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Tuesday, May 12, 2020
Special Meeting- Budget Hearing
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Action Items
1.FY 2020/21 Budget Hearing – Council will be discussing the upcoming
Fiscal Year Operating and Capital budgets, Utility Rates, and Proposed
Municipal Fee Schedule amendments on May 12 and May 13, 2020.
This meeting will be continued to May 13, 2020 at 1:00 P.M.
(On Tuesday and Wednesday mornings, staff will post a
tentative list of specific topics that Council anticipates
discussing on that day. Council may move topics from one day
to the other, however, as needed for efficient discussion; the
public is advised that any aspect of the budget may be
discussed, regardless of whether listed on that day’s tentative
topic list)
REVISED
Proposed Operating Budget Documents Here
Proposed Capital Budget Documents Here
DEPARTMENT MEETING SCHEDULE HERE
Public
Comment
2 May 12, 2020
2. Discussion and Direction to Staff Regarding the Establishment of a Pension
Funding Policy and Approval of Amendment Number 1 to Contract Number
C15159278 to Increase Compensation by $97,675 for Additional Actuarial
Consultant Services for a New Total Not-To-Exceed Amount of $230,000
Adjournment
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3 May 12, 2020
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City of Palo Alto (ID # 10784)
City Council Staff Report
Report Type: Action Items Meeting Date: 5/13/2020
City of Palo Alto Page 1
Summary Title: Review, Discuss, and Recommend Establishment of a Pension
Funding Policy
Title: Discussion and Direction to Staff Regarding the Establishment of a
Pension Funding Policy and Approval of Amendment Number 1 to Contract
Number C15159278 to Increase Compensation by $97,675 for Additional
Actuarial Consultant Services for a New Total Not-To-Exceed Amount of
$230,000
From: City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that the City Council:
1) Provide input and guidance to staff on elements of a Pension Funding Policy to proactively
fund the City’s long-term pension obligations.
2) Approve and authorize the City Manager or his designee to execute the attached
Amendment No. 1 to Contract C15159278 with Bartel Associates to increase the funding by
$97,675 for a revised total amount Not-To-Exceed $230,000 for additional actuarial
consultant work related to long-term obligations for pension and retiree health liabilities.
Executive Summary
This report continues the City’s work on Fiscal Sustainability as an organization, specifically
focused on addressing the City’s long-term pension obligations. The Finance Committee
discussed this topic on October 15, 2019 as part of City Manager’s Report (CMR) 10645. CMR
10645 contains critical elements necessary to inform the conversation about a Pension Funding
Policy with the City Council and is included as Attachment A with this report. Through the
conversation on October 15, 2019, the Finance Committee provided general guidance to staff
on elements to further explore for the development of a Pension Funding Policy. This report
serves as a companion document to CMR 10645 and further explores the guidance provided by
the Finance Committee for discussion with the full City Council. Staff is seeking direction from
City Council to refine the elements of the Pension Funding Policy and approval of contract
City of Palo Alto Page 2
authority necessary for the continued analysis and modeling of potential pension impacts. Staff
anticipates incorporating direction from City Council into a formal Pension Funding Policy and
returning to City Council for the adoption of said policy at a later date.
In October, the Finance Committee requested more information regarding reaching different
funding levels between the next ten and fifteen years. Through work with Bartel Associates,
the City’s outside actuarial consultant, staff analyzed the additional contributions that would be
necessary to reach 90% of CalPERS’ calculated funding for the Miscellaneous and Safety plans
over different timeframes ranging from 15 years to 10 years. This was based on assets as of
June 30, 2019 and is meant to be a framework for the discussion around additional
contributions to the City’s long-term pension liability. This included as Attachment B to this
report.
It is noteworthy that CalPERS has experienced significant volatility in recent weeks which have
significantly impacted the valuation of our assets. This volatility underscores the need for the
City to pursue its own pension funding policy but was too recent to be included in the actuarial
analysis that was performed to examine funding levels over the ten to fifteen year time horizon.
Nonetheless, the actuarial analysis presents a model at a point in time for comparing
anticipated fiscal impacts. The recent volatility of the market emphasizes the need for a flexible
policy that is elastic and adaptable to the changing needs of the organization. The City has
evidenced its commitment to funding its long-term liabilities through additional contributions
using year-end savings each year since FY 2017.
As discussed with the Finance Committee, the overarching goal of a pension funding policy is to
minimize service delivery crowd-out from escalating pension costs by balancing near-term
investments with anticipated long-term needs. As discussed in the Fiscal Sustainability
Workplan, CMR 10267, and again with the Finance Committee in October, the development
and establishment of a pension funding policy is just one element of the City’s overall fiscal
sustainability. The fiscal sustainability ecosystem is comprised of service delivery, resources,
and the cost of doing business. As the City establishes a Pension Funding Policy, it is important
to keep the ecosystem balanced. Significant impacts on one area of the ecosystem, such as the
cost of doing business, will have corresponding impacts on the other areas of service delivery
and resources. As such, this item is being brought forward concurrent to the discussion of the
FY 2021 Budget, which will greatly impact service delivery throughout the organization.
Important to this discussion are the following attachments and a summary of the additional
information provided within:
Attachment A: As discussed above, CMR 10645 is included as Attachment A for review along
with this report. That CMR also includes additional information regarding the City’s long-term
pension obligations.
Attachment B: The additional information requested by the Finance Committee regarding
additional contributions necessary to reach 90 percent of CalPERS’ calculated funding over
City of Palo Alto Page 3
different timeframes ranging from 15 to 10 years is discussed in Attachment B. As discussed
above, this is meant to be a framework for the discussion around additional contributions to
the City’s long-term pension liability.
Attachment C: A sample pension funding policy is drafted and is intended to spur discussion. It
is anticipated that it will be refined based on City Council feedback and staff will return to the
City Council for formal adoption.
Attachment D: A scenario that shows the impact of CalPERS achieving a 0 percent rate of
return for FY 2020 is included as Attachment C with a brief discussion of that scenario. This
scenario was created using CalPERS Pension Navigator tool. This is meant only to offer
additional context for the conversation; many other factors will also impact the City’s
contributions over the immediate future and long-term horizon.
Attachment E: As a result of the significant additional actuarial work associated with analyzing
and developing this policy, attachment D contains an Amendment No. 1 to Contract
C15159278, originally approved in September 2015 by the City Council, with Bartel Associates
to serve as the City's outside actuarial consultant for long-term liabilities related to Retiree
Health and Pension costs.
Background
CMR 10645 (Attachment A) contains a comprehensive summary of conversations that had been
held through October 2019 with the City Council and the Finance Committee. At their meeting
on October 15, 2019 the Finance Committee discussed the example Pension Funding Policies
that were outlined in Table 2 of Attachment A and discussed in greater detail in that report.
There was consensus among the Finance Committee that the City should continue to make the
Actuarial Determined Contributions (ADCs) as calculated by CalPERS, continue its current
practice of using a more conservative discount rate to calculate the normal cost (pay-go)
portion of pension obligations, and look to expand into additional funding options. Paying the
ADC is the lynchpin of the City’s pension funding obligations. Continuing to pay the full ADC
ensures that the City does not further worsen its funding ratio. Using a lower discount rate to
calculate the normal cost is also an important element of the overall strategy. That
methodology has been part of the City’s annual contributions to its irrevocable Section 115
Trust (PARS Trust) Fund, generating approximately $8.2 million in contributions through FY
2020. In addition, the City has also elected to make ad hoc contributions totaling $19.0 million
to the PARS Trust since it was created in January 2017. This brings principal contributions to
$27.2 million through FY 2020.
City of Palo Alto Page 4
Options available, as outlined in Table 2 of Attachment A, include tactics on a continuum with a
variety of impacts to the long-term pension obligations and corresponding impacts on service
delivery levels. One option with minimal service delivery impact would be to amend the existing
BSR policy to include PARS contributions as an eligible use of excess BSR above 18.5% without
City Council approval. This would enable greater discretion by the City Manager to allocate
excess resources at year-end. On the other end of the spectrum are options such as a
contractual ‘Fresh Start’ with CalPERS, which would legally obligate the City to meet a new,
shorter amortization schedule. Although this would yield long-term savings by avoiding interest
at the tail end of the current amortization schedule, it would have a drastic and immediate
impact on service delivery levels by necessitating significant additional expenses for the annual
ADC.
In October 2019, the Finance Committee expressed interest in learning what additional levels of
contributions would be necessary to reach a 90% funding level over different timeframes,
ranging from 10 years to 15 years, and contextualizing what service delivery trade-offs would
be necessary to achieve that funding level within each timeframe. That analysis is transmitted
as Attachment B to this CMR.
Discussion
As discussed in CMR 10645, it is important that the City not get too far ahead of CalPERS.
Therefore it is recommended that the valuation of assets in a Pension Funding Policy be aligned
with CalPERS. To do otherwise risks adverse impacts to the City’s credit rating, which could limit
the City’s ability to borrow at favorable rates. However, given the recent volatility seen by
CalPERS, largely due to the unforeseen impacts of COVID-19, it seems prudent to presume that
CalPERS will not meet its 7% rate of return on an annual basis for the current year. This
reinforces previous concerns voiced by the City Council regarding the optimistic rates of return
presumed by CalPERS and the corresponding impacts of that optimism on the City’s long-term
pension liability.
Synthesizing these two concepts would mean that the City could use the 7% Discount Rate to
determine its actuarial valuation but should not rely exclusively on the contribution rates
specified under that projection alone to bolster its proactive pension contributions.
The City has evidenced its commitment to proactively funding the long-term pension
obligations by diligently preserving ad hoc transfers of excess revenue and year-end savings to
the PARS Trust. Additionally, the City has contributed the difference in normal cost calculations
to the PARS Trust fund since receiving corresponding guidance from the City Council.
In order to institutionalize the City’s current practice and address the City Council’s desire to
adopt a Pension Funding Policy it is recommended that a policy be adopted that codifies the
City’s current practice of paying the CalPERS’ Actuarial Determined Contribution and confers
City of Palo Alto Page 5
flexibility to the City Manager to pursue both additional contributions and potential uses of the
PARS Trust as part of the annual budget process.
Elements of a Pension Funding Policy are discussed briefly below and more fully in Attachment
A.
Funding Goal and Timeframe
The Pension Funding Policy should also clarify a desired funding goal to be reached in the PARS
Trust and with CalPERS, and the timeframe to achieve that. The example Pension Funding Policy
attached to this CMR (Attachment C) suggests a 15 year timeframe to reach a 90 percent
funding level.
Funding Components
The Pension Funding Policy should include guidance and direction on funding components to
achieve the funding goal within the specified timeframe. The example Pension Funding Policy
attached to this CMR includes continued calculation of the Normal Cost at a lower 6.2 percent
Discount Rate as well as use of excess BSR above 18.5 percent as funding components.
Additional discussion of potential funding components and their uses is included in CMR 10645
(Attachment A) as are additional options that are not recommended, such as investments in
other City Reserves, Pension Obligation Bonds, and a Formal Fresh Start that would trigger an
irrevocable contract amendment with CalPERS.
Allowable Uses of Funding
Another element of the Pension Funding Policy is clarifying the allowable uses of funding
accumulated in the PARS Trust Fund and when those funds should be transferred to CalPERS.
The example Pension Funding Policy includes the parameter that the funding components
described above would be sent to the PARS Trust Fund on annual basis. The example Pension
Funding Policy also clarifies that Additional Discretionary Payments (ADPs) from PARS to
CalPERS would be articulated as part of the annual budget process. (In general, funding will
yield a greater benefit to the City if it is invested with CalPERS since the funding does not
impact the annual ADC until it is invested with CalPERS.)
Contingencies, Service Delivery Outcomes, and Fiscal Impacts
As discussed earlier in this CMR, the uncertainty that the City currently faces emphasizes the
need for an elastic and flexible Pension Funding Policy. The Pension Funding Policy should
clarify contingencies, service delivery outcomes, and fiscal impacts that are anticipated to allow
for adaptive responses to changing circumstances.
Contingencies could be included as ‘guard-rails’. Parameters for consideration could include
requiring the City to continue using a lower discount rate to calculate the normal cost for
pensions until a funding target of 90% is met, unless General Fund revenues decline by more
than a certain percentage year-over-year. In these cases, the City Manager could be required to
City of Palo Alto Page 6
identify how a year of diminished contributions could impact the funding target and timeframe
element and identify strategies for ‘making-up’ that payment in subsequent years. COVID-19
has impacted CalPERS rate of return for the current year, but it has also disproportionately
impacted the City’s Fiscal Sustainability ecosystem by constraining resources as discussed with
the transmission of the FY 2021 Proposed Operating and Capital Budgets on April 20, 2020 and
though multiple subsequent status reports to the City Council.
Given that the City is anticipating resource constraints that have not been seen since the Great
Recession, pursuing a more aggressive pension funding policy would have even greater impacts
on the City’s service delivery environment. Through the budget process, it is anticipated that
service delivery impacts will be presented even without increased funding for additional
proactive pension contributions. This environment emphasizes the importance of duly
considering service delivery outcomes and fiscal impacts when developing a Pension Funding
Policy.
An example Pension Funding Policy is included as Attachment B; it is meant to spur discussion
and dialogue on this topic as the City works to adopt a policy in this time of heightened
uncertainty. The sample Pension Funding Policy uses a 15 year timeframe to reach a 90%
funding level of CalPERS calculated funding, using a lower discount rate (6.2 percent) to
calculate the Normal Cost and transmitting that difference to the Section 115 PARS Pension
Trust Fund on an annual basis. The sample policy would require any use of the Pension Trust
Fund’s accumulated funding to be approved by the City Council. The City Manager would be
required to identify the impacts of any temporary changes to the practices prescribed by the
policy, including temporarily diminishing contributions to the PARS Trust, on the funding goal
and timeframe to the City Council through the annual Budget process.
Contract Amendment
The City has an open contract with Bartel to work on three bi-ennial Other Post-Employment
Benefit valuations, the most recent of which was transmitted on April 30, 2020 for discussion
with the Finance Committee on May 5, 2020. It also included authority for additional services
related to pension forecasting and analysis. This contract amendment increases the contract
authority to align with the significant work effort to date from Bartel Associates, which has
been instrumental in the extensive discussions that have been had with the City Council and the
Finance Committee regarding long-term pension obligations. It also includes contract authority
for additional Government Accounting Standards Board (GASB) reporting requirements to
ensure the City’s compliance with those regulations. Although no budgetary adjustment is
necessary for this contract amendment, staff does anticipate using salary savings to fund
elements of the amended scope.
Stakeholder Engagement
City of Palo Alto Page 7
The Administrative Services Department has engaged stakeholders throughout the
organization, including Human Resources, the City Attorney’s Office, the Public Works
Department, and the Police Department for feedback on this issue. As the City Council clarifies
its desired path forward for a pension funding policy, staff will work to ensure that stakeholders
remain informed of developments and changes.
Additionally, the City’s interest in meeting its pension funding obligations necessitates ongoing
engagement with the State Legislature to give cities more tools for managing those obligations.
The State could choose to give cities tools such as defined contribution plans, which could
significantly limit long-term obligations compared to the current system of defined-benefit
plans.
Resource Impact
The FY 2021 Proposed Budget included the CalPERS required pension payments as well as
additional proactive pension funding, calculated by taking the difference in Normal Cost annual
payments between CalPER’s 7.0% Discount Rate and a 6.2% Discount Rate. If the City Council
chooses to pursue additional funding, there will be corresponding changes necessary to the
budget with resulting adverse service delivery impacts. Conversely, if the City Council decides to
pare down or scale back contributions to the long-term pension obligations given the current
financial outlook, it may allow for some positive service delivery impacts.
No Budget Amendment is necessary for Amendment No. 1 to the contract with Bartel
Associates. Staff will need to reallocate salary savings in the Administrative Services
Department to fund elements of the amended scope.
Environmental Review
This report is not a project for the purposes of the California Environmental Quality Act.
Environmental Review is not required.
Attachments:
• Attachment A: CMR 10645 - Direction to Staff on Pension Funding Policy
• Attachment B: Finance Committee Request for Information
• Attachment C: Example Pension Funding Policy
• Attachment D: Impact of 0% Investment Return for CalPERS for FY 2020
• Attachment E: Amendment No. 1 to C15159278 Bartel Associates LLC
City of Palo Alto (ID # 10645)
Finance Committee Staff Report
Report Type: Action Items Meeting Date: 10/15/2019
City of Palo Alto Page 1
Council Priority: Fiscal Sustainability
Summary Title: Review, Discuss, and Recommend Establishment of a Pension
Funding Policy
Title: Discussion and Direction to Staff Regarding the Establishment of a
Pension Funding Policy
From: City Manager
Lead Department: Administrative Services
Recommendation
Staff recommends that the Finance Committee review and discuss the options for a Pension
Funding Policy and recommends elements to include in the establishment of a Pension Funding
Policy to be reviewed and adopted by the City Council.
Executive Summary
This report continues the City’s work on the City Council’s Fiscal Sustainability priority and
corresponding workplan through the development of a pension funding policy. Four example
policies, including a CalPERS example as a baseline, are outlined for discussion by the Finance
Committee and refinement prior to returning to the City Council for adoption. A brief analysis
of each example policy is included to inform the conversation and discussion regarding the
impacts and outcomes of each. Also included is a list of the funding components and levers that
the City can use to address its long-term pension liability.
The development and establishment of a pension funding policy is just one element of City’s
overall fiscal sustainability workplan. As discussed in CMR 10267, the City’s fiscal sustainability
ecosystem is comprised of service delivery, resources, and the cost of doing business. As the
City works to develop a pension funding policy, it is important to keep in mind that the goal is
to keep the ecosystem balanced; significant impacts on one area of the ecosystem, such as
reducing the cost of doing business, will have a corresponding impact on the other areas of
service delivery and resources.
This report contains a brief description of the work the City has already done to proactively
address its long-term pension liability before presenting draft policies for consideration and
ATTACHMENT A
City of Palo Alto Page 2
discussion by the Finance Committee. Attachment A to this report provides additional
background on the City’s pension liability, including a summary of the reports and discussions
with the Finance Committee and City Council to date, and variables and factors that impact the
City’s liability. When the CalPERS actuarial reports were transmitted to the Finance Committee
on September 24th, the committee made a request to see the differences in the annual
payments between the current CalPERS required payments and a “Fresh Start”, which would
reamortize the Unfunded Accrued Liability over a shorter horizon. Attachment B provides a
table showing the Fresh Start payment schedules, as calculated by CalPERS, for the
Miscellaneous and Safety Plans.
Background
The City of Palo Alto has been discussing its options for prefunding its long-term pension
obligations as part of its work towards addressing the ‘Fiscal Sustainability’ workplan.
Significant progress has been made over the past three years towards better understanding the
challenges the City faces and proactively identifying and implementing tools to better position
the City to address its long-term liabilities. The establishment of a pension funding policy is an
important segment of the City’s Fiscal Sustainability workplan and the City’s continued progress
towards addressing long-term pension liability. The pension funding policy is a tool to guide
pension funding decisions within the context of service delivery and resources. The ecosystem
is depicted in the diagram below.
It is important to remember that the City cannot work in isolation to address its pension
obligations given our needs to remain a competitive employer and for our retirement benefits
and costs to be understandable and relevant to the marketplace. As a part of the CalPERS
system, the central actions that CalPERS takes impact our pension costs.
To date, CalPERS has taken the following actions:
- lowered their expectations for investment returns and inflation rates to better align
with the rates they have experienced over the past ten years (from 7.5% to 7.0%
discount rate);
- changed how they calculate the annual payment for the Unfunded Accrued Liability
(UAL) from a percentage of payroll to a flat-rate dollar amount thereby guaranteeing a
certain level of contributions from member agencies; and
ATTACHMENT A
City of Palo Alto Page 3
- changed the timeline for amortizing new bases (gains/losses) from investment returns
from 30 years to 20 years and eliminated the ramp-up and ramp-down of these bases
beginning with the valuation reports as of June 30, 2019.
These actions have resulted in increases to the City’s costs for funding the defined benefit
pension plan but will better position the City on a long-term basis.
Parallel to the actions being taken centrally by CalPERS, the City of Palo Alto has also
individually implemented practices to better address its long-term pension liabilities. Actions
taken by the City include:
- No longer paying any portion of the employee share of pension costs (also referred to as
“EPMC” or “Employer Paid Member Contribution”);
- Employees now “pick-up” a percentage of the employer share of pension costs (also
known as “cost sharing”);
- Establishment of an irrevocable IRS Section 115 Pension Trust Fund; and,
- Adoption of a more conservative discount rate than CalPERS (currently 6.2%) that is
used to calculate the normal cost of pensions for all financial planning across all funds.
These actions are described in further detail below.
A chart showing the currently approved employee pick-up of the employer share rates at the
end of the current labor agreements, as well as the expiration date of the current agreement, is
shown below in Table 1.
TABLE 1: Employee Pick-Up of Employer Share
Labor Group
Employee Cost Share Rate
(by the end of Current Labor
Agreements)
Current Labor Agreement
Expiration
SEIU 2.0% 12/31/2021
UMPAPA 1.0% 6/30/2020
MGMT 1.0% 6/30/2020
FCA/IAFF 4.0% 6/30/2021
PAPOA 3.5% 6/30/2021
PAPMA 4.0% 6/30/2021
Additionally, the City Council authorized the establishment of an irrevocable Section 115
Supplemental Pension Trust Fund (“Pension Trust Fund”)with the Public Agency Retirement
Service (PARS) through CMR 7553 in January 2017. The Pension Trust Fund is irrevocable
because the City can deposit funds into this fund and those contributions may only be used for
paying City’s pension costs. From January 2017 through FY 2020, the City will have invested
more than $22.0 million in principal contributions into the PARS Trust. Contributions were
initially made on an ad-hoc basis, using one-time savings or excess revenues. However, the City
has since incorporated a structural change to its budgeting practice and financial planning. Per
ATTACHMENT A
City of Palo Alto Page 4
City Council direction on October 29, 2018 through CMR 9740, the City now calculates the
normal cost, or “pay-as-you-go” cost of pensions using a lower Discount Rate than CalPERS,
currently 6.2%. This change in methodology generated approximately $6.2 million in
contributions for FY 2020 across the organization and is anticipated to generate approximately
$5.0 million in ongoing contributions above those currently projected by CalPERS.
Discussion
Through staff’s work to extensively research the strategies and tools to draft and implement a
policy to more proactively address growing pension costs, four guiding principles and questions
have emerged. They are listed below and were used to inform the policy examples that follow.
1) What is the desired funding target? What is the desired timeline to achieve that target?
(While 100% funding would be the presumptive goal, achieving this quickly could
require drastic service reductions with corresponding workforce and community
impacts. A balanced and thoughtful strategy is therefore necessary.)
2) The policy should be “evergreen” (similar to the Budget Stabilization Reserve (BSR)
policy); it should guide staff and the Council when certain parameters are met and
require action when those parameters are not met. The more conservative the policy,
the more accountability will need to be included in the policy.
3) What can the City afford? What is the most efficient use of its funding? Based on those
answers, what payment options and tools best align with those considerations?
4) It is important to remember that this is a state-wide issue and that CalPERS invests over
a very long-term time horizon. Although the City is currently experiencing cost volatility
and increases in its pension costs, it has also experienced “superfunded” status in the
past. The City should position itself to take advantage of potential changes in the
pension landscape over the medium- and long-terms.
Overall, staff recommends that the goal of the City’s pension funding policy is to reach 100%
of funding necessary for its pension liabilities as calculated by CalPERS. The goal of 100%
funding is based on conversations with actuarial consultants; full funding provides the most
resilience to changes in the market that would impact pension costs. Using CalPERS’ calculated
funding requirements ensure that the City remains aligned with the fourth guiding principle.
There are different timelines, mechanisms, and options available to pursue this goal. The
purpose of a fiscal policy, which a potential pension funding policy would be effectively guiding,
is to establish practices and procedures that will guide City Council and staff when certain
parameters are met and require certain levels of action when those parameters have not yet
been met. Staff has outlined example pension policies with variations between each based on
research of other jurisdictions, conversations with actuaries, and reviews of existing best
practices from industry publications.
ATTACHMENT A
City of Palo Alto Page 5
Each of the example policies makes progress towards addressing the City’s pension liabilities;
the first example models the strategies that CalPERS is implementing while the remaining
examples go above and beyond what CalPERS is currently requiring. The minimum funding
level and the timeline to achieve that minimum funding level vary among the examples. As a
result, the tools to reach the funding level over the desired timeframe differ slightly from
example to example. Each example outlines different applied uses of the funding to align with
the funding level and the timeline target. Finally, each of the different policies will have a
different impact on the City’s Fiscal Sustainability ecosystem and require different levels of
structural adjustment, service delivery impacts, and/or the generation of new revenue in order
to meet the funding goal.
These example policies are intended to prompt discussion among the Finance Committee and
ultimately recommend a set of parameters for the basis of a draft policy. A brief analysis of
each of the different options is detailed below Table 2. A further discussion of potential
funding components follows after the analysis: some of the components are recommended,
some of them are potential tools that could be used depending on the desired funding level and
target, and still others are not recommended because of the disadvantages associated with
them.
Table 2 outlines examples of what a potential pension funding policy may include. Reading from
left to right, the first column identifies the different elements of a pension funding policy.
Moving from left to right the components of each element are building in the next. For
demonstration, a policy under “example 3” would be inclusive of all elements and the
components of them in Examples 1, 2, and 3. The elements to be contemplated as part of the
adoption and implementation of a funding policy are described below.
Funding Goal: The first element of a pension funding policy is articulating the funding goal of
the policy, and staff recommends inclusion of an acceptable range as well as a target funded
level (like the City’s General Fund Budget Stabilization Reserve “BSR” policy). The percent
funded a plan is would be calculated by the total assets divided by the total liabilities. If the
lower end of the range was not met (“floor”), the funding components section of the funding
policy would be required to be invoked. In general, the higher the floor, the greater need the
need for additional funding to be dedicated towards proactive pension contributions which will
require structural adjustments (revenue increases, or expense reductions; the latter would
have impacts on service delivery).
Timeframe: The second element is the timeframe; this represents the timeframe to meet the
desired funding level in the context of the many variables used in actuarial analysis and
calculations. Examples of additional variables include but are not limited to demographic
changes - the shift from a workforce comprised mostly of ‘Classic’ members to PEPRA
members, mortality estimates, and workforce size and tenure. The shorter the timeframe, the
greater structural adjustments would be necessary to achieve the goals.
Funding Components: These are the actions that would be required when the funding “floor”
was not met. As the examples move from Example 1 to Example 2, to Example 3, and Example
ATTACHMENT A
City of Palo Alto Page 6
4, the additional funding components are noted. As outlined above, each example includes the
elements in the earlier examples. (Example 3 includes everything in Examples 1 and 2 as well as
the additional components detailed in the Example 3 column.)
Allowable Uses of Funding: This element of a pension funding policy details the allowable uses
of the funding generated through the funding components. Depending on the ultimate policy
goals here, further refinements such as investment strategy and reporting will need to be
added.
Service Delivery Outcomes: In order to implement the elements of each of the examples
outlined, there will be implications on the organization. This section outlines the adjustments
necessary to meet the policy elements outlined in each example; the impacts and actions
needed to contribute sufficient funding to meet the goals. Any further structural adjustments
will necessitate service delivery impacts.
Fiscal Impacts: Any further structural adjustments will have additional impacts on the City’s
fiscal sustainability; this element begins to articulate the scope or magnitude of structural
adjustments necessary to achieve a funding goal.
ATTACHMENT A
City of Palo Alto Page 7
TABLE 2: Pension Funding Policy Examples
Pension
Funding
Policy
Elements
Example 1:
CalPERS
(Baseline)
Example 2:
Lower Funding Target
(Current Practice)
Example 3:
Medium Funding
Target
Example 4:
Higher Funding
Target
%
Fu
n
d
e
d
Go
a
l
(R
a
n
g
e
)
100%; no lower
element of range
80% - 100%;
Target of 85%
80% min - 100%;
Target of 95%
90% - 100%+;
Target of 100%+
Ti
m
e
fr
a
m
e
30 years Within 10 years Within 10 years Within 10 years
Fu
n
d
i
n
g
C
o
m
p
o
n
e
n
t
s
Normal Cost (NC)
calculated at 7.0%
Discount Rate
(+) Cost-sharing with employees
(see table above for specific rates)
(+) Additional cost-
sharing with
employees
(+) Recalculate the
UAL with the same
lower DR (phase-in)
Changes in actuarial
assumptions amortized
over 20 years
(+) Using a more conservative
discount rate (DR) for calculation of
normal cost
(+) Identify funding for
the pension obligation
through Budget
(+) Amend existing
BSR policy, 100%
excess BSR allocated
for pension costs (all
funds contribute a
commensurate
amount)
UAL amortized over 30
years for gains/ losses;
calculated at 7.0%
Discount Rate (20 years
beginning 6/30/2019)
(+) Amend existing BSR policy, 50%
excess BSR can be allocated for
pension costs (all funds contribute
a commensurate amount)
(+) Reach one-year of funding for
CalPERS ADC in 115 Trust Fund
(invest moderately conservatively);
subsequent proactive funding to
CalPERS as ADP
Al
l
o
w
a
b
l
e
U
s
e
s
of
F
u
n
d
i
n
g
Co
m
p
o
n
e
n
t
s
NC covers pay-go
portion; UAL portion
pays off unfunded
liability in 30 years if
CalPERS investment
returns met
(+) Use of 115 Trust Fund funding
to be addressed through annual
budget process or separate City
Council approved action. Pension
Rate Stabilization Program
(+) Fresh start in
concept for the Safety
group, beginning in a
target year
(-) Contractual Partial
Fresh Start for the
Safety group
beginning in a target
year in-lieu of fresh
start in concept
Se
r
v
i
c
e
D
e
l
i
v
e
r
y
O
u
t
c
o
m
e
s
Continue services
throughout the City
including the ability to
keep up with the cost
of doing business as
well as limited strategic
investments.
Continue current constraints and
limitations on service delivery
including an inability to keep up
with the cost of doing business.
Prioritization would continue to be
necessary annually through the
budget process.
(+) City Manager to
identify plan to
address additional
contributions to
pension as part of
annual budget process
(+) Significant
adverse impacts on
service delivery
levels; additional
revenue
(+) Impacts on Service
Delivery and/or
structural additional
revenue
Fi
s
c
a
l
Im
p
a
c
t
Savings to the City Continue $5.0 million structural
adjustments necessary to maintain
contributions
Additional structural
adjustments
Estimated at ___%* of
the General Fund
Significant additional
structural
adjustments
Estimated at ___%*
of the General Fund
(+) Indicates that this is in addition to the step to the left while (-) indicates that this is instead of the step to the left.
* This information is not available at the time of the printing of the report; however, staff is working to provide a metric for
context.
ATTACHMENT A
City of Palo Alto Page 8
Example 1: CalPERS Methodology
Example 1 shows the baseline elements of CalPERS methodology. CalPERS has a funding goal of
100% of the City’s pension liability over the next 30 years. To meet this goal, it actuarially
calculates what the City’s normal cost should be given the CalPERS actuarial assumptions, as
well as the Unfunded Accrued Liability annual payment for the City. In a year when CalPERS
meets its investment return the UAL will shrink since the City has made its payment, it will
shrink more when CalPERS exceeds its investment return. Conversely, when CalPERS fails to
meet its investment return, the UAL will grow. CalPERS will be changing its amortization
timeline from 30 years to 20 years beginning with the June 30, 2019 valuation which will
shorten the City’s horizon to pay off its UAL. If the City were to use this methodology, it would
result in savings of approximately $5.0 million compared to the City’s current practice. These
savings could be used for service delivery enhancements and/or to lower rates in the City’s
enterprise activities.
Example 2: Lower Target/More Flexibility
Example 2 provides the most flexibility of any of the policies, with the lowest funding floor,
fewest restrictions on budgetary additions, the least amount of additional impacts to the City’s
service delivery, and the lowest additional fiscal impact of the three non-CalPERS examples.
This example stipulates that the City Council has a range of between 80% and 100% funded, a
target of 85%, and a minimum funding level of 80% necessary within 10 years. When the City’s
overall funded status is less than 80%, the tools detailed under the option would be required
actions. For Example 2, this would result in continued cost-sharing with employees, calculating
the Normal Cost portion of the pension at a more conservative rate than CalPERS, and
transmitting half of the excess BSR above City Council’s 18.5% target to either PARS or CalPERS.
The recalculation of the Normal Cost portion is included under each pension funding policy
Example other than the CalPERS example; it is recommended that the City Council set its
desired discount rate to use in the calculation every two years to avoid excessive volatility.
In Example 2, the City would transmit the costs beyond the CalPERS annual ADC to the PARS
trust until one year’s worth of ADC was accumulated in the trust. In each option, the PARS Trust
assets would still be invested in the PARS ‘moderately conservative’ portfolio. After one year of
ADC funding was reached, the City would transmit the funding to CalPERS as an Additional
Discretionary Payment to pay down the Unfunded Accrued Liability. Once the PARS fund
reached its target, use of its accumulated funding would be discussed as part of the annual
budget process or separately through a City Council approved action. This example would have
a relatively low additional impact on Service Delivery, since it largely aligns with current
practices, but it would maintain the ongoing structural adjustments and service delivery
impacts articulated in the FY 2020 Operating Budget. As a result, although no additional
restrictions would need to be enacted to restrict new services throughout the organization,
they would likely need to be offset either by corresponding reductions of services that were
lower priority or structural revenue changes.
ATTACHMENT A
City of Palo Alto Page 9
Example 3: Medium Funding Target
Example 3 provides a combination of the elements seen in Examples 2 and 4. It would have a
higher floor than Example 2 but have a more aggressive timeframe of 10 years. This option
stipulates that the City Council has a desired range of between 80% and 100% funded, with a
target funding level of 95%. As such, it would expand on the tools used in Example 2 by drawing
on some of the funding components listed in Example 4. In addition to each of the tools
described in Example 2, this policy would also include pursuing further cost-sharing with the
labor groups through the standard negotiating process. This policy would also require the City
Manager to identify additional funding for the pension obligation through the Budget process;
to the extent that these were further expense reductions they would cause additional service
delivery impacts.
As with Example 2, the City would transmit the costs beyond the CalPERS annual ADC to PARS
until one year of ADC was accumulated before transmitting the ongoing funding generated by
the tools to CalPERS to reduce the UAL. This option also includes a fresh start in concept for the
Safety group in a target year, which would allow the City to re-amortize specified bases over a
certain timeline with CalPERS but not contractually obligate the City to make those payments to
CalPERS. (The partial Fresh Start detailed in Example 4 would be contractually required
payments). Given the higher funding floor for Example 3 than Example 2, further structural
adjustments to the City’s revenue and expenses would be necessary. As such, it would be
important for the City to carefully weigh the implications of service delivery changes against its
pension obligation.
Example 4: Higher Funding Target/Less Flexibility
Example 4 provides the least flexibility of any of the policies, with the highest funding floor,
most restrictions on budgetary additions, the greatest additional impacts on the City’s service
delivery, and the greatest additional fiscal impact of the examples. This example stipulates that
the City Council has a target range of between 90% and 100%+ funded, with a target level of
100%+. When the City’s overall funded status is less than 90%, the tools included in this policy
would be required actions. In addition to each of the funding components included in Examples
2 and 3, this policy would also include a phase-in of calculating the City’s annual UAL payment
at a more conservative discount rate (this would be tied to the same discount rate used for the
Normal Cost).
As with Examples 2 and 3, the City would transmit the costs beyond the CalPERS annual ADC to
PARS until one year of ADC was accumulated before transmitting the ongoing funding
generated by the tools to CalPERS to reduce the UAL. This option also includes a partial fresh
start for the Safety group, which would require the City to re-amortize specified bases over a
certain timeline with CalPERS and contractually obligate the City to make those payments. Since
this option has the highest funding target, it correspondingly offers the least flexibility. It would
ATTACHMENT A
City of Palo Alto Page 10
effectively impair the City’s ability to add services and would have significant impacts on service
delivery due to the further structural adjustments necessary to maintain contributions.
The example policies included in this CMR are meant to be a starting point for discussion with
the Finance Committee regarding the establishment of a pension funding policy. Further
description of the funding components included in the chart and examples above and some of
the allowable uses of those components, as well as additional funding components that are not
recommended are included below.
Pension Funding Policy Funding Components: Recommended
The City is currently using some of these funding components, including ongoing expense
reductions to fund contributions to the Pension 115 Trust Fund, as well as employee cost-
sharing (employee pick-up of the employer share) to help limit the City’s exposure on the
Unfunded Accrued Liability.
Section 115 Trust Fund: In the FY 2020 Operating Budget, $6.2 million in contributions to the
PARS Trust was included, bringing total contributions to the PARS Trust to more than $22.0
million since its inception in 2017. It is anticipated that approximately $5 million a year will be
transmitted to the PARS Trust as a result of the City’s current practice of budgeting a lower, and
thereby costlier, discount rate to calculate the Normal Cost contributions than the one CalPERS
uses for its actuarial modeling.
Cost share with Employees: The City has successfully negotiated employee pick-ups of the
employer share of pension costs in its bargaining agreements with its pensioned employee
groups. Each group in the Miscellaneous plans currently picks up 1%, while groups in the safety
plan are transitioning from a 3% pick-up of the employer share to higher rates of between 3.5%
and 4.0%.
Additional Discretionary Payments: Another recommended tool would be to make Additional
Discretionary Payments (ADPs) to CalPERS once the PARS Trust reaches a certain funding level.
CalPERS does not recognize the funding in PARS in its actuarial analysis, as such once a certain
level is reached in PARS funding the additional contributions should be transmitted to CalPERS.
Once it is sent to CalPERS it could be applied to a specified amortization base, in essence paying
down the principal on the City’s Unfunded Accrued Liability. This accomplishes two things
simultaneously: 1) Transmitting the funding to CalPERS records the asset on CalPERS’ balance
sheet, which lowers the City’s unfunded accrued liability, thereby lowering the future annual
expenses as calculated by CalPERS, and 2) it limits the City’s exposure to future investment
return volatility since the principal amount is lower.
Fresh Start in Concept: The City could use the ADPs discussed above to either pay down specific
bases (removing a specific liability from CalPERS completely) as discussed above or to re-
amortize over a shorter time period. This latter option is what is referred to as a “Fresh Start in
Concept” because it mirrors the action taken by a Fresh Start. However, a formal Fresh Start, as
ATTACHMENT A
City of Palo Alto Page 11
discussed below, requires a contract amendment and handcuffs the City to that new
amortization schedule. A “Fresh Start in Concept” would confer many of the benefits of
reducing the UAL without the disadvantages and risk.
One-time Funding (Additional Revenues/Expense Savings): In certain instances, one-time
funding may emerge that has not been appropriated for ongoing commitments. In such
instances, whether from expense savings or Revenue windfalls, funding could be used to
partially address the City’s long-term pension liability.
Amend Existing Policies: The City Council has the authority to amend existing policies, such as
the Budget Stabilization Reserve Policy. If it chose to amend that policy, the City Council could
include pension pre-funding as an eligible item that excess BSR (above City Council’s target of
18.5%) could be spent on instead of Capital Infrastructure. Currently, Capital Infrastructure is
the only allowable use of excess BSR. The revised policy could even be narrowed further to say
that half of excess BSR remaining at year-end could be used for pension pre-funding and half
could be used for Capital Infrastructure purposes.
Pension Funding Policy Funding Components: Other Options
There are other funding components that the City could choose to pursue to address its long-
term pension liability. These tools are listed below along with a brief description.
Partial Fresh Start (Formal): The City could choose to enter a partial Fresh Start with CalPERS.
This would re-amortize certain specified bases over a shorter time period. However, it would be
contractually binding and would be irreversible. If the City chose to pursue this instead of a
“Fresh Start in Concept” it would be a significant work effort to identify which bases to include
in a partial fresh start.
Further Cost Sharing with Employees: Each employee bargaining unit currently includes an
employee pick-up of the employer share in its bargaining agreement. If the City chose to
continue to expand this tool it would need to negotiate in good faith with its bargaining units in
order to develop the rate of the pick-up as well as the timeline.
Revenue Generation: The City could choose to pursue the generation of additional revenue in
order to fund some of the strategies discussed above. Options could include a parcel tax or
other mechanism to generate additional income which could be earmarked specifically for
addressing the City’s long-term pension liability.
Further Expense Reduction: The City has taken steps to contain costs over the past few years.
Any further reduction would have a corresponding impact on service delivery. However, if the
City Council chose to prioritize additional pension pre-funding over current service levels then
expenses could be reduced, and those reductions could be used to partially address the City’s
long-term pension liability.
ATTACHMENT A
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Pension Funding Policy Funding Components: Not Recommended
A brief explanation of the other pension funding policy funding components that are not
recommended, including why they are not recommended, follows below.
Investments in Other City Reserves: The City could choose to bolster its reserves and use them
to address the City’s long-term pension liability. This action is not recommended because of the
City’s investment policies, which could limit the growth of an asset when compared to a Section
115 Trust Fund administered by PARS, and because the investment in the City’s reserves is
revocable. The funding put into a reserve could be repurposed for something else depending on
the reserve polices. In contrast, funding paid into the Section 115 Trust Fund is irrevocable and
cannot be used for any purpose other than addressing the City’s pension liability.
Pension Obligation Bonds: The City Council could choose to issue Pension Obligation Bonds
(POBs). POBs are taxable bonds that would be issued by the City, which would then invest the
proceeds from the issuance and hope to achieve a greater rate of return on the investment
than promised by the bonds. This is not recommended due to the inherent risk in such an
investment and due to the increase, it would have on the City’s bonded debt burden and
potential impacts on the City’s credit rating.
Formal Fresh Start: The City could choose to formally alter its contract with CalPERS to enter
into a “Fresh Start”. This would re-amortize the entire obligation for either the City’s
miscellaneous plan or safety plan (or both) over a shortened time period. This is not
recommended because once the contract with CalPERS is altered it cannot be rescinded. This
could significantly impact costs and service delivery since the City would be obligated to pay
according to the new schedule. Many of the benefits of the formal fresh start could be realized
by a “Fresh Start in Concept” without the adverse impacts.
Next Steps
After discussing the potential draft policies with the Finance Committee, Staff hopes to refine a
formal pension funding policy for consideration and adoption by the full City Council. Feedback
on the example policies will be incorporated into the drafting and presentation of a formal
pension funding policy.
Engagement
As staff incorporates feedback from the Finance Committee into the development of a pension
funding policy, engagement will occur with both the workforce and the community to inform
them of developments and solicit additional feedback. Additionally, the City's interest in
meeting its pension funding obligations necessitates ongoing engagement with the State
legislature to give cities more tools such as the ability to change benefits prospectively for
current employees, and/or defined contribution plans.
Staff examined pension prefunding policies from other jurisdictions and confirmed that the City
ATTACHMENT A
City of Palo Alto Page 13
of Palo Alto is among very few cities with sustained contributions to Section 115 Trust Funds
built into their budgeting practice and their operations. Many other cities in California that are
proactively funding pensions continue to do so on an ad hoc basis, using fund balance at year-
end, or a certain portion of remaining fund balance above a minimum amount to generate their
contributions. Some examples of other California cities that have ongoing contributions include
Fountain Valley, which earmarked a portion of a local sales tax measure for unfunded pension
liabilities, Sausalito, which uses a lower discount rate to calculate its pension obligation and
transmits the difference to its Section 115 Trust Fund, and Pasadena, which transmits the
savings from paying the UAL as a lump sum at the beginning of the year to its 115 Trust.
Additionally, Staff consulted with its outside actuarial consultant, Bartel and Associates, as well
as its pension modeling software vendor (GovInvest) regarding implications of various
strategies. Staff also consulted with CalPERS to learn more about pension prefunding options.
Industry groups for government finance, including the Government Finance Officers Association
(GFOA) and the California Society of Municipal Finance Officers (CSMFO), were used as sources
of emerging best practices for proactively funding long-term pension obligations. Each of these
engagements informed the guiding principles and questions, which were placed into context for
the City of Palo Alto to inform the creation of the different pension funding policy options.
Resource Impact
The resource impact from the development of a pension funding policy would be directly
correlated to the parameters and requirements of the policy itself. To the extent changes to the
City’s current budgeting practice (using a more conservative 6.2% Discount Rate for the
calculation of the normal cost) are included in the policy corresponding changes would need to
be included in the development of the City’s annual Long Range Financial Forecast and annual
Operating Budget. It is anticipated that the establishment of a formal pension funding policy,
including parameters for the use of funds beyond the CalPERS ADC, would have a beneficial
impact on the long-term financial sustainability of the organization by limiting our risk from
CalPERS long-term investment returns.
Environmental Review
This report is not a project for the purposes of the California Environmental Quality Act.
Environmental review is not required.
Attachments:
• ATTACHMENT A: Additional Information and Background Regarding the City of Palo
Alto's Pension Obligations
• ATTACHMENT B: CalPERS Fresh Start Amortization Tables
ATTACHMENT A
ATTACHMENT A
Attachment A Page 1
Attachment A: Additional Information and Background
Regarding the City of Palo Alto’s Pension Obligations
As discussed in the body of CMR 10645 the City of Palo Alto has been discussing its options to address its
long-term pension liability. A brief timeline of the CMRs and discussions with the Finance Committee
and the City Council over the past few years is included below to offer additional context. After the
timeline, a few of the more critical inputs that impact the City’s long-term pension liability are discussed
for further background on the subject.
Timeline:
• 9/2017 Finance Committee, “Review and Discuss CalPERS Pension Annual Valuation Reports as
of June 30, 2016 Including Assumptions, Financial Disclosures and Next Steps” 8509
• 10/2017 Finance Committee, “Review and Recommend Strategies to Address the City’s Pension
Liability” 8579
• 12/2017 Finance Committee “FY2019 - FY2028 Long Range Financial Forecast & City Pension
Liabilities” 8676
• 1/2018 City Council, “Approval of the FY 2017 Comprehensive Annual Financial Report (CAFR)
and Approval of Conforming Amendments to FY 2017 Budget in Various Funds; Acceptance of
the FY2019 - FY2028 Long Range Financial Forecast; and Discussion and Potential Direction
Regarding Budgeting for City Pension Liabilities” 8754
• 9/2018 Finance Committee, “Accept CalPERS Pension Annual Valuation Reports as of June 30,
2017 and Review and Confirm Pension Funding and Reporting Policy Guidelines” 9604
• 10/2018 City Council, “CalPERS Pension Annual Valuation Reports as of June 30, 2017 and
Pension Funding and Reporting Policy Guidelines” 9708
• 10/2018 City Council, “Direct Staff to Amend Budget Assumptions for Pension Benefit Costs and
Complete the Workplans to Address the City Council FY 2019 Adopted Budget Referral to
Identify $4 Million in General Fund Savings” 9740
• 9/2019 Finance Committee, “Accept CalPERS Pension Annual Valuation Reports as of June 30,
2018” 10641
Through the various discussions, the City has been able to better understand and analyze many of the
inputs and factors that impact the City’s pension liability. A few of the most important inputs are
detailed below to offer additional context regarding the City’s long-term pension obligations.
Inputs –
Discount Rate: The CalPERS pension plan is built on the assumption that assets will generate a certain
rate of return over the career of an individual; these returns make up the bulk of an individual’s pension
benefit. The long-term investment assumption is called the Discount Rate. As a result, the assumptions
for the discount rate have a significant impact on the City’s pension liability. If a higher investment
return is assumed, the City’s contributions can be lessened compared to a lower investment return. The
Discount Rate is comprised of both the “real” investment returns as well as inflation assumptions. If the
inflation assumption changes, then there would also be an impact on the City’s liability.
ATTACHMENT A
ATTACHMENT A
Attachment A Page 2
Salary Growth: The salary growth of the City is another important variable; to the extent that the City’s
salary growth is higher or lower than CalPERS’ projections the City’s contributions would need to be
higher or lower to ensure adequate funding.
Mortality Rates: The mortality rates also impact the City’s long-term pension liability. This is because as
individuals live longer, they draw on their pension for a longer period, thereby increasing the cost of the
benefit. As CalPERS refines mortality rates to reflect people living longer, the changes adversely impact
the City’s long-term liability.
Maturity Measures: As pension plans mature, they become more susceptible to risk than less mature
pans. One of the methods to show the maturity level of a CalPERS plan is to examine the ratio of actives
to retirees. A pension plan that is just beginning will have a very high ratio of active to retired members.
As the plan continues and members retire the ratio starts declining. CalPERS consider a plan to be
mature when the ratio is near or below 1.0. The average support ratio for CalPERS public agency plans is
1.25, meaning that 1.25 active employees are supporting each retiree. For the City of Palo Alto, as an
institution that was founded 125 years ago, the active:retiree ratio is 0.72 for Miscellaneous, and is .39
for the Safety group.
PEPRA: The Public Employee Pension Reform Act (PEPRA) will have an impact on the City’s long-term
pension liability because it mandates a different retirement formula to employees in the PEPRA tier and
limits the maximum annual compensation eligible for pension calculations for employees in the PEPRA
tier. Employees fall into the PEPRA tier if their first date of employment was after January 1, 2013 and
they had no prior membership in another California Public Retirement System, or they have a break-in
service of more than 6 months. As the City’s workforce continues to shift demographically from
“Classic” members to PEPRA members, the City’s long-term liability will likely contract accordingly.
Other: Other elements also impact the City’s long-term pension liability, including the upcoming change
in CalPERS’ amortization policy. They will be shifting from a 30-year amortization with a 5-year ‘ramp-up’
at the beginning and a 5-year ‘ramp-down’ at the end to a 20-year amortization with a 5-year ‘ramp-up’
and no ‘ramp-down’. This will have an impact on the City’s annual Actuarial Determined Contributions
(ADC) and the pension liability that will vary depending on whether it is a gain or a loss that is being
amortized.
ATTACHMENT A
City of Palo Alto Unfunded Pension Liability - Safety
As of June 30 2018
Unfunded
Balance Payment Unfunded
Balance Payment Difference
From Current
Unfunded
Balance Payment Difference
From Current
6/30/2020 176,810,640 11,210,740 176,810,640 13,079,551 1,868,811 176,810,640 15,947,209 4,736,469
6/30/2021 177,590,903 12,598,401 175,657,792 13,439,239 840,838 172,691,464 16,385,757 3,787,356
6/30/2022 176,990,378 13,825,697 174,052,181 13,808,818 (16,879) 167,830,308 16,836,365 3,010,668
6/30/2023 175,078,292 14,694,686 171,951,881 14,188,560 (506,126) 162,162,758 17,299,365 2,604,679
6/30/2024 172,133,468 15,421,340 169,311,752 14,578,746 (842,594) 155,619,549 17,775,098 2,353,758
6/30/2025 168,230,853 15,845,427 166,083,203 14,979,661 (865,766) 148,126,213 18,263,913 2,418,486
6/30/2026 163,616,378 16,258,249 162,213,945 15,391,602 (866,647) 139,602,709 18,766,170 2,507,921
6/30/2027 158,251,858 16,705,350 157,647,725 15,814,871 (890,479) 129,963,021 19,282,240 2,576,890
6/30/2028 152,049,340 17,164,748 152,324,036 16,249,780 (914,968) 119,114,729 19,812,502 2,647,754
6/30/2029 144,937,439 17,636,782 146,177,815 16,696,649 (940,133) 106,958,548 20,357,346 2,720,564
6/30/2030 136,839,428 18,121,791 139,139,115 17,155,807 (965,984) 93,387,845 20,917,173 2,795,382
6/30/2031 127,672,863 17,622,496 131,132,748 17,627,591 5,095 78,288,102 21,492,395 3,869,899
6/30/2032 118,381,115 17,537,542 122,077,918 18,112,350 574,808 61,536,364 22,083,436 4,545,894
6/30/2033 108,526,816 16,625,803 111,887,812 18,610,440 1,984,637 43,000,626 22,690,730 6,064,927
6/30/2034 98,925,829 16,285,453 100,469,170 19,122,227 2,836,774 22,539,196 23,314,725 7,029,272
6/30/2035 89,004,832 15,649,262 87,721,827 19,648,088 3,998,826 (15,649,262)
6/30/2036 79,047,446 14,573,328 73,538,215 20,188,410 5,615,082 (14,573,328)
6/30/2037 69,505,998 13,957,164 57,802,836 20,743,592 6,786,428 (13,957,164)
6/30/2038 59,934,015 13,296,089 40,391,696 21,314,041 8,017,952 (13,296,089)
6/30/2039 50,375,812 12,812,833 21,171,700 21,900,177 9,087,344 (12,812,833)
6/30/2040 40,648,424 12,595,936 (12,595,936) (12,595,936)
6/30/2041 30,464,477 10,720,552 (10,720,552) (10,720,552)
6/30/2042 21,507,566 10,084,590 (10,084,590) (10,084,590)
6/30/2043 12,581,512 9,249,935 (9,249,935) (9,249,935)
6/30/2044 3,894,010 2,256,558 (2,256,558) (2,256,558)
6/30/2045 1,832,389 1,008,317 (1,008,317) (1,008,317)
6/30/2046 917,644 949,218 (949,218) (949,218)
354,708,287 342,650,200 (12,058,087) 291,224,424 (63,483,863)
Current Amortization 20 Year Amortization 15 Year Amortization
Date
ATTACHMENT B
Attachment B Page 1
ATTACHMENT A
City of Palo Alto Unfunded Pension Liability - Miscellaneous
As of June 30 2018
Unfunded
Balance Payment Unfunded
Balance Payment Difference
From Current
Unfunded
Balance Payment Difference
From Current
6/30/2020 286,363,666 23,432,860 286,363,666 25,828,203 2,395,343 286,363,666 35,308,545 11,875,685
6/30/2021 282,169,983 25,768,686 279,692,222 26,538,479 769,793 269,885,680 36,279,530 10,510,844
6/30/2022 275,266,546 27,775,842 271,819,062 27,268,287 (507,555) 251,249,840 37,277,217 9,501,375
6/30/2023 265,803,649 29,093,334 262,639,861 28,018,165 (1,075,169) 230,277,476 38,302,340 9,209,006
6/30/2024 254,315,525 30,450,533 252,042,436 28,788,664 (1,661,869) 206,776,650 39,355,655 8,905,122
6/30/2025 240,619,337 28,631,100 239,906,181 29,580,352 949,252 180,541,209 40,437,935 11,806,835
6/30/2026 227,846,449 25,356,875 226,101,459 30,393,812 5,036,937 151,349,768 41,549,979 16,193,104
6/30/2027 217,566,346 26,054,188 210,488,957 31,229,642 5,175,454 118,964,620 42,692,603 16,638,415
6/30/2028 205,845,327 26,770,680 192,918,992 32,088,457 5,317,777 83,130,572 43,866,650 17,095,970
6/30/2029 192,562,693 27,506,872 173,230,763 32,970,890 5,464,018 43,573,697 45,072,982 17,566,110
6/30/2030 177,588,753 28,263,313 151,251,563 33,877,589 5,614,276 (28,263,313)
6/30/2031 160,784,169 25,566,093 126,795,922 34,809,223 9,243,130 (25,566,093)
6/30/2032 145,593,290 25,078,301 99,664,696 35,766,476 10,688,175 (25,078,301)
6/30/2033 129,843,622 22,968,475 69,644,094 36,750,055 13,781,580 (22,968,475)
6/30/2034 115,173,901 21,972,705 36,504,628 37,760,681 15,787,976 (21,972,705)
6/30/2035 100,507,333 20,503,251 (20,503,251) (20,503,251)
6/30/2036 86,334,117 18,042,492 (18,042,492) (18,042,492)
6/30/2037 73,714,206 16,794,746 (16,794,746) (16,794,746)
6/30/2038 61,501,581 15,464,725 (15,464,725) (15,464,725)
6/30/2039 49,809,855 14,472,775 (14,472,775) (14,472,775)
6/30/2040 38,325,790 13,874,452 (13,874,452) (13,874,452)
6/30/2041 26,656,752 10,174,002 (10,174,002) (10,174,002)
6/30/2042 17,998,655 9,509,422 (9,509,422) (9,509,422)
6/30/2043 9,421,939 8,211,777 (8,211,777) (8,211,777)
6/30/2044 1,587,145 1,641,756 (1,641,756) (1,641,756)
523,379,255 471,668,975 (51,710,280) 400,143,436 (123,235,819)
Current Amortization 15 Year Amortization 10 Year Amortization
Date
Attachment B Page 2
ATTACHMENT A
Attachment B
Discussion of Finance Committee Request for Information
The City consulted with its outside actuarial consultant, Bartel Associates, to analyze what additional
level of contributions would be necessary to reach a 90% funding level for the Miscellaneous plan and
the Safety plan over different timeframes, ranging from 15 years to 10 years. This analysis was
conducted using both a methodology consistent with CalPERS (presuming a 7.0% discount rate) and
using a more conservative Risk Mitigation methodology where the discount rate would be lowered by 5
basis points each year beginning in FY 2023.
As part of the conversation around a Pension Funding Policy, it is crucial to remember that CalPERS itself
is the largest public pension fund in the United States. CalPERS is striving to reduce risk in its portfolio,
balance the competing interests of its various constituencies, and maintain returns over a time horizon
that spans decades. Thus, although CalPERS has begun de‐risking by shifting its investment portfolio,
lowering its discount rate from 7.5% to 7.0%, and shortening its amortization period for new
gains/losses from 30 years to 20 years, the City likely still has an interest in additional proactive
contributions to further mitigate its long‐term pension liabilities.
Table 1, below, shows the additional contributions, above the CalPERS Actuarially Determined
Contribution, necessary to reach a funding level of 90% in the Miscellaneous plan using a methodology
consistent with CalPERS current calculations. The table incorporates the PARS trust fund into the
consideration of total funding level and includes the cost of paying the difference in Normal Cost Rates
(between 7.0% and 6.2%) as its own row of data. As the timeframe for reaching 90% funding shortens,
the marginal cost of additional contributions necessary to reach 90% within that timeframe is shown. As
seen in the table below, based on the actuarial assets as of June 30, 2018, and presuming that CalPERS
met its 7.0% investment return in each year, the City would have reached 90% of funding within 11
years for the Miscellaneous plan if it continued paying the difference in Normal Cost rates each year.
This means that no additional contribution would be necessary unless the City wanted to reach a 90%
funding level within 10 years. The marginal cost to reach it within 10 years is reflected on that row.
As seen in Figure 1, which follows the table, the largest component of the City’s contributions remains
the CalPERS calculated contributions. Thus, paying the CalPERS ADC remains a critical component of the
City’s pension funding strategy.
Attachment B
Table 1. Additional Contributions to reach 90% Funding in Miscellaneous Plan – 7% DR ($000s)
Figure 1. Graph of Additional Contributions to reach 90% in Miscellaneous Plan – 7% DR ($000s)
Table 2, below, shows the same information for the Safety Plan. In the Safety Plan, additional
funding would be needed for each year of the timeframe in order to reach a funding level of
90% of CalPERS’ assets. As seen in the table and figure below, $165,000 in additional funding
would be needed in the first year to reach 90% funding in 14 years, and an additional $539,000
would be needed to reach 90% funding in 13 years, with increased contributions necessary for
the shorter timeframes.
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034
6.2% DR NC Margin 2,729 2,686 2,668 2,648 2,624 2,603 2,583 2,566 2,550 2,535 2,520 2,505 2,490 2,476
14 Years - - - - - - - - - - - - - -
13 Years - - - - - - - - - - - - -
12 Years - - - - - - - - - - - -
11 Years - - - - - - - - - - -
10 Years 368 378 389 399 410 421 433 445 457 470
Attachment B
Table 2. Additional Contributions to reach 90% Funding in Safety Plan – 7% DR ($000s)
Figure 2. Graph of Additional Contributions to reach 90% Funding in Safety Plan – 7% DR ($000s)
Table 3. Budgeted Additional Contributions through FY 2031 ($000s)
As seen from the tables and figures above, the City is currently contributing enough additional
funding to reach 90% funding within 15 years for both the Miscellaneous and Safety plans if
CalPERS achieved a 7.0% rate of return. However, given the historic rate of return for CalPERS
and CalPERS’ stated desire to further mitigate risk by reducing the discount rate to the extent
practicable and possible, Bartel Associates also calculated a projection under a “Risk Mitigation”
scenario. This scenario models necessary contributions if CalPERS’ discount rate was steadily
lowered by 5 basis points per year. As in the tables above, the difference in calculating the
normal cost at a discount rate of 6.2% and the Risk Mitigation Rate (which lowers from 7.0%
throughout the projection), is included as its separate row beginning in FY 2023. In the tables
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034
6.2% DR NC Margin 1,337 1,369 1,365 1,363 1,361 1,359 1,357 1,356 1,354 1,348 1,334 1,322 1,308 1,291
14 Years 165 170 174 179 184 189 194 200 205 211 216 222 228 235
13 Years 539 554 569 585 601 617 634 652 670 688 707 726 746
12 Years 695 714 734 754 775 796 818 840 863 887 912 937
11 Years 854 877 902 926 952 978 1,005 1,033 1,061 1,090 1,120
10 Years 1,088 1,118 1,149 1,180 1,213 1,246 1,280 1,316 1,352 1,389
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031
Miscellaneous Plan 3,754 3,865 3,946 4,030 3,958 4,051 4,144 4,237 4,344 4,422 4,515
Safety Plan 1,795 1,810 1,825 1,827 1,756 1,789 1,821 1,853 1,886 1,918 1,970
Attachment B
below, the additional cost associated with lowering the discount rate from 7.0% to a lower rate
is included as the “Costs > 7.0% DR” row.
Table 4. Additional Contributions to reach 90% Funding in Miscellaneous Plan – Risk Mitigation
($000s)
Figure 3. Graph of Additional Contributions to reach 90% Funding in Miscellaneous Plan – Risk
Mitigation ($000s)
Table 5. Additional Contributions to reach 90% Funding in Safety Plan – Risk Mitigation ($000s)
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034
Costs > 7.0% DR - - 331 1,167 1,964 2,967 3,831 4,987 5,735 6,678 7,377 8,703 9,268 9,564
6.2% DR NC Margin 2,729 2,686 2,668 2,482 2,132 1,952 1,776 1,604 1,435 1,268 1,102 939 778 619
14 Years - - - - - - - - - - - - - -
13 Years - - - - - - - - - - - - -
12 Years 255 121 121 121 121 121 121 121 121 121 121 121
11 Years 1,320 649 670 692 714 737 761 785 810 836 862
10 Years 1,286 629 646 664 682 701 720 740 761 781
FY 2021 FY 2022 FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 FY 2030 FY 2031 FY 2032 FY 2033 FY 2034
Costs > 7.0% DR - - 186 612 1,021 1,536 1,995 2,482 2,929 3,467 3,825 4,324 4,807 5,094
6.2% DR NC Margin 1,337 1,369 1,365 1,278 1,106 1,019 933 847 762 674 584 496 409 323
14 Years 1,088 1,118 1,149 1,180 1,213 1,246 1,280 1,316 1,352 1,389 1,427 1,466 1,507 1,548
13 Years 710 730 750 770 791 813 836 858 882 906 931 957 983
12 Years 694 713 733 753 774 795 817 839 862 886 910 935
11 Years 1,066 1,095 1,125 1,156 1,188 1,221 1,254 1,289 1,324 1,361 1,398
10 Years 1,068 1,097 1,128 1,159 1,190 1,223 1,257 1,291 1,327 1,363
Attachment B
Figure 4. Graph of Additional Contributions to reach 90% Funding in Safety Plan – Risk
Mitigation ($000s)
As seen by comparing the Risk Mitigation tables to Table 3. Budgeted Additional Contributions
through FY 2031 ($000s), the City would need to ramp up its contributions as the discount rate
lowers beginning in FY 2023 to reach a funding level of 90% within 14 years for miscellaneous,
and would need to ramp up immediately for the Safety plan to reach 90% within 14 years.
Given the current and projected financial status of the organization, these additional
contributions would have immediate service delivery impacts.
Attachment C
Example Pension Funding Policy
Determination of an appropriate level for proactive Pension Funding is a policy decision. The
overarching goal of a Pension Funding Policy is to ensure that the City of Palo Alto avoids
service-delivery crowd-out by increasing annual pension costs. This must be balanced against
immediate impacts to service delivery in order to fund proactive contributions.
The City is statutorily required to make the CalPERS Actuarial Determined Contribution (ADC)
on an annual basis. The ADC is made up of two parts, the Normal Cost (NC), which represents
the pay-as-you-go portion of costs, and the Unfunded Accrued Liability (UAL) payment, which
represents the catch-up portion of costs. CalPERS currently calculates both the NC and the UAL
based on a discount rate of 7.0%. CalPERS amortizes any difference between investment
returns and that discount rate as part of its UAL calculation over 20 years. In a year when
CalPERS does not meet its target (loss) the City has to pay more over the next 20 years. In a
year when CalPERS exceeds its target (gain) the City would be able to pay less over the next 20
years. The timeframe of 20 years for amortizing gains and losses is recent; they were amortized
over 30 years through the June 30, 2018 valuation).
Additionally, the City recognizes the importance of ensuring that pension obligations included
in the City’s financial reports, such as the Comprehensive Annual Financial Report (CAFR), are
consistent with CalPERS. Reports such as the CAFR impact the City’s credit rating and thereby
influence areas such as bond financing that the City may seek to obtain.
However, the City also recognizes that CalPERS calculated costs are based on a discount rate,
annual rates of return, and other variables that might not align with actual experience nor
perhaps with expected experience. To address these shortcomings, the City is establishing a
Pension Funding Policy to guide proactive pension contributions.
This policy provides direction to the City regarding a desired funding target in relation to
CalPERS valuations, the timeframe over which to achieve that target, and actions that are
required until the target is met. There are contingencies that provide an additional range of
options if certain circumstances are met and some that require additional actions if other
criteria are satisfied.
Funding Goal and Timeframe: Through this policy, the City’s target is to fund 90% of the
CalPERS determined liability by FY 2036. The City will strive to reach the target of 90% of the
CalPERS determined liability within 15 years. If the City only paid the CalPERS ADC it would take
at least 30 years to reach full funding of the CalPERS determined liability. CalPERS’ 30-year
timeframe to reach full funding is also predicated on every single one of their actuarial
Attachment C
assumptions materializing. Thus, a 15-year timeframe to fund 90% of the CalPERS determined
liability represents a commitment from the City above and beyond the CalPERS ADC.
Funding Components: In order to achieve the target of 90% funding by FY 2036, the City will
calculate what the Normal Cost portion of annual pension costs would be if a discount rate of
6.2% were used instead of the CalPERS rate for the Miscellaneous and Safety Groups across the
organization. This additional cost will be included as part of the City’s standard budget process
and transmitted to the City’s Irrevocable section 115 PARS Pension Trust Fund (PARS Trust Fund
or PARS). Should the City reach its goal of 90% funding before FY 2036, the City Manager will
report the status to the City Council with a recommendation on whether the practice should be
continued, modified, or discontinued. The City Manager must identify the impacts on the
funding goal and timeframe to modify the transmission of the additional contributions to the
PARS Trust Fund.
In addition to the contributions required by this Pension Funding Policy, the City will examine
additional opportunities for proactive contributions to the PARS Trust Fund. Furthermore, the
City Manager will include recommendations on whether funding should be transmitted from
PARS to CalPERS as part of the annual budget process. This may change from year-to-year
depending on the circumstances and level of funding accumulated. Some years may result in
accumulating additional funding in PARS, while others may result in transferring an amount
greater than a single year of additional contributions, calculated through the lower discount
rate, to CalPERS. City Council approval is required for use of accumulated funds in PARS either to
CalPERS as an Additional Discretionary Payment (ADP) or to offset a portion of the standard
ADC.
An additional action that will not require City Council approval is transfer of excess Budget
Stabilization Reserve (BSR) above 18.5% to the PARS Trust Fund. The BSR Policy will be
amended to confer discretion to the City Manager to make this transfer. The BSR Policy
currently confers discretion to the City Manager to transfer excess BSR above 18.5% to the
Infrastructure Reserve. Once amended, the BSR Policy will confer authority to the City Manager
to proactively fund infrastructure and pension obligation needs through transfers to the
Infrastructure Reserve and to the PARS Trust Fund. Additionally, through standard reports to
the City Council (such as Year-End, Mid-Year, or another City Manager’s Report) the City
Manager will include actions for additional contributions from funds other than the General
Fund to maintain alignment with the contributions from the General Fund via excess BSR. City
Council approval is required for these contributions from funds other than the General Fund.
The City will work to proactively monitor its pension funding position through not only its
CalPERS reports but also by continuing to use an outside actuary as a consultant to model
different scenarios. The City will continue to transmit the CalPERS reports on an annual basis.
Attachment C
Once every three years, the City will consult with an outside actuary to provide an update on
the progress the City has made towards reaching a funding goal of 90% of funding of the
CalPERS determined liability by FY2036 and update the City Council. Additional actions may
come out of those reports and discussions with the City Council.
Service Delivery Outcomes: The goal of the Pension Funding Policy is to prevent service
delivery crowd-out by the increased costs of pension obligations. If the City’s efforts to
proactively contribute to the long-term pension obligations would result in service delivery
impacts in the short-term, the City Manager will identify those impacts and recommendations
to mitigate them, as appropriate, through the budget development process.
Fiscal Impacts: If the General Fund’s revenues are projected to decline more than 7.5% year-
over-year, the City Manager will return to the City Council with recommendations addressing
the implications for the City’s proactive funding contributions for the coming year through the
budget development process.
Attachment D
Impact of a 0% Investment Return for CalPERS for FY 2020
Staff analyzed the impact of a 0% investment return for CalPERS for Fiscal Year 2020, spanning
from June 30, 2019 through June 30, 2020. This analysis was performed using CalPERS’ Pension
Navigator tool. This tool allows for forecasting changes to certain parameters to approximate
the anticipated impact of changes to things like the rate of return for a given year.
As seen in the table and graph below, the impact would be phased‐in over five years, increasing
by 20% each year. It begins at 20%, increases to 40% in the next year, and continues to increase
through the fifth year when it reaches 100%. The cost in FY 2026 remains constant through the
conclusion of the 20 year amortization period, concluding in FY 2041. Through staff’s analysis,
each 1% of investment return is equivalent to approximately $1.0 million in total impact. Thus,
if CalPERS were to achieve a 1% investment return for FY 2020, the impact to the City would be
approximately $6.2 million at the end of a five‐year phase‐in.
Approximately 45% of the impact associated with the Miscellaneous plan would be borne by
the General Fund. The entirety of the impact on the Safety Plan would be borne by the General
Fund. The General Fund would accordingly bear approximately 67% of the total impact.
Table 1. Phase‐In of Impacts of a 0% Investment Return (FY 2020) ($Ms)
Figure 1. Graph showing Phase‐In of Impacts of a 0% Investment Return (FY 2020) ($Ms)
FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Impact on Miscellaneous 0.97 1.93 2.90 3.87 4.84
Impact on Safety 0.47 0.94 1.41 1.88 2.34
Total Impact 1.44 2.87 4.31 5.75 7.18
0.97 1.93
2.90 3.87 4.84
0.47
0.94
1.41
1.88
2.34
‐
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
FY 2022 FY 2023 FY 2024 FY 2025 FY 2026
Phase‐In of Impacts of a 0% Investment
Return ($Ms)
Impact on Miscellaneous Impact on Safety
Vers.: Aug. 5, 2019
Page 1 of 10
AMENDMENT NO. 1 TO CONTRACT NO. C15159278
BETWEEN THE CITY OF PALO ALTO AND
BARTEL ASSOCIATES, LLC
This Amendment No. 1 (this “Amendment”) to Contract No. C15159278 (the “Contract” as
defined below) is entered into as of September 1, 2015, by and between the CITY OF PALO ALTO, a
California chartered municipal corporation (“CITY”), and BARTEL ASSOCIATES, LLC, a limited liability
corporation, located at 411 Borel Avenue, Suite 620, San Mateo, CA 94402 (“CONTRACTOR”). CITY
and CONTRACTOR are referred to collectively as the “Parties” in this Amendment.
R E C I T A L S
A. The Contract (as defined below) was entered into by and between the Parties
hereto for the provision of actuarial services related to the City’s non-pension Other Post-
Employment Benefits (OPEB) benefits, as detailed therein.
B. The Parties now wish to amend the Contract in order to include CalPERS pension
valuations in the Scope of Services, replacing Exhibit “A” (“Scope of Services”), and add to the
compensation amount, replacing Exhibit “C” (“Schedule of Fees”), as detailed herein.
NOW, THEREFORE, in consideration of the covenants, terms, conditions, and provisions of
this Amendment, the Parties agree:
SECTION 1. Definitions. The following definitions shall apply to this Amendment:
a. Contract. The term “Contract” shall mean Contract No. C15159278
between CONSULTANT and CITY, dated September 1, 2015.
b. Other Terms. Capitalized terms used and not defined in this Amendment
shall have the meanings assigned to such terms in the Contract.
SECTION 2. Section 5, “Compensation for Original Term”, of the Contract is hereby
amended to read as follows:
“5. COMPENSATION FOR ORIGINAL TERM. CITY shall pay and CONTRACTOR agrees to
accept as not-to-exceed compensation for the full performance of the Services and
reimbursable expenses, if any:
The total maximum lump sum compensation of dollars ($ ); OR
The sum of dollars ($ ) per hour, not to exceed a total maximum
compensation amount of dollars ($ ); OR
For Services detailed in Exhibit A (Scope of Services), including OPEB biennial
Vers.: Aug. 5, 2019
Page 2 of 10
valuations as of June 30, 2015, June 30, 2017, and June 30, 2019 and other
Services, sums calculated in accordance with the fee schedule set forth at Exhibit C,
not to exceed a total maximum compensation amount of Two Hundred Thirty
Thousand Dollars ($230,000).
CONTRACTOR agrees that it can perform the Services detailed in Exhibit A (Scope of
Services), including OPEB biennial valuations as of June 30, 2015, June 30, 2017, and June
30, 2019; other as needed actuarial analyses; and CalPERS pension valuations for an
amount not to exceed the total maximum compensation set forth above. Any hours
worked or services performed by CONTRACTOR for which payment would result in a total
exceeding the maximum amount of compensation set forth above for performance of the
Services shall be at no cost to CITY.
In addition, included in the total maximum compensation amount above, the CITY
has set aside the sum of ten thousand dollars ($10,000.00) for Additional Services.
CONTRACTOR shall provide Additional Services only by advanced, written
authorization from the City Manager or designee. CONTRACTOR, at the CITY’s
request, shall submit a detailed written proposal including a description of the
scope of services, schedule, level of effort, and CONTRACTOR’s proposed maximum
compensation, including reimbursable expense, for such services. Compensation
shall be based on the hourly rates set forth above or in Exhibit C (whichever is
applicable), or if such rates are not applicable, a negotiated lump sum. CITY shall
not authorize and CONTRACTOR shall not perform any Additional Services for which
payment would exceed the amount set forth above for Additional Services.
Payment for Additional Services is subject to all requirements and restrictions in
this Agreement.”
SECTION 3. The following exhibit(s) to the Contract is/are hereby amended or added, as
indicated below, to read as set forth in the attachment(s) to this Amendment, which is/are hereby
incorporated in full into this Amendment and into the Contract by this reference:
a. Exhibit “A” entitled “SCOPE OF SERVICES”, of the Contract is hereby deleted
and replaced in its entirety to read as attached to this Amendment as
Exhibit “A”, entitled “SCOPE OF SERVICES, AMENDMENT NO. 1”, AMENDED,
REPLACES PREVIOUS..
b. Exhibit “C” entitled “SCHEDULE OF FEES”, of the Contract is hereby deleted
and replaced in its entirety to read as attached to this Amendment as
Exhibit “C”, entitled “SCHEDULE OF FEES, AMENDMENT NO. 1”, AMENDED,
REPLACES PREVIOUS..
Vers.: Aug. 5, 2019
Page 3 of 10
SECTION 4. Legal Effect. Except as modified by this Amendment, all other provisions of the
Contract, including any exhibits thereto, shall remain in full force and effect.
SECTION 5. Incorporation of Recitals. The recitals set forth above are terms of this
Amendment and are fully incorporated herein by this reference.
(SIGNATURE BLOCK FOLLOWS ON THE NEXT PAGE.)
Vers.: Aug. 5, 2019
Page 4 of 10
SIGNATURES OF THE PARTIES
IN WITNESS WHEREOF, the Parties have by their duly authorized representatives executed
this Amendment effective as of the date first above written.
CITY OF PALO ALTO
City Manager (Contract over $85k)
APPROVED AS TO FORM:
City Attorney or designee
(Contract over $25k)
Contracts Administrator
(Checklist Approval)
BARTEL ASSOCIATES, LLC
Officer 1
By:
Name: Mary Elizabeth Redding
Title: Vice President
Officer 2 (Required for Corp. or LLC)
By:
Name: Doug Pryor
Title: Vice President and Secretary
Attachments:
Exhibit “A” entitled “SCOPE OF SERVICES, AMENDMENT NO. 1” (Amended – Replaces Previous)
Exhibit “C” entitled “SCHEDULE OF FEES, AMENDMENT NO. 1” (Amended – Replaces Previous)
Vers.: Aug. 5, 2019
Page 5 of 10
EXHIBIT “A”
SCOPE OF SERVICES, AMENDMENT NO. 1
(Amended – Replaces Previous)
A. Project Purpose
CONTRACTOR will prepare bi‐annual actuarial valuation of the City’s non‐pension Other
Post‐Employment Benefits (OPEB), as per applicable Governmental Accounting Standards Board
(GASB) and actuarial requirements. The last OPEB valuation was prepared as of June 30, 2013.
Additionally, the City requires as‐needed actuarial services for labor negotiations, CalPERS
projections, or other financial analyses.
B. Other Post‐Employment Benefits Valuation
CONTRACTOR will provide an actuarial evaluation of the City’s OPEB in compliance with applicable
GASB and actuarial requirements. Specifically, the consultant will provide:
1. A determination of the City’s retiree medical benefit actuarial liability on a biannual basis
as of June 30, 2015, June 30, 2017, and June 30, 2019.
2. Within 60 days after receipt of the necessary payroll and other information from CITY, the
CONTRACTOR will meet with CITY to discuss the OPEB liability and funding level options
and will recommend actuarial and economic assumptions appropriate for the City based on
plan benefits, anticipated funding levels, and the current economic environment.
3. The required annual total contribution amounts needed to amortize the cost over the
amortization period selected.
4. A breakdown of this liability by the following:
Age (<65 v. >65)
Benefit Group (Tier)
Fund
Labor Group
Miscellaneous v. Safety employees
Normal Costs v. Unfunded Actuarial Accrued Liability (UAAL) Amortization
Liability and Normal Cost by Bargaining Unit (7 units)
Current Employees/Retired Employees and Dependents (survivors) (2 groups)
5. A description of the actuarial basis and assumptions used in the valuation.
6. A description of assumption and other changes since the last valuation.
7. A written executive summary describing the results of the valuation.
8. Sensitivity Analysis:
Investment return analysis using all CalPERS Trust options
Discount Rate
Amortization Period
Implied Subsidy
Other analyses suggested by proposer
9. Preparation of the California Employers’ Retiree Benefit Trust (CERBT) Fund documentation
and certifications needed by CITY to send to CalPERS.
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CONTRACTOR shall perform the following activities to complete the bi‐annual actuarial review of
the City’s OPEB programs:
1. Meet with City representatives including Finance Committee and Council, as well as staff,
at least four to five times. The preliminary meeting will be conducted to discuss and to
understand assumptions and methods before the study is undertaken. In addition, at the
first meeting, a project schedule will be agreed upon. The subsequent meeting will be held
to explain and to present the results of the project. CONTRACTOR will then attend Finance
Committee and/or City Council meetings to present results.
2. Submit a draft report for review and approval prior to submission of final report
3. Prepare a final written report summarizing conclusions and documenting the analysis. This
report may be similar in format to the one prepared for the June 30, 2013 actuarial
valuation including a written executive summary, though other formats may be acceptable.
4. The report should include exhibits summarizing all appropriate results for two fiscal years
(i.e. fiscal year ending June 30, 2015 and projected June 30, 2016). The report should also
include information analyzing the impact of any changes in assumptions and methodology
as well as plan experience relative to what would have been expected to occur during the
preceding two years.
C. GASB 75 Reports
In addition to the OPEB valuation work described in Section B, annual reports providing the
accounting information required under GASB Statement No. 75, Accounting and Financial
Reporting for Postemployment Benefits Other Than Pensions (GASB 75), which was first effective
for fiscal year ending June 30, 2018. CONTRACTOR will prepare GASBS 75 reports for fiscal years
2017/18, 2018/19, 2019/20 and 20120/21. Each report will include all actuarial information
required for GASBS 75:
1. Note Disclosures
2. Required Summary Information (RSI)
3. Supporting Exhibits, including the Crossover Test
4. Journal Entries
5. An allocation of OPEB amounts by Fund, and by Department within the General Fund
D. Other As‐Needed Actuarial Analyses
Throughout the contract period, CITY may require additional actuarial analyses related to labor
negotiations, CalPERS pension valuations, or long‐term financial analyses. Additionally, CITY may
require the CONTRACTOR to attend arbitration hearings, Finance Committee meetings, Council
meetings, etc.
E. CalPERS Pension Valuations
In addition to the work above, CITY will require a comprehensive analysis of CalPERS Pension
Valuations and impact of changes in CalPERS actuarial assumptions, including but not limited to
CalPERS funding policy changes, demographic assumption changes, risk mitigation strategy
changes, and the phase-in to a lower discount rate of 7.0% from 7.5%. The strategic asset
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allocation of CalPERS and annual inflation assumptions will also be analyzed. The analysis of these
various factors and their impact on the City’s anticipated contributions to CalPERS will be discussed
and used to inform a conversation about options to address the City’s long-term pension
obligations. This analysis will also include a discussion of using a 6.2% discount rate to calculate the
City’s normal cost contribution to CalPERS compared to both the 7.0% discount rate currently used
by CalPERS as well as the potential for CalPERS to lower their discount rate through a risk
mitigation strategy. It is anticipated that this marginal cost will aid the City in calculating its
contributions to its Section 115 Pension Trust Fund and inform conversations with the City Council
about a pension funding policy. Additionally, the City may ask for consultation on potential
disbursement strategies to maximize the effectiveness of the Section 115 Trust Fund and ensure
that proactive funding for the City’s long-term pension obligations is optimally utilized.
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EXHIBIT “C”
SCHEDULE OF FEES, AMENDMENT NO. 1
(Amended – Replaces Previous)
CITY shall pay CONTRACTOR according to the following rate schedule. The maximum amount of
compensation to be paid to CONTRACTOR, including both payment for services and any specified
reimbursable expenses, shall not exceed the amounts set forth in Section 5 of the Agreement. Any
services provided or hours worked for which payment would result in a total exceeding the
maximum amount of compensation set forth herein shall be at no cost to CITY.
The fee information is relevant to a determination of whether the fee is fair and reasonable in light
of the services to be provided. Provision of this information assists the City in determining the firm’s
understanding of the project, and provides staff with tools to negotiate the cost, provide in a table.
Compensation based upon deliverables
Services in the chart below refer to services referenced in Exhibit “A” – Scope of Services,
Amendment No. 1, Section B – Other Post‐Employment Benefits Valuation as of the dates shown.
Costs for reports that may be required as of the Measurement Date for accounting under the new
GASB Statements 74 and 75 are excluded. The number and timing of any such reports are
dependent on the City’s selected Measurement Dates, and typically cost $1,500 to $3,500 each.
CONSULTANT will provide an exact fee quote once the City selects its GASB 74 and 75 timing.
Hourly rates and fees below for 2017 and 2019 are based on assumed CPI of 2.5% per year.
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EXHIBIT “C” – SCHEDULE OF FEES, AMENDMENT NO. 1 (Amended – Replaces Previous)
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EXHIBIT “C” – SCHEDULE OF FEES, AMENDMENT NO. 1 (Amended – Replaces Previous)
Compensation based upon fee schedule
CITY shall pay CONTRACTOR according to the following rate schedule for work referenced in Exhibit
“A” – Scope of Services, Amendment No. 1, Section C – Other As‐Needed Actuarial Analyses (also
referred to as Additional Services in Section 5 of the Agreement) and Section D – CalPERS Pension
Valuations. The maximum amount of compensation to be paid to CONTRACTOR, including both
payment for services and reimbursable expenses, shall not exceed the amounts set forth in
Sections 5 of the Agreement. Any services provided or hours worked for which payment would
result in a total exceeding the maximum amount of compensation set forth herein shall be at no
cost to CITY.
Position 2020 Hourly Rate
Partner & Vice Present (Redding) $300
Assistant Vice President (Lin, Van Valer) $270
Associate Actuary $220
Senior Actuarial Analyst $200
Actuarial Analyst $160