for full-time employees through the California Public
Employees Retirement System (CalPERS). Employees who serve as sworn public safety
officers (police officers and fire fighters) are members of the Safety Plan which has three benefit
tiers:
1. The first provides a 3% at age 50 benefit
2. The second tier for police provides a 2% at age 50 benefit, while the second tier for fire
personnel provides a 3% at age 55 benefit
3. The third tier program for both police and fire personnel provides a 2.7% at age 57 benefit
Employees who work in other capacities such as planners and clerical staff are members of the
Miscellaneous Plan, which also has three benefit tiers.
1. The first tier provides a 2.7% at age 55 benefit
2. The second tier provides a 2% at age 60 benefit
3. The third tier provides a 2% at age 62 benefit
CalPERS establishes the annual employer contribution rate that is charged against the City’s
payroll costs for eligible employees. The safety pool contribution rate is comprised of these
components:
1. Normal Cost, which is the amount needed to fund benefits earned by active employees in the
upcoming year
2. Unfunded Rate which is the amount charged to pay down the pool’s unfunded liability
3. Amortization of Side Fund which is the amount required to amortize the safety side fund
liability over 22 years
In addition to the employer contribution rate, CalPERS sets the member contribution rate which
is paid by each employee through a payroll deduction. The amounts of each rate applicable to
2014-15 are shown below:
Police Fire
Tier 1 Tier 2 Tier 3 Tier 1 Tier 2 Tier 3
Normal Cost 20.128% 15.973% 12.25% 20.128% 17.128% 12.25%
Unfunded Rated 9.428% 5.49% 9.428% 5.937%
Amortization of Side Fund 15.645% 15.645%
Employee Contribution 9.0% 9% 12.25% 9% 9% 12.25%
ATTACHMENT 2
B2-19
Page 3
Starting in 2015-16, CalPERS has changed the funding requirements for the Safety Pool Plan so
that all pool members will pay a fixed amount towards the unfunded liability instead of an
employer rate multiplied by the actual safety payroll processed by the City. The effective rates
and fixed amount to be paid for 2015-16 are shown in the table below.
Police Fire
Tier 1 Tier 2 Tier 3 Tier 1 Tier 2 Tier 3
Normal Cost 20.23% 15.373% 12.250% 20.23% 17.293% 12.250%
Amortization of
Unfunded*
Employee Contribution 9.00% 9.000% 12.250% 9.00% 9.000% 12.250%
*The unfunded component of the annual employer charge for the Tier 1 program has been
replaced by a fixed dollar amount payment. This amount is $2,948,165; Tier 2 and 3 programs
do not have an unfunded rate component.
Miscellaneous Plan
Normal Cost 10.656%
Unfunded Rate 17.644%
Employee Contribution 7.930%
Each October, CalPERS provides an actuarial valuation report for each benefit plan that updates
certain values to reflect changes in plan activity since the previous valuation. These changes
include but are not limited to:
The difference between the expected 7.5% rate of return and the actual amount
realized
Changes in the number of plan members who retire each year
Changes in the number of new plan members
Changes in the annual payroll provided to existing members of the plan
Miscellaneous Plan
Normal Cost 10.615%
Unfunded Rate 15.640%
Employee Contribution 8.000%
ATTACHMENT 2
B2-20
Page 4
The actuarial valuations also provide new information on the variables associated with
maintaining the plan, such as the amount of the unfunded liability and the annual Employer
Contribution rate described above, which represents the amount for every dollar of safety payroll
that the City is required to pay from the start of the following fiscal year. The information used
for this report is taken from the latest valuation report that was issued for the year ending June
30, 2013.
Interest Yields and Discount Factors
The City places its idle cash in several different investments. For short term cash needs, the City
uses the state Local Agency Investment Fund which pays an annual return of approximately
.25%. For monies invested for longer terms, the interest rate varies from approximately .50% to
1.9%. For the quarter ending September 30, 2014 the yield on the City’s portfolio was .82% As
discussed in the next section of this report, CalPERS assumes that all investments and liabilities
will return 7.5% each year. When this does not occur and other changes in variables do not
mitigate the shortfall, the unfunded liability amounts increase.
The currently adopted CalPERS actuarial assumptions rely on an investment return of at least
7.5% on all of the amounts it invests as well as on all of the amounts that are owed to it (i.e.
unfunded liabilities such as the safety side fund amount). This is known as the discount factor. If
the actual rate of return is less than this amount and all other factors remain the same (i.e.
number of annual retirements, mortality, compensation adjustments, etc.), later annual valuations
will reflect a greater unfunded liability. This means that while the city may prepay all or a
portion of the safety side fund liability, at any time that CalPERS does not earn the required rate
of return on the monies that the city has paid, an additional liability may be created in the safety
pool benefit program that would not reappear as a separate safety side fund obligation. This
generally results in increases to contribution rates for the safety pool and the City’s safety pool
liability would be increased based on its proportional share of all pool liabilities. As discussed
later, the City benefits from the effects of pooling when market losses are realized by CalPERS.
What are the Unfunded Liabilities?
Retirement Programs
As previously discussed, the City maintains its retirement benefit program with the California
Public Employees Retirement System (CalPERS). These programs provide retirement benefits
for both sworn public safety and non-sworn staff members. These retirement benefit programs
are known as the safety and miscellaneous plans, respectively.
Prior to July 2007, the City maintained a standalone public safety retirement plan through
CalPERS. Beginning with the June 30, 2003 actuarial valuation CalPERS created risk pools in
order to combine individual plans having less than 100 members with the benefits of risk sharing
resulting from the pooling of resources. When the City joined the safety pool in 2007, CalPERS
created the safety side fund to account for the difference between the funded status of the City’s
standalone safety plan and that of the safety pool. At the time that the City joined the safety
pool, its standalone safety plan had an unfunded liability known as the safety side fund liability
which totals $24.6 million according to the latest CalPERS actuarial report as of June 30, 2013.
ATTACHMENT 2
B2-21
Page 5
The safety plan’s share of the safety pool’s unfunded liability which is an additional amount
owed to CalPERS as of June 30, 2013 is $29.2 million. The total unfunded liability at June 30,
2013 for the safety plan is $53.8 million based on the market value of plan assets. This amount is
comprised of 3 components, each with their own amortization period. The first is the safety side
fund ($24.6 million) which has a 21 year amortization period; the next portion is the pre-2013
pool amount ($15.3 million) which has a 22 year amortization period; the last portion is the
plan’s share of asset gains and losses ($14.1 million) which has a 30 year amortization period.
Overall the current funding level is set to retire all components of the liability within a 30 year
period.
The miscellaneous plan, which is not part of a pool, also has an unfunded liability of $61.8
million as of June 30, 2013 based on the market value of plan assets. Employees who participate
in the miscellaneous plan represent programs that are funded from the General and Enterprise
Funds. Accordingly, any changes in funding rates impact all of these programs.
Other Post-Employment Benefits (OPEB)
In addition to the liabilities that exist for the retirement program, the City also maintains a retiree
health benefit program in accordance with the requirements of the CalPERS Health Benefit
Program. This program provides retirees who qualify with a $119.00 monthly benefit toward the
cost of their health insurance premiums. (There is a group of 6 retirees for whom the City
contributes more to the cost of their health insurance premiums until they reach age 65 or pass
away.) The City has been a member of this program since 1993 and entered into an agreement
with the California Employers’ Benefit Trust (CERBT) to pre-fund the City’s OPEB liability
during the 2008-2009 fiscal year. Under the current funding plan, the City is on track to retire the
unfunded liability in 23 years.
An actuarial valuation was completed on April 15, 2014 for the year ending June 30, 2013 which
reported that the unfunded liability as of June 30, 2013 was $4.4 million based on the actuarial
value of assets. The annual contribution toward the cost of this benefit program is currently
$588,000. This amount is made up of the City’s share of cost to prefund the unfunded liability
($297,000) and premium contributions made by retirees who purchase their health insurance
under the City’s health insurance program.
A recent change has been made to the Actuarial Standards of Practice rules that will require the
calculation of an implied subsidy starting in two years. An implied subsidy is an actuarially
determined liability that results from allowing retirees to both purchase their insurance and
obtain the post-retirement benefit at the same rates as active employees. Because the cost of
health care increases with age, and because retirees are older than the population of active
employees, the true cost of providing health care benefits to retirees is generally higher than the
amount reflected in the health insurance premium cost. This reporting change will result in an
increase in the amount of the unfunded liability prepayment portion of the Annual Required
Contribution (ARC) to reflect the cost associated with the higher liability starting in 2016-17.
The estimated increase in cost for that year is $383,000. (the General Fund provides 79% of the
funding for this program based on the distribution of employees among the various programs
operated by the City).
ATTACHMENT 2
B2-22
Page 6
In the latest valuation report that was completed as of June 30, 2013, the actuary calculated the
implied subsidy using the actuarial value of assets to be $5.0 million. As a result, the combined
total of the OPEB unfunded liability is $9.4 million as of June 30, 2013.
The Effects of GASB Changes on Pension and OPEB Reporting
While the City has been reporting its unfunded liabilities in its Comprehensive Annual Financial
Report each year in accordance with the current requirements of Governmental Accounting
Standards Board pronouncement #27, starting with the financial statements that will be prepared
for the Fiscal Year ending June 30, 2015 all cities must report their unfunded pension liability on
their Statement of Net Position in accordance with GASB pronouncement #68. This change in
reporting means that for the first time, the unfunded pension liability must be measured using the
fair market value of assets and reported on the agency-wide balance sheet. Additional
documentation regarding the City’s participation in the retirement program will also be provided
in accordance with the pronouncement.
The change in reporting requirement is intended to create a more prominent presentation of the
unfunded liability, but is not intended to change the manner in which the City continues to
operate or fund its operations. After the change in presentation method is made, the City will
continue to reflect a high level of solvency.
The actuary that prepared the City’s most recent OPEB valuation report has indicated that a new
Governmental Accounting Standards Board (GASB) pronouncement may soon be issued that
will require public agencies to report the value of the unfunded liability (including the implied
subsidy portion) in the same manner that the pension plan unfunded liability will be reported at
the end of the current fiscal year under GASB 68. The starting date for the new reporting on the
OPEB unfunded liability has not been determined.
Further Discussion of the OPEB Unfunded Liabilities
The current funding strategy for the OPEB program reflects the payoff of the unfunded liability
within 23 years based on current assumptions. With the change in reporting and the addition of
the implied subsidy liability, the Annual Required Contribution (ARC) will increase as discussed
above. Staff is researching what the effects of not fully funding the ARC will be on the City’s
credit rating to find out if it makes financial sense to continue paying only the annual amount
needed to prepay the portion of the unfunded liability that does not reflect the implied subsidy.
What Have Other Public Agencies Done to Pay Down Their Pension Liabilities?
A check of other agencies has revealed the following actions that each has taken. It is notable
that most of these agencies have not identified a specific period by which they intend to have
their unfunded liabilities paid down. Most are making at least one prepayment in an effort to
begin paying down their liability with whatever resources they have available at the time. Only
one has completely retired the unfunded liability.
ATTACHMENT 2
B2-23
Page 7
Huntington Beach - $278 million unfunded liability
At the time the city was preparing its 2013-14 budget, the Council adopted staff’s
recommendation to make a prepayment to CalPERS based on a finding that excess revenues
existed at the end of each fiscal year. According to the Finance Director, the City has settled on
paying $1.0 million per year from their excess revenues against their safety plan unfunded
liability with the intent that the City will reduce the amortization period by 5 years. This will
reduce the amortization period from 30 years to 25 years. The city has adopted the theory that it
should pay for promises already made to its employees before entering into new ones.
Santa Maria - $5.6 million Fire Safety Side Fund liability
The City elected to utilize an inter-fund loan from its solid waste enterprise fund in order to pay
down the unfunded liability in full. The enterprise fund is being repaid from retirement plan cost
savings over 10 years with interest set at 3%.
Newport Beach – $257.9 million unfunded liability
The city is making $250,000 quarterly prepayments this year to prepay the safety program’s
unfunded liability ($163.2 million). This is the limit of what they can afford to spend and there
does not appear to be a specific target set for the reduction of the amortization period. Staff is
considering a proposal that would utilize future savings in PERS costs that are realized at the end
of each year (estimated to be from $250,000 - $500,000) as a source of future prepayments.
Menlo Fire District – $38 million unfunded liability
The District plans to use savings from its unspent payroll budget to make prepayments starting in
March 2015. There is no formal plan to reduce the amortization period by a specified period.
Irvine - $91.1 million unfunded liability
The city adopted a plan that is funded largely from a $61 million reserve that exists in its Asset
Management Plan Fund (AMPF) and also uses $1.0 million annually from other fund excess
reserves. The plan to fund the prepayments includes a one-time upfront prepayment of $3.0
million from excess reserves, followed by annual installments of $5.0 million each from the
AMPF and an additional $1.0 million that will come from other excess reserve monies. Savings
generated from the prepayments will be used to repay the AMPF so that the fund reserve does
not fall below $43.9 million over the 10 year period.
Laguna Beach - $53 million unfunded liability ($24 million miscellaneous; $29 million safety
pool)
The city approved a $1.0 million prepayment against its unfunded liability from 2014-15 excess
reserves. In the future, up to $1.4 million is to be programmed for annual prepayments starting
no later than 2015-16 without impacting current city services.
Costa Mesa - $228 million unfunded liability ($144 million safety; $84 million miscellaneous)
The city approved a $6 million prepayment at the end of 2013-14 toward its fire side fund
liability and the use of the annual savings that result to make further prepayments against that
obligation. In addition, they approved making early payments of the required annual contribution
for the miscellaneous plan to take advantage of the discount available and also approved the
future prepayments of up to $500,000 annually toward the unfunded liability
ATTACHMENT 2
B2-24
Page 8
San Luis Obispo – $115.6 million unfunded liability
The City Council approved a $935,000 prepayment on the Safety Side Fund liability during the
Mid-Year Budget Update session and a second $300,000 prepayment was made as part of the
2014-15 Supplemental Budget plan. Both prepayments came from excess reserves in the
General Fund. The City elected to continue paying the original employer rates rather than take
advantage of the rate savings that the prepayments generated (approximately .5%) in order to
generate additional prepayments during the rest of the fiscal year.
Summary
To summarize the actions taken by these agencies, with the exception of Santa Maria, all have
chosen to use savings and/or excess reserves to provide the resources necessary to make the
prepayments that have been called for by their prepayment plans. Inter-fund loans are not always
an appropriate means of financing long-term obligations since they restrict the available
enterprise fund resources for the duration of the loan and possibly lower enterprise fund reserve
levels below those needed to support the start of construction on several significant capital
projects.
It was also noted that several cities including Irvine stated that they will review their policy and
the effect of all prepayment assumptions each year to determine whether any changes are needed
to the prepayment plan.
Prepayment Strategy Considerations
It is important to note that with the recent changes in retirement funding that have been put into
place by CalPERS, the City is expected to pay off the unfunded liability within 30 years based on
current actuarial assumptions. In the past, the retirement system used rolling amortization
schedules to determine when the unfunded liabilities would be paid off. This meant that the
payoff dates were continually being moved into the future. One consideration that should be
taken into account when determining whether a policy for the repayment of these liabilities
should be created is whether there is a significant advantage to making additional payments to
retire the debt early. Therefore, one objective of a policy to prepay unfunded liabilities could be
the balancing of resources between those needed to meet current needs with the need to retire
existing unfunded debt.
As seen with the other cities’ efforts to address their unfunded liabilities, most have not set a firm
funding objective other than to begin making prepayments to reduce their liabilities. Irvine has
targeted a 98% funding objective by the year 2023 and Huntington Beach has sought to reduce
their unfunded liability amortization period from 30 years to 25 years.
According to the City’s CalPERS actuary, Barbara Ware, one of the variables to consider when
establishing a policy for prepaying a retirement liability is the period of time when employees
will begin drawing their benefits because this provides assurance that the benefits are fully
funded. The actuary that prepared the OPEB valuation report also indicated that the timeframe
in which most plan participants will be retired should be considered as part of a prepayment
strategy for the same reason. CalPERS and the OPEB valuation consultant both have the ability
ATTACHMENT 2
B2-25
Page 9
to provide the City with statistics showing when a majority of the members from these plans are
likely to retire.
Both the CalPERS and OPEB actuaries are also able to provide amortization tables that provide
the City with the ability to determine the timing and amount of each prepayment that would be
required to retire the unfunded liability of these plans over a specified period.
As stated above, all of the agencies that were contacted about their retirement prepayment plans
intended to use excess reserves, excess revenues or excess savings that were identified at the end
of a fiscal year to make their prepayments. The new policy should also identify where the
resources that will be used for making the prepayments will come from.
ATTACHMENT
Report to Council from April 15, 2014 outlining retirement repayment options
ATTACHMENT 2
B2-26
THIS PAGE IS INTENTIONALLY LEFT BLANK
Addressing the City’s Long
Term Liabilities
Wayne Padilla, Director of Finance & IT
Jason Stilwell, Interim Director of IT & Financial Planning
February 17, 2015
1
Why we are here?
2013-15 Major City Goal: Sustain Essential Services,
Infrastructure, and Fiscal Health
Identify and address long-term liabilities that are important to our fiscal
health
Analyze the City’s long-term pension obligations and report to the
Council on options for paying off CalPERS liabilities
Continue to monitor pension costs and consider strategies to
effectively reduce liabilities associated with the pension program
Identify and address long-term liabilities that are important to our fiscal
sustainability
Fiscal Responsibility Philosophy
The City will identify all long-term liabilities and strive to achieve a
higher funded portion on pension obligations and manage all liabilities
to maintain and enhance fiscal responsibility
2
Recommendation
1.Give priority consideration to accelerated payments to the unfunded pension liability, Other Post Employment Benefit (OPEB) liability, roads infrastructure, and equipment replacement funds (in that order).
2.Return at Strategic Budget Direction with recommendations to allocate portions of available one-time resources to make prepayment to certain long-term liabilities of the City based on the prioritization adopted by the City Council.
3.Develop a Budget Policy for incorporation in the 2015-17 Financial Plan that reflects this policy direction regarding the use of one-time resources.
3
Long Term Costs
Additional reporting of long term costs
City has a balanced approach to paying long-
term costs while providing current levels of
service
City has the ability to make accelerated
payments
4
Analysis
Staff reviewed two categories of long term costs
Actuarial accrued liabilities
Deferred maintenance liabilities
Findings support accelerated payment priority
Pension liability,
Other Post Employment Benefit (OPEB) liability,
Deferred road maintenance, and
Equipment replacement.
5
6
-$70,000
-$60,000
-$50,000
-$40,000
-$30,000
-$20,000
-$10,000
$0
Negative Funded Status $ (thousands)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Funded Status %
Funded Status
7 Extra payments now provide savings later
8
Priority Recommend for additional
allocation
Not Recommended
at this time
1 CalPERS safety pool CalPERS
miscellaneous plan
2 OPEB
Facilities
3 Roads Storm Pipes
4 Equipment
Prepayment Priority
Next Steps
Strategic Budget Direction
Specific recommendations about proposed
allocations for this purpose
Preliminary Budget Review
Policy statement of prepayment included in
2015-17 Financial Plan for Council’s
consideration in June
9
Recommendation
1.Give priority consideration to accelerated payments to the unfunded pension liability, Other Post Employment Benefit (OPEB) liability, roads infrastructure, and equipment replacement funds (in that order).
2.Return at Strategic Budget Direction with recommendations to allocate portions of available one-time resources to make prepayment to certain long-term liabilities of the City based on the prioritization adopted by the City Council.
3.Develop a Budget Policy for incorporation in the 2015-17 Financial Plan that reflects this policy direction regarding the use of one-time resources.
10
Questions?
11