HomeMy WebLinkAboutSection G.2 - Fiscal Health Response PlanSection G.2
Background Materials
Reports from November 13, 2018 Workshop
FISCAL HEALTH RESPONSE PLAN
Fiscal Health Response Plan
PLAN PURPOSE
The purpose of this plan is to establish a three-year framework to respond to the long
term fiscal impacts of the significant increases in required pension contributions to the
CalPERS retirement system. This plan is a specific deliverable and is structured in a
manner to provide guidance for budgetary actions in the 2018-2019 Fiscal Year as well
as to provide broad strategic budget direction for the 2019-2021 Financial Plan.
THE PROBLEM
The City of San Luis Obispo and the other
3,000-member agencies in the California
Public Employees Retirement System
(CalPERS), are facing significant increases
in required pension contributions. The City's
annual Ca IP E RS 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
a II funds including the City's Enterprise
Funds (Water, Waste Water, Transit, and
Parking).
To addresses these rapidly rising costs, the
City must address an $8.9 million ($7.5
million from the Gen era I Fund and $1.4
million from the Enterprise Funds) budget
gap over the next three fiscal years (2018-
19, 2019-20, and 2020-21). 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
actuary who specializes in pensions.
Last Updated: April 9, 2018
The City's fiscal forecasting is based on
as sumptions such as:
1.Continuing current levels of service.
2.Continuing the commitment to ca pita I
investment including a slight increase
due to ongoing maintenance needs.
3.Modest long-term revenue growth and
inflation.
4.Continuing Local Revenue Measure
(Measure G) funds.
5.Enterprise Funds revenue projections
based on approved and historic rates and
revenue growth trends.
The City must continue to utilize CalPERS as its
retirement system as it is not feasible for the City
to leave without incurring significant costs. To
exit CalPERS, the City would have 30 days to
meet its projected (worst case) financial
obligations estimated to be from $377 to $495
million at the time of separation. Furthermore,
the current legal framework in California restricts
cities ability to reduce retirement benefits for
current employees, as well as retirees. Lastly,
CalPERS forbids offering alternative retirement
benefits for new employees, different from those
reduced benefits that already have been
legislatively authorized.
Fiscal Health Response Plan
GENERAL FUND FOCUS; ENTERPRISE
FUND PARTICIPATION
This Plan is primarily focused on gu iding
the General Fund closure of the ongoing
budget gap over the next three fiscal
yea rs.
The Enterprise Funds (Water, Sewer,
Parking, and Transit) are also participating
because the problem of rising pension costs
a Isa affects employees of the Enterprise
Funds as they participate in the same
CalPERS retirement system as General
Fund employees. Each fund, however, will
solve the problem based on the fund type
and its unique situation, as discussed later in
this report.
KEY CITY POLICIES AND GUIDING
PRINCIPLES FOR THIS PLAN
•The City's existing financial policies
provide the foundation for this P Ian and
include a balanced, sustainable budget
based on conservative investment practices
and diversified revenues.
•Specific policies which support this P Ian
include: the 2001 Fis cal Health Contingency
Plan, the 2014 Fina ncia I Responsibility
Philosophy, the Compensation Philosophy
and the 2017 Long-Term Liabilities and
Maintenance of Infrastructure.
•Ongoing Fiscal Heal th Monitoring
including modeling of economic trends and
incorporation of new data will occur through
the budgetary process and three years of this
P Ian.
•Budgetary changes in response to the Plan
will minimize service level impacts.
Last Updated: April 9, 2018
•Budgetary reductions will be implementable
and monitored during the three years of the
P Ian.
•Sus ta inability principles will be
incorporated into changes in the ways the City
"does business" whe re possible.
•Capital Improvement Project investment
will not be diminished in the General Fund
and is projected to increase slightly during the
Plan's effective period.
•The City's Organizational values will be
considered when evaluating budgetary
reductions so that employees, programs,
departments, and the organization can
continue to support and implement these
values.
•The maintenance of facilities, infrastructure,
and equipment will continue, and reductions
will have the least amount of maintenance
impacts as possible.
•The application of unassigned fund-balance
due to one-time expenditure savings or one
time increase in revenue will continue to be
applied to paying down long-term unfunded
liabilities and investment in infrastructure
and/or critical equipment.
•Ongoing increases in revenue will be
carefully evaluated and will also be
considered as a means to speed up the
paydown of unfunded liabilities. The City will
carefully evaluate the tradeoffs of expanding or
adding new programs, rather than paying down
unfunded liabilities.
•The City will work closely with its elected
representatives and others (including the
League of California Cities) in ongoing efforts
to address long-term changes to the Ca IP ER S
system.
Fiscal Health Response Plan
INTEGRATION OF THE PLAN WITH THE FINANCIAL PLANNING PROCESS
The Fiscal Health Response Plan will be ap plied to the 2018-19 Budget Su pplement as well
to the 2019-21 Financial Plan process. The 2019-21 Financial Plan will include Major City Goals
informed by public participation. However, the Fiscal Health Response Plan sets forth the
framework by which the 2019-21 will need to close the structural budget gap of $8.9 million over
the term of this Plan.
For ease of use, and so that Council and the community can review the implementation of this
P Ian with respect to solving this problem, this document will be updated with a record of Council
meetings regarding the Plan's implementation.
Council Meeting Date Action Related to FHRP Taken
April 17, 2018 1.Adoption of FHRP
2.Strategic Budget Direction for 2018-19 Budget Supplement
To be completed as meetings Scheduled meetings include June 5 and 19, 2018 Council meetings on
occur. the 2018-19 Budget Supplement and primary options to address
unfunded liabilities.
ELEMENTS OF THIS PLAN
There are three key components to this Plan. These components create savings and
revenue necessary to address the unfunded liability. In addition, there are two primary
options for reducing the increased costs of the City's unfunded liability.
THREE KEY COMPONENTS PRIMARY OPTIONS TO ADDRESS THE
UNFUNDED LIABILITY
1.New Revenues 1.Prepayment of both normal and
unfunded P E RS Cos ts
2.Op erating Reductions and New Ways
of Doing Bu siness 2.Section 115 Pens ion Tr ust Formation
3.Employee Conc essions
Last Updated: April 9, 2018
Fiscal Health Response Plan
KEY COMPONENTS OF THIS PLAN
The City must address an $8.9 million ($7.5 million from the General Fund and $1.4 million from
the Enterprise Funds) budget gap over the next three fiscal years (2018-19, 2019-20, and 2020-
21). There are three key components that have been identified to accomplish this Plan: 1) new
revenues, 2) operating reductions and new ways of doing business, and 3) employee
concessions. These will be apportioned as follows for the General Fund:
New Ways of Doing Business
Operating Reductions
Concessions
NEW REVENUES
Revenues
30-40% of the solution is proposed through new revenues. Only the General Fund will
participate in this component.
• A General Fund Cannabis Tax. The General Fund's primary sources of funding are taxes
and fees for services. A general-purpose tax on Cannabis sales, requiring voter approval of a
simple majority, will be evaluated for placement on the November 2018 ballot.
Sh ould a Cannabis Tax be Unsuccessful? Should a Cannabis Tax be unsuccessful,
either by not receiving voter approval or by underperforming in projected revenues, other
new sources of revenue will be evaluated, such as consideration of increased Transient
Occupancy Tax (TOT) or a Stormwater Tax. Additional revenue from taxes and any
recommended would require further direction from Council prior to implementation.
•The Enterprise Fu nds will not propose new revenues to solve this problem. The
Enterprise Funds are funded by rates and/or fees for the services provided. Transit is primarily
funded through Federal and State grants and programs in combination with a 20% match from
fares. Increases to rates and/or fees will not be made to close this budget gap in the Enterprise
Funds. Any changes to those rates and/or fees in the Enterprise Funds during the fis ca I period
of this P Ian will be due to other cost increases or a result of enhanced fee recovery unrelated
to unfunded pension liability cost increases.
Last Updated: April 9, 2018
Fiscal Health Response Plan
OPERATING REDUCTIONS AND NEW WAYS OF DOING BUSINESS.
30 to 40% of the solution is proposed from operating reductions and/or new ways of doing
business. All Funds and Departments will participate in this component to varying degrees.
OPERATING REDUCTIONS
1.Proactive Fiscal Management.
a.Refinance City Bonds. Eligible City
bonds will be refinanced to reduce debt
rates.
b.Pay CalPERS Requ ired Contribution
in One-Lu mp Sum Once A Vear. Based
upon the City's cashflow analysis, the City
will exercise the option to pay
contributions to Ca IP ER S in one lump
sum resulting in ongoing savings.
CalPERS offers two options of payment,
annual and one-lump sum.
c.Evaluate other Fiscal Efficiencies.
For in stance, credit card bank charges
will be evaluated so that any cost
reductions which do not diminish
customer service are implemented. Other
fiscal management efficiencies will be
explored for cost savings.
2.Pu rsue Energy Efficiencies and
Cans umption Reductions. Departments
will evaluate budgets to identify energy
efficiencies which could save both costs and
energy. Fuel and other consumables usage
will be reduced through fuel efficiency
vehicles and/or use pattern improvements.
Last Updated: April 9, 2018
3.Consultant services agreements. When
possible, consultant services agreements
will be renegotiated for better value and/or
budgeted amounts will be adjusted to reflect
service levels needed.
4.Other Agreemen ts. The City has multiple
agreements for a myriad of purposes ranging
from the purchases of goods to the provision
of City services and/or use of City facilities.
Those agreements subject to renewal will be
evaluated for the opportunities to decrease
costs or to increase cost recovery while at
the same time balancing the value of
community partnerships.
5.Tax and Fee Enforcement. The City will
continue to proactively seek compliance with
business license, Transient Occupancy Tax
(TOT) Homestay, Code Enforcement, and
other activities which could result in more
accurate revenue collections.
6.Long-term liabilities. Consistent with the
City's fiscal policies, the City will continue to
utilize one-time funds to pay down unfunded
liabilities and to invest in infrastructure.
7.Risk Management. The City will continue
to actively implement its "30% in 3" risk
management program to reduce liability and
worker's compensation expenditures.
Fiscal Health Response Plan
NEW WAYS OF DOING BUSINESS
1.Su stainability.
The City will pursue increased
investment in sustainable infrastructure
with positive and short-term paybacks on
investment.
2.Enhanced Efficiency & Effectiveness.
a.Energy Efficiency.
Including the use of solar power will
be explored and implemented when
possible for short and long-term cost
savings. Other energy efficiencies
will be evaluated as well.
b.Enterprise Resource System.
The Motion project, consisting of
business process re-engineering and
implementation of an Enterprise
EMPLOYEE CONCESSIONS.
Resource System, will result in
decommissioning of several older
systems and will create opportunities
for employee efficiencies and
effectiveness.
c.Equipment Replacement.
Equipment replacement will result in
energy savings, more accurate data
collection, and more accurate
revenues will be identified.
3.Th oughtful re-organizations.
Staff transitions will be used to evaluate
current staffing levels and service
provision. The City will evaluate cross
departmental operations, service levels,
and contracted services for re
organization opportunities.
20% to 30% would be contributions via employee conces sions. All Funds, General and
Enterprise, will participate in employee concessions.
•In addressing unfunded pension liability as it relates to employee concessions the City's
adopted F isca IS ustainability Philosophy, Compensation Philosophy and Labor Relations
Objectives will provide guida nee.
•The City will meet and confer in good faith with its represented employee groups regarding
the impacts of changes to wages, hours, and/or working conditions.
PRIMARY OPTIONS TO ADDRESS THE UNFUNDED LIABILITY
The City will evaluate each of the options in June 2018: Prepayment of unfunded liabilities by pre
paying PERS and/or funding a Section 115 Pension Trust to make future payments to PERS.
The use of each method may vary by Fund.
Last Updated: April 9, 2018
Fiscal Health Response Plan
COMMUNICATIONS STRATEGIES
The following identifies communication strategies with the Community and employees.
COMMUNITY ENGAGE ME NT
As is the City's practice the Community will
be engaged consistent with the City's Public
Engagement and Noticing (PEN) Manual.
There will be multiple methods of
communications used to inform and educate
the community as well as receive feedback
and address questions and concerns. In
addition to the PEN methods of
communication and public engagement will
include:
•Public Notification of Council
Meetings on the Plan.
•What's New in S LO and other
website informational postings.
•E-notification, social media posts
and press releases.
•Community forums and
workshops in conjunction with the
financial planning process.
•Presentations to City Advisory
Bodies and interested community
groups.
•OpenCityHall topics.
Last Updated: April 9, 2018
EMPLOYEE ENGAGEMENT
As is the City's practice all employees will be
engaged in the financial planning process
and the application of this Plan to that
process. There will be multiple methods of
communications to inform and educate
employees as well as receive input and
address questions and concerns.
•Briefings with City Manager,
Department Heads and Budget
Manager.
•Updates via emails and
SLOW hat Monthly publication.
•Briefings with employee
associations' representatives.
•Surveys to Employees
• 0 rga nization-wide briefings.
Fiscal Health Response Plan
IMPLEMENTATION OF THE PLAN
•The Plan will guide staff's preparation of the 2018-19 Budget Suppl ement for Council's
consideration and adoption in June 2018.
•The Plan will guide the Fina ncia I Plan process for the development of the Major City Goa Is
and Financial Plan for 2019-21.
EXTERNAL IMPACTS TO PLAN
This plan has been based on assumptions made in the fiscal forecast in December 2017. It is
based on fisca I forecasts which have multiple inputs from multiple economic resources both
external and internal to the City. However, a forecast is an estimate at a point and time and during
the life of this Plan there could be significant external forces which further impact the City's fiscal
forecast. There are other fiscal policies and plans in place to help guide such a change. The
following could have impact to the City's overall budget through either expenditures or revenues
and would res ult in staff returning to Council for further direction.
•Changes in Economic Conditions. The nation continues to be in an unprecedented
economic expansion following the Great Recession. This is unlikely to continue for the
entire period of this Plan. Additionally, changes in federal fiscal policy and grant funding
may res ult in a slowing of the nationa I and loca I economies.
•Diablo Cl osure
The closure of Diablo Canyon presents an uncertain economic impact to the City and
County of San Luis Obispo. At the time of this Plan's creation, the mitigation of that
impact is uncertain. The City will continue to have a lead role in addressing this problem
and preparing an economic and financial analysis of the impacts of this closure. This
analysis will be incorporated into the 2019-21 Financial Plan.
•Further CalPERS Changes. Required contributions to CalPERS are based on actuarial
assumptions and further changes may occur if approved by the Ca IP ER S Board.
Examples of past significant changes in assumptions include changes to amortization
periods, changes to expected rate of return, and changes to demographic assumptions.
Future changes in actuarial assumptions may once again result in significant fiscal impacts
to the City.
•Natural Disaster. All municipalities are vulnerable to natural disasters be it earthquake,
fire, or flood. The City maintains reserves for these unfortunate circumstances but in
recent years the magnitude of disasters seen in neighboring cities north and south have
been at unprecedented economic levels.
Last Updated: April 9, 2018