HomeMy WebLinkAbout11-07-2017 Item 11 Setting the Stage - Process for Developing a Fiscal Health Response Plan
Meeting Date: 11/7/2017
FROM: Shelly Stanwyck, Parks and Recreation Director
SUBJECT: SETTING THE STAGE – PROCESS FOR DEVELOPING A FISCAL HEALTH
RESPONSE PLAN
RECOMMENDATION
Consistent with the City’s 2017-19 Fiscal Sustainability and Responsibility Major City Goal,
receive and file a report on the process to develop a Fiscal Health Response Plan.
DISCUSSION
2017-19 Major City Goal: Fiscal Sustainability and Responsibility
With the adoption of the City’s 2017-19 Financial Plan, Council continued to address the City’s
long-term financial sustainability by adopting the Major City Goal – Fiscal Sustainability and
Responsibility. The adopted Financial Plan outlined a work program for that Major City goal
which included to engaging residents, staff, businesses and other interested members of the
community in developing strategies to address the fiscal challenges ahead with a focus on the
City’s long-term financial sustainability. This agenda report provides an overview of the process
to develop a Fiscal Health Response Plan and seeks the Council’s concurrence of that process
through this agenda item.
Defining the Problem
Like almost 3,000 other member agencies in the California Public Employees Retirement System
(CalPERS), the City is facing significant increases in required pension contribution costs. The
City’s annual CalPERS costs are projected to more than double in ten years; growing from $7.8
million in 2014-15 to $19 million in 2024-25 for the General Fund. These costs will continue to
grow through 2031-32 and affect all funds including the City’s Enterprise Funds (Water, Waste
Water, Transit, and Parking).
The City has determined that expenditures need to be reduced by approximately $8.9 million (7.5
million from the General Fund and $1.4 million from the Enterprise Funds) over the next three
years to address these rapidly rising costs. The size of the problem has been informed using
fiscal forecasting supported by third party economic models as well as the City’s outside sales
tax advisor and a separate actuary1 who specializes in pensions. The City’s forecasting is based
on assumptions such as:
1) Continuing current levels of service
2) Continuing the commitment to capital investment including a slight increase due to
ongoing maintenance needs
3) Modest long-term revenue growth and inflation
4) CalPERS’ required pension contributions
1 A person who compiles and analyzes data and statistics and uses them to calculate benefit premiums.
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5) Local Revenue Measure (Measure G) funds will continue and be used consistent with
voter directive and Council policy
California Public Employees Retirement System “CalPERS” 101
As mentioned previously, the City is a member of CalPERS, a State of California executive
branch agency. This agency manages pension and health benefits for over 1.6 million
employees, retirees, and families. The City contracts with CalPERS to provide “defined benefit”
pensions. It should be noted that City employees do not participate in Social Security.
This type of pension is based on a formula which includes the years of service, final
compensation, age and a multiplier to determine the employee’s pension benefit. The formula is
determined by an employee’s date of hire and employee group (for example, public safety is
different from non-public safety). In December 2012, the City Council adopted a second pension
tier as a means to control costs, which was followed by the Public Employees’ Pension Reform
Act of 2013 (“PEPRA”) creating a mandated third tier, as shown in the table below.
City of San Luis Obispo Employee Benefit Formulas
Group Tier 1 Tier 2 PEPRA
Miscellaneous 2.7% @55 2% @ 60 2% @ 62
Police Safety 3% @ 50 2% @ 50 2.7% @ 57
Fire Safety 3% @ 50 3% @ 55 2.7% @ 57
Employees and the City contribute various amounts of the total required payment each year into
the CalPERS investment fund. CalPERS then invests that contribution, and the combination of
the contribution and interest earned are used to pay retirement benefits that employees have
accrued. The required payment includes both normal costs and costs related to the unfunded
liability. The normal costs are the amount of money set aside based on actuarial assumptions for
future benefits. The unfunded liability is the amount of money by which future payment
obligations exceed the present value of funds available. The unfunded liability costs exist and are
still due even if the City had no employees.
It is not currently feasible for the City to leave CalPERS without incurring significant costs. To
exit CalPERS, the City would have 30 days to meet its projected (worst case) financial
obligations at the time of separation currently estimated to be from $377 to $495 million.
Furthermore, the current legal framework in California restricts cities’ ability to reduce
retirement benefits for current employees, as well as retirees.
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Setting the StageProcess for Developing a Fiscal Health Response PlanLike 3,000 other member agencies in CalPERS, the City of San Luis Obispo is facing significant financial challenges ahead due to increased pension costs. 111-07-2017 Item 11 - Staff Presentation
Staff RecommendationConsistent with the City’s 2017-19 Major City Goal: Fiscal Sustainability and Responsibilityreceive and file a report on the proposed process to develop a Fiscal Health Response Plan.211-07-2017 Item 11 - Staff Presentation
Good Fiscal Management Including fiscal policies to guide daily operations and long-term solutions to ensure a continued balanced budget.Public EngagementInvolving the City Council, community, and staff in discussions about solutions.Quality ServicesProviding quality services to the community through committed employees.San Luis Obispo is committed to addressing its fiscal challenges311-07-2017 Item 11 - Staff Presentation
Overview of Tonight’s Presentation4Inform –Defining the ProblemPlan–Developing a Plan to Address the ProblemEngage–Public and Staff Engagement11-07-2017 Item 11 - Staff Presentation
What is the Problem?The City’s annual costs for CalPERS will more than double in 10 years.To address these increases, the City needs to reduce expenditures by $8.9 millionin the General Fund & Enterprise Funds over the next three years.$7.8 million$19 million2014–15 ANNUAL CALPERS COST2024–25 PROJECTED CALPERS COST511-07-2017 Item 11 - Staff Presentation
Fiscal Forecast Assumptions Inform Size of ProblemBased on current levels of service.Continued commitment to capital investment.Modest long term revenue growth and inflation.CalPERS required pension contributions.Informedby Beacon Economics, HDL and the City’s third-party actuary Bartell & Associates.Local Revenue Measure (Measure G) funds will continue and be used consistent with voter directive and Council policy.6INFORM11-07-2017 Item 11 - Staff Presentation
Retirement Benefits BasicsThe California Public Employees Retirement System (“CalPERS”) is an agency in the state’s executive branch that manages pension and health benefits for more than 1.6 million employees, retirees and families.The City contracts with CalPERS to provide a “defined benefit” pension; meaning the retirement benefit is set based on years of service, final compensation, age, and a multiplier in the benefit formula.City employees do not participate in Social Security.Formulas differ between public safety employees and non-public safety employees, as well as hire date.INFORM7D211-07-2017 Item 11 - Staff Presentation
Slide 7D2 Isn't it some years of highest compensation rather than just final compensation? Need to clarify because critical audience will sense spiking.Don, 10/3/201711-07-2017 Item 11 - Staff Presentation
Retirement Benefits BasicsBenefits to retirees are determined based on formulas that indicate the percent of final compensation and the retirement age.For instance, a 2% @ 60 formula means the retirement benefit is 2% of final compensation, times the years of CalPERS service.INFORMCityTier 1Tier 2PEPRAMiscellaneous 2.7% @ 55 2% @ 60 2% @ 62Police Safety 3% @ 50 2% @ 50 2.7% @ 57Fire Safety 3% @ 50 3% @ 55 2.7% @ 57811-07-2017 Item 11 - Staff Presentation
How are CalPERS pensions funded?Employees and the City contribute various amounts of the total payment each year into the CalPERS investment fundCalPERS then invests that contribution, and the combination of the contribution and interest earned are used to pay retirement benefits that employees have accruedCalPERS uses actuarial analysis to determine the funding needed to pay contractually obligated benefits.INFORMRetirement Benefits Basics911-07-2017 Item 11 - Staff Presentation
Retirement Benefits BasicsWhat is the difference between Normal Costs and Unfunded Liability?INFORMNormal Costs• The amount of money based on actuarial assumptions that must be set aside, for future pensions benefits.Unfunded Liability• The amount of money by which future payment obligations exceed the present value of funds available.10D311-07-2017 Item 11 - Staff Presentation
Slide 10D3 Other agencies have found it useful to use the home mortgage analogy here. You don't set aside all of the money now to pay off your home mortgage. You build it up over time. That's why ___% of CA cities have unfunded liability. What's changed now is the amount these unfunded liabilities have grown due to the Great Recession decline in CalPERS investment earnings to cover them.Don, 10/3/201711-07-2017 Item 11 - Staff Presentation
Can the City leave CalPERS?To exit the CalPERS system, the City would be required to pay between $377- $495 million in terminations costs.Current laws also restrict the ability of cities to reduce retirement benefits for current employees and retirees.INFORMRetirement Benefits Basics1111-07-2017 Item 11 - Staff Presentation
Managing CalPERS Costs Through the Years• Enhanced in 2000• Reduced in 2013Benefit Levels• Retirees living longerDemographic Changes• Creating the unfunded liabilityInvestment losses during the Great Recession• 2016 Adjustment by CalPERS Reduced rate of returnINFORM1211-07-2017 Item 11 - Staff Presentation
New Lower Benefit Retirement Tiers establishedEmployees pay a greater share of the total pension costsRetirement age increasesPaying down unfunded retirement liabilitiesWhat Has the City Already Done to Address CalPERS Costs?INFORMCityTier 1Tier 2PEPRAMiscellaneous 2.7% @ 55 2% @ 60 2% @ 62Police Safety 3% @ 50 2% @ 50 2.7% @ 57Fire Safety 3% @ 50 3% @ 55 2.7% @ 571311-07-2017 Item 11 - Staff Presentation
How Pension Costs GrowINFORM14In thousand11-07-2017 Item 11 - Staff Presentation
If we do nothing…INFORMIn thousandsIM1311-07-2017 Item 11 - Staff Presentation
Slide 15IM13 Suggested talking points - The blue line indicates actual, budget, and forecasted GF REsources often thought of as Revenue and the red line shows expenditures. You can see that expenditures are above revenues in 2017-17 (check this with Xenia). When we see this happen for a short term, we can use one time money above the policy reserve to bridge the gap. However, this chart shows that basedon our forecast expenditures outpace Resources. The yeallow line indicates the amount under our policy level reserve that we anticipate if we do not address this problem. The amounts grow significantly starting in 2021 and increase to an ending balance that is $81 m below policy level.Irons, Monica, 10/4/201711-07-2017 Item 11 - Staff Presentation
Take action in the next 3 yearsINFORMIn thousands11-07-2017 Item 11 - Staff Presentation
1.Following the City’s Fiscal Responsibility Philosophy which includes:Informed decision making, shared responsibility, increased transparency, aligned investments, diversified and aligned revenue sources, long-term unfunded liabilities, continued efficiency and effectiveness.2.Activation of the Fiscal Health Contingency Plan which includes a hiring and travel “chill”.3.Adoption of the 2017–19 Major City Goal: Fiscal Sustainability & Responsibility4.Prioritize one-time funds toward the payment of unfunded liabilities and infrastructure.Response to the Problem17PLAN11-07-2017 Item 11 - Staff Presentation
How Do We Fix the Problem?USE AN ITERATIVE PROCESS TO DEVELOP A PLANA process will be used which takes input and identifies components for a plan and how they may be apportionedTHE PLANA plan is needed to guide the responses to the fiscal shortfallCOUNCIL DIRECTIONBoth strategic and specific direction will be needed from CouncilPLAN1811-07-2017 Item 11 - Staff Presentation
New Ways of Doing BusinessPLANOperational ReductionsEmployee ConcessionsRevenue OptionsFiscal Health Response Plan: Potential Components 1911-07-2017 Item 11 - Staff Presentation
Inform public and staff, answer questions, receive feedbackStaff develops preliminary options and scenariosSeek foundational direction from Council in DecemberProcess for developing the Fiscal Health Response PlanPLAN2011-07-2017 Item 11 - Staff Presentation
Fiscal Health Response PlanOCTOBERInform community & staffNOVEMBERCity Council Meeting to consider process to develop planDECEMBERCity Council Meeting for direction on how plan components are to be distributedJAN-MAR Develop components of plan based on Council directionAPRIL Plan adoption at Strategic Budget DirectionJUNE Budget adoption consistent with planPLAN2111-07-2017 Item 11 - Staff Presentation
December 12thCouncil Meeting22Solving the ProblemUpdate to 10 year Fiscal Forecast10 Year CIPDirection on Components of Fiscal Health PlanDirection on Use of One-Time Funds11-07-2017 Item 11 - Staff Presentation
Continued Engagement of the Public and Staff23Press releasesE-notificationsOpen City HallPresentationsInfographicsWebpageStaff & Community Informational Sessions11-07-2017 Item 11 - Staff Presentation
Staff RecommendationConsistent with the City’s 2017-19 Major City Goal: Fiscal Sustainability and Responsibilityreceive and file a report on the proposed process to develop a Fiscal Health Response Plan.2411-07-2017 Item 11 - Staff Presentation
Participate by attending Council Meetings or online at Open City Hall (www.slocity.org/opencityhall)Sign up for e-notification at www.slocity.orgContact Us: fiscalhealth@slocity.orgwww.slocity.org/fiscalhealthHow the Public and Staff can to Stay Involved2511-07-2017 Item 11 - Staff Presentation
Why are CalPERS Costs going up?
A variety of factors have contributed to increased CalPERS costs including portfolio losses from
the market crash during the Great Recession, retirees living longer than actuarial projections, and
past legal decisions about employee benefits (which are largely out of the City’s control). Most
recently, in late 2016, CalPERS adjusted its investment strategy to include more conservative
investment assumptions to protect its assets. This decreased the expected rate of return (also
known as the discount rate) on investments leading to increases to required contributions from
member agencies.
What has the City Done to Address CalPERS Costs?
The City has established new, lower retirement benefit tiers and approximately 40% of all City
employees are now in Tier 2 or PEPRA. These new tiers create a higher age of ret irement and
lower benefit which results in cost savings through lower normal costs . Employees also pay a
greater share of the total pension costs. In 2016-17, employees paid 21% of the City’s total
pension costs (exact percentages vary by bargaining group and tier). Lastly, Council has adopted
fiscal policies which have resulted in $2.74 million going to pay down the existing unfunded
liability thereby lowering the City’s obligation overall.
In 2017-18 the City continued to implement the previously adopted Fiscal Responsibility
Philosophy, activated the Fiscal Health Contingency Plan (resulting in hiring and travel “chills”)
and adopted the Major City Goal of Fiscal Sustainability and Responsibility. The development
of a Fiscal Health Response Plan is part of the work program for that Major City Goal.
How Do We Fix the Problem?
A Fiscal Health Response Plan is needed to guide the City’s response to this $8.9 million-dollar
structural budget problem. Staff is proposing to develop the Plan based on existing fiscal policies
and commitments to residents, employees, and the community as a guide for future budgets. This
fall, staff has been informing the public about nature of the problem and potential options to
address it. In those discussions staff has identified four potential components to be used in the
development of the Fiscal Health Response Plan. Those components include:
1. Operational Reductions;
2. Revenue Options;
3. Employee Concessions; and
4. New Ways of Doing Business.
If Council concurs with the process to develop the Fiscal Health Response Plan, staff will bring
back preliminary options and scenarios for general direction from Council at its Budget
Foundation meeting scheduled for December 12, 2017. At that meeting, an update to the City’s
Fiscal Forecast and Capital Improvement Program over the next 10-years will be brought
forward for discussion. Staff will also present recommendations for the use of one-time funds
based on Council adopted policies.
Finally, staff will make recommendations for the strategy to close the budget gap, identifying the
timeframe and addressing the options to pay down unfunded liabilities. The four components
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listed above will be analyzed by staff and policy recommendations will be presented on
December 12th. The policy recommendations and direction sought from Council will include
discussion of scenarios and impacts that might result from implementation of measures identified
with each of the four components.
Council will be providing broad direction to guide the development of the Plan at that meeting.
An actual Fiscal Health Response Plan will not be presented to Council until April 2018 so that it
can be developed more specifically and include public and staff engagement.
Public and Staff Engagement
On October 5th, staff hosted two informational sessions with staff and one informational session
with the public at the Ludwick Community Center. At those engagement sessions, in addition to
staff presenting information, an independent actuary contracted by the City was present to
address technical questions. Also, Facilitator Don Maruska took questions from the audience for
a panel to address.
City Manager, Derek Johnson, presented to the Advisory Body Chairs at the Mayor’s Quarterly
meeting in October and staff liaisons to advisory bodies have been making the same presentation
at their October and November meetings. Additional outreach meetings have also taken place
with stakeholder groups such as the Chamber of Commerce. Consistent with the City’s Public
Engagement and Noticing Manual, all the information developed on this topic is available at
www.slocity.org/fiscalhealth and participation can occur with questions and/or suggestions via
Open City Hall at www.slocity.org/opencityhall. Employees have also received email updates
from staff as well as similar surveys. Throughout this process, it is staff’s intent to continuously
present information and engage the public and staff about solutions.
FISCAL IMPACT
Based on CalPERS actions taken in December of 2016, the City has identified significant fiscal
challenges facing the City. The Council adopted the Fiscal Sustainability and Responsibility
Major City Goal including a work program to with actions to ensure long-term fiscal health and
fiscal sustainability. The Fiscal Health Response Plan will address the structural budget gap.
Based on the preliminary forecasts, including thorough analysis of pension costs and unfunded
liabilities, the City would face a substantial fiscal imbalance if actions are not taken.
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ENVIRONMENTAL IMPACT
There is no environmental impact associated with developing this process nor maintaining a
fiscally balanced strategy.
ALTERNATIVE
Council could elect not to concur with the process described in this report. Based on the
preliminary forecasts, including thorough analysis of pension costs and unfunded liabilities, the
City would face a substantial fiscal imbalance if actions are not taken. The proposed process is
consistent with existing fiscal policies, best practices, and the Major City Goal Work program;
however, Council may elect to modify the process . Specific direction should be provided for any
desired modifications.
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