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HomeMy WebLinkAbout2017-09-19 Finance Committee Summary MinutesFINANCE COMMITTEE TRANSCRIPT Page 1 of 82 Regular Meeting September 19, 2017 Chairperson Filseth called the meeting to order at 7:03 P.M. in the Community Meeting Room, 250 Hamilton Avenue, Palo Alto, California. Present: Filseth (Chair), Fine, Holman, Tanaka Absent: Oral Communications Chair Filseth: Nice to see all you folks again. It seems like I haven’t seen you for a long time. Lalo had a beard back then. So, first on the agenda is Oral Communications, and if there are any speakers from the public who wish to comment on any item not on the agenda, please speak now. Seeing no public speakers, we will proceed to action items. Agenda Items 1. Utilities Advisory Commission Recommendation That the City Council Approve Policy Objectives for the 2017 Wastewater Collection Utility Cost of Service Analysis. Chair Filseth: The first action item is the UAC recommendation that the City Council approve the policy objectives for the forthcoming cost-of-service analysis. Ed Shikada, Assistant City Manager/Utilities General Manager: Thank you very much, Chair, Members of the Committee. I’m Ed Shikada, Assistant City Manager of Utilities, also General Manager of Utilities. What we have for you this evening is the first step in an exercise we conduct every few years for each one of our utilities, known as a cost-of-service analysis, or COSA, as we refer to it. Tonight, we will cover the wastewater collection and the Palo Alto share of the wastewater treatment plant expenses. The purpose of a COSA is to ensure that our method of allocating costs among different TRANSCRIPT Page 2 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 categories of customers is fair and equitable. I would note that it is somewhat distinguishable from the amounts that are charged to customers in that the rates themselves are based upon the expenses that are reviewed annually by the City Council’s budget process and adopted as part of the budget. So, with that, we are at an early stage in this wastewater collection system COSA, and I will ask Eric Keniston, our Rates Manager, to walk you through some of the particulars. Eric Keniston, Senior Resources Planner: Good evening Council Members. So, as Ed mentioned, the last time we did the wastewater collection COSA was back in 2011. Generally, we like to do COSA’s about every 5 years or so, have them updated. So, this one here is getting relatively stale. We would like to have another look at all of our costs, as well as our customer usage, now that we’re coming back out of a period of drought and water usage levels are coming back up and stabilizing. We would like to just review and make sure that how we’re allocating costs amongst the various customer classes is still rational and reasonable. In the past the UAC and Council both expressed interest in having input on rate designs before we actually have the COSA completed, so that’s why we’re coming to you tonight and asking for anything you would like to see or would like to have our consultants look at when we’re doing the COSA analysis. So, some of the things that we just have to do, rates must be based on cost to serve customers. That’s the overriding principle, that just has to be done. Everything else is subsidiary. One of the things that has been brought up in the past by members of the public is that right now we have a single flat rate for all residential customers, and it has been mentioned that folks would like to see if there would be a potential for doing a separate one for say multifamily units, smaller dwellings and that sort of thing. So, we’re going to have the consultant look into that as one of the design points and see if it’s practical, feasible, cost justified. Another thing we generally look at is to make sure the mean proposed rate designs have the lowest impact on low- income customers and mitigate that as much as possible. So, after receiving your feedback tonight, we’re also going to bring this back to the City Council in general. We were at the UAC last month, so we’re here tonight to seek any issues of concern, areas of review or anything else you would like to see. With that, I open it up for questions and commentary. Chair Filseth: Super. Thank you very much. Questions and commentary from the Committee? Council Member Fine. Council Member Fine: Thank you Chair. Just a few questions. So, one, are COSA’s done in conjunction, like do we do a couple of them at a time. Is TRANSCRIPT Page 3 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 there any advantage there or do we just do them every 5 years as they’re getting stale? Mr. Keniston: Generally, they’re stand-alone products, so right now we’re doing the gas one as well, so this year we will have 2 going on. They do take quite a bit of staff time to run through and grab data analysis, we try not to do too many of them at one shot, but… Council Member Fine: And then a totally separate question, where would the low-income mitigations come from? Mr. Keniston: You know, as much as possible we would see what we can do with the costs as they come through, and then with whatever rate design that we propose for – so I guess, I don’t know if we could see if we, how to put this – we cannot do anything like, say, low-income discounts. Certain items, I think, would be precluded under Prop 218. It’s, essentially it would be considered a tax to everyone else to give a discount. But, you know, as much as possible try to develop a rate that is as fair and as low as possible to as many customers as possible. I mean, it’s an objective we hope to do it, but in the end, we will see what we can do. Council Member Fine: So, 2 things there. One, how many folks would this apply to eventually, right, and is it worth this effort of trying to find these different points where we could cross subsidize for them? Is that what we’re looking at? (crosstalk) Mr. Keniston: Well, we can’t cross subsidize. (crosstalk) Council Member Fine: Well, you can’t do it explicitly, but let’s say implicit? Mr. Keniston: Well, no, you wouldn’t be cross subsidizing, but you would, you know, try to set a rate that would not be regressive to any particular group. Council Member Fine: Does that mean we’re losing out on the top end? Mr. Keniston: No, you would set them fairly under cost-of-service principles. Council Member Fine: Okay. TRANSCRIPT Page 4 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Keniston: Yeah, and multifamily too. You know, like, if you do have smaller units, again, that’s a reasonable estimation, where if they use less water we would have a lesser rate for… Council Member Fine: I mean, those 2 seem to stick to me, actually, right, the multifamily use versus the low-income customers. I think we actually do have to treat them differently, because part of the thing about the multifamily is we’re saying, these are different building typologies and they produce or consume less resources. There may be something there for the low-income folks, but I guess I’m still not quite clear on where we’re going to be allowed to – we’re just lowering the rate overall to make it easier for some folks? Mr. Keniston: Well, we wouldn’t, yeah, we wouldn’t be able to do that. I mean, we wouldn’t penalize anybody, so yeah. Council Member Fine: Okay, thank you. Chair Filseth: Council Member Holman. Council Member Holman: Yes, one way I can think of, if it was available on a broad enough scale, is one way to help the low-income is to provide low-flow devices, you know. Lower cost or rebates for low-flow toilets, that sort of thing. So, instead of giving them a lower rate, give them ways that they can use less water. Does that make sense? Mr. Keniston: Methods of outreach, try and bring in less water in general, yes. Council Member Fine: But shouldn’t we do that for everyone? Council Member Holman: Yeah, but you can focus, of course, but you could also focus on the low income. (crosstalk) Chair Filseth: Could I ask a (crosstalk) question here? We’re talking about wastewater collection, right? Which is, how much runs into the sewers, right? So, we’re using water consumption as a proxy for that? Mr. Keniston: In general, right. TRANSCRIPT Page 5 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Chair Filseth: But if we do things to help people conserve water, like low- flow toilets and showers and stuff like that, will we be able to track that and apply that to their wastewater bill? Council Member Holman: Good question. Mr. Keniston: In a – usually for residential class customers, we don’t take individual metered usage and use that as like, we don’t take your winter basis for each unit and translate that to a charge for you. It’s based upon class averages. Now, in general, if you bring down the class average that would, you know, reduce the overall water. Chair Filseth: Thanks. Sorry to interrupt you Council Member Holman. Council Member Holman: That’s okay. No, it’s a good question and it’s probably too complicated to do something like, you know, be classified as a user that has X, Y or Z fixtures. That’s probably complicated. I don’t understand small units, because even if you have a small unit, you’re still going to be, you know, using the same number of fixtures, let’s say, so I don’t understand why a smaller unit would get some other consideration, other than any general multifamily or living unit. So, can you say anything about why small units? Mr. Keniston: I will say that other jurisdictions do have different rates for smaller unit places. I mean, it’s one thing that, it’s something that we will take and we will evaluate based upon the water usage going, you know, in and out and during the winter months and see if it’s something practical or feasible to do here. The analysis might show that there isn’t a difference and so the rate, we might just end up having the same rate for both, but it is something that we want to investigate and have the consultant work on. Council Member Holman: So, how do you track that? It’s like… Mr. Shikada: Number of bedrooms as an example, as a way of distinguishing different classes of multifamily developments and different rates associated with each. Council Member Holman: That way you mean – by number of bedrooms. TRANSCRIPT Page 6 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Shikada: As a surrogate for the size of the unit and also for the number of occupants. Council Member Holman: Yeah, so one area that isn’t covered here, and that seems like kind of hard to track too, I mean, it seems like a lot of… Mr. Shikada: Data. Council Member Holman: A lot of, yes, a lot of data to track, yeah. And I’m not insensitive to this, but it’s also like, where do you stop, because it’s like how many people live in the household and, you know, there’s also people who, it’s not associated with this, but people who have very large lots and water usage, for instance, it’s like – I don’t know. Where do you stop, so...? Mr. Keniston: Good points, yes. Council Member Holman: Yeah, Alright, I don’t really have anything else. Chair Filseth: Council Member Tanaka. Council Member Tanaka: So, if I recall correctly, I think this provides, this treatment plant also provides services for other cities, is that right? Mr. Keniston: The treatment plant, yes. Council Member Tanaka: So, is that factored in in all of this, as well? Mr. Keniston: These are just for the collection rates for the City of Palo Alto, so we won’t be doing any analysis for anything. I mean, as taken as a cost is how much of the treatment-related cost is allocated to the Palo Alto sector, and that will be factored in the cost-of-service. Council Member Tanaka: So, basically, we have the total cost and we subtract off what we get from other cities, then we’re left with our cost? Mr. Shikada: Subtraction is division but, effectively yes. Our share of the expenses relative to the other cities. TRANSCRIPT Page 7 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Council Member Tanaka: Just a question, do we include like the retirement benefits, like the unfunded pension liabilities in the cost analysis where you allocate it to other cities? Lalo Perez, Administrative Services Director/Chief Financial Officer: At the PERS rates that you know (crosstalk). Council Member Tanaka: So not the market rate? Mr. Perez: We need to define that, so yes. Council Member Tanaka: So, the answer is, no we don’t? Mr. Perez: Correct. Council Member Tanaka: Okay. So, we’re probably low-balling what we’re charging other cities then. Mr. Perez: We’re charging what PERS charges, but we can, you the body as a Council, can change those assumptions. Council Member Tanaka: I just wanted to understand, because we don’t have our true costs, so we have kind of the estimated cost, but not the true cost. Mr. Perez: I think we’re in agreement that we don’t necessarily see eye-to- eye with CalPERS’ assumptions on the rate of return. Council Member Tanaka: Okay. And then, I guess commercial is metered, is that right? Mr. Keniston: Commercial customers, yes. Council Member Tanaka: But not residential? Mr. Keniston: Residential is an interesting case. So, we have, I mean, single family homes, everyone is metered, but certain multifamily complexes (crosstalk) TRANSCRIPT Page 8 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Council Member Tanaka: No, not metered, wastewater. Mr. Shikada: Potable water. Mr. Keniston: Potable water, yes. Mr. Shikada: I’m sorry. For clarification, we don’t meter the wastewater. It’s the potable water inflow that is used as a surrogate. Mr. Keniston: Yes, I’m sorry. We don’t have any outflow meters at all on (crosstalk). Council Member Tanaka: So, how common is it for cities to have, to meter the outgoing for residential? Mr. Keniston: To meter outgoing in general is not very common. It’s usually, usually the estimation is done based upon water in, not flow out. Usually outflow meters are reserved for like, usually larger industrial type. Council Member Tanaka: Is it because it’s really expensive, or? Mr. Keniston: One, they’re expensive to install, but they’re also not always the most accurate things in low-flow situations. Council Member Tanaka: I see. The reason I’m asking is, I do know some people who have done a lot of gray water, so basically – I mean, I think as more and more people start doing, you know, kind of green building techniques, the amount of wastewater is not necessarily comparable to the amount of water use, if you understand what I’m saying. So, that’s why I was wondering. But, you know, it may be the cost of a meter is way too much more to even justify this. I have no idea. So, I’m just asking to see if we try to do this, or do customers that have proven gray water recycling techniques, right, do they get a lower rate, or is it just too bad? Mr. Keniston: These are things we can investigate. Mr. Shikada: I think it would be fair to say under existing rate design, there’s really not a way of accounting for that, other than to the extent that a gray water system actually decreases the volume of incoming potable water. And so, to the extent that they are able to reuse on site, it could TRANSCRIPT Page 9 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 reduce the incoming, but at this time in our current rate design, it really doesn’t account for what you’re describing. Council Member Tanaka: Because I think if there is a city that would do this, I think it’s probably Palo Alto, right, and I know more than one that has actually done this, you know. And I think we want to encourage it, in fact, right? Because it helps recharge your reservoir and, you know, less load on the wastewater treatment plant, right? So, anyways, if that could be considered, I think that would be a good thing. Mr. Shikada: It’s a good item, I think, for us to look into as well. Chair Filseth: Thank you very much. So, a couple of questions. We had a 9 percent wastewater increase in July 2016, as I read from this. And we’re anticipating a 7 percent increase in July 2018, and actually it looked to me, did I read this right that in practice it’s actually more than the 7 percent increase because we’re going to be subsidizing it. Even with that we’re going to be pulling down reserves to keep rates constant, so actually the increase is above 7 percent, which is above 3.5 percent per year. Why is that? Because I noticed a comment in here that it was related to inflation, but inflation’s not 4 percent a year, right? Mr. Keniston: Well, we had several years where we did no rate increases, so that’s part of it. If you’re looking inflationary, say you should be doing like say 2 percent a year, but we might have several years where we stretch and don’t do anything and instead use reserves, so… Chair Filseth: When was the last rate increase before July 2016? Mr. Keniston: Oh, you’re testing my memory. I do not actually recall. I want to say it was potentially the year right before that, but… Mr. Shikada: 2013. Chair Filseth: Three years, so 3 years at 3 percent followed by 2 years at 4 percentand so forth. I mean, is some of that going to capital expenditures, or? Mr. Keniston: It is yes. There were capital expenditures. TRANSCRIPT Page 10 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Chair Filseth: Okay. And then I wanted to ask about, and I think you sort of started to touch on this as well – it looks like some of the points of the investigation of the COSA are single family homes versus multi-units. Most of the, I mean, most of the things I’ve read about the greater consumption of water in single family homes versus relative multi-units have to do with like landscaping and lawns and stuff like that, but we don’t count that towards, as a proxy towards wastewater, right? Because it doesn’t go into the sewers, it goes into the ground. Mr. Shikada: Correct. Chair Filseth: So, are you going to be able to measure water consumption of single family homes versus multi-units and split out the landscaping and the irrigation? Is that practical? Mr. Keniston: Yes, that’s where we again, we really look at the winter base, the wet months to try to factor out any sort of irrigation sort of effects. Chair Filseth: I see. So, you say, okay, you do it in January and you’re assuming people aren’t spending too much time watering their lawns. That’s probably a good assumption. Mr. Keniston: And you don’t use just last year’s. You use a few years’ worth of data to ty to figure it out. Chair Filseth: Because I would guess, okay, that a 3-bedroom condo probably would use more water than a 1-bedroom cottage, for example. So, you said earlier you might be able to slice it by number of bedrooms, which would be a proxy for sort of the number of people consuming water and so forth. Is that, in fact, going to be part of the study? Mr. Keniston: We could also look at like, instead of bedrooms, we could also look at the number of fixtures. There is certain census and parcel-related data that we do have access to. Chair Filseth: Okay. Sure. Please, thank you. Jonathan Abendschein, Assistant Director Utilities Resource Management: Probably the simplest insight here into why a multifamily might be different from single family is that if you look at census data you have fewer people TRANSCRIPT Page 11 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 living in multifamily households generally, which means less indoor water use, which means when we actually run the numbers on that, split them out as a separate customer class, it’s very likely they’re going to show fewer costs should be allocated to them because they’re using less water. It’s likely to be as simple as that, but we can look at more complex analyses. Chair Filseth: Okay, because that was going to be my only comment, which is, and the other one applies to, you know, as Council Member Fine brought up, low-income customers versus non-low-income customers. I mean, progressive taxation is the law of the land, and you know, I think we all support it, right? But there is also Prop. 218, right. So, to the extent that this kind of stuff can be explicitly tied to water into the wastewater as opposed to, you know, we want to tax people with houses or we want to tax rich people or something like that. Okay, with that I’m done. So, if anybody would like to make a Motion? I’ll move it then, I’ll move the staff recommendation that the City Council approve the policy objectives set out by the UAC for the cost analysis. Council Member Holman: I’ll second. MOTION: Chair Filseth moved, seconded by Council Member Holman to recommend the City Council approve the Policy Objectives for the 2017 Wastewater Collection Utility Cost of Service Analysis. Chair Filseth: Do you care to speak to your second? Council Member Holman: No. Chair Filseth: All in favor? Motion carries 4-0. Thank you very much. MOTION PASSED: 4-0 Council Member Fine: It’s interesting to use the winter months to measure. Chair Filseth: Yeah, it sort of makes sense, doesn’t it, yeah. I just use so much more water for my indoor hydroponics in the winter, which is for that place on California Avenue (crosstalk). Council Member Fine: (Inaudible). TRANSCRIPT Page 12 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 2. Discuss and Recommend the City Council Adopt an Ordinance Amending the Fiscal Year 2018 Municipal Fee Schedule to Reflect Development Services Cost of Services Study and a Reserve Fund Policy. Chair Filseth: Okay, the next item on the agenda is Development Services Cost-of-Services Study, Phase 2. I should ask, are there any members of the public who wish to speak to this item? Okay, seeing none, welcome Director Pirnejad. Please proceed. Peter Pirnejad, Development Services Director: Thank you Chairman Filseth, Member of the Council. I’m happy to be here before you today to continue our saga in getting our fees aligned with our expenses. This has been ongoing since 2015. We’re very excited about putting a close to this. I’d like to acknowledge my staff. They have been working very diligently with me, the newest member of it, which is Cash, came onto the scene and has been helping, doing a yeoman’s job taking this last phase across to the finish line to this team. I’m sorry? So behind me, Katy, my Management Analyst, Evon Ballash, our Assistant Chief Building Official, and our consultant from Capital Accounting Partners, Dan is here to answer any specific questions you might have about the technical aspects of the fee study. So, the recommendation before you tonight is that the Council adopt an Ordinance amending the Municipal Fee Schedule to reflect the Development Services cost study, Number 1, and then to adopt the reserve fund policy. So, our objectives are very simple. We have 2, and the first of which is to implement a new base fee based on the International Code Council Methodology, independent and objective assessment of value. Easily said, we want to make sure that fees are based on assessed value, a give value, rather than the value that they give us. So, we’re using a table that the industry uses based on the type of building and the construction time to determine what the cost per square foot is, based on the industrial standard of building such a building. So, if you have 2 people coming in with the exact same sized house, 1 has gold fixtures and 1 has Home Depot fixtures, the cost of doing the plan review and the inspection would be the same. We want to ensure they pay the same fees. So, we went through an exhaustive process of reestablishing our fees rather than basing it on a given valuation. We’re basing it on a standard valuation. Chair Filseth: Can I interrupt and ask a question? Mr. Pirnejad: Yes sir. TRANSCRIPT Page 13 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Chair Filseth: So, I noticed this was called valuation-based fees, which sort of sounded to me like the opposite. Can you explain where that comes from? Mr. Pirnejad: We are calculating the value of the construction. There’s 2 ways to assess value. One is that when the applicant gives us the value and we say, how much is your contractor bidding you to do this job? And they will say a million dollars and then we will do a million dollars times our percentage of that becomes the fee. Versus, okay, what is the size of your construction, what is the construction type, which is the building type, and then we look at the ICC table, we apply our multiplier and then we get a fee. Chair Filseth: So then, based on the cost of construction? Mr. Pirnejad: Correct, exactly. The second objective tonight is to implement a reserve fund based on a 25 percent target percentage of our operating budget collected over a 5-year period. Very simply put, we’re trying to protect the general fund against any overages we might have due to market fluctuation or cost fluctuation by putting in a reserve, a very conservative reserve. We would be able to isolate some of those unforeseen issues. Just a quick overview of background, this has gone to Finance and Council twice. Just a quick overrun, it’s a 2-phase project. Consider this phase 1 and phase 1.5. The first phase went to Finance in 2016. We got a 4-0 vote. We took the nonvaluation-based fees, these are the one-off fees, the water heater fee, the reroof fee, the things that don’t require a valuation, and we took the Public Works fees separately. Then we went to Council in December and got approval of that. We came back to Council as part of our fiscal year process and at Finance Committee back in May of 2017 we adjusted for the annual inflator that all the fees across the entire municipal fee schedule got adjusted by 6 percent. We also added a 1.8 percent tech fee to account for all of our technology needs in Excella that we use, the permitting system. Then we realigned our green building fees. That went to Council and also got an 8-1 vote of approval. Now we’re going to phase 2, which is the valuation- based fees, which is essentially looking at all of our fees that are value based, not one-offs or specific fixture based or square footage based, and we’re adjusting those to, again, be at full cost recovery plus the reserve. Okay? So, I’ll give you a little explanation of the valuation-based fee process. This is moving from the given construction valuation to the ICC table. This is in alignment with the Council’s previous direction to be A) at full cost recovery, and B) do it in a way that is defensible. We’re working very closely with our partners in the City Attorney’s Office, identifying what is the most defensible model of assigning valuation, and this is the industry standard, working closely with Dan, this is where a lot of cities are heading. TRANSCRIPT Page 14 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 We’re ahead of the game on this, to be quite frank. We’re ahead of a lot of our neighbors that are trying to get to this model. It’s a lot of work because we’re looking at every single fee and what is the relationship between the construction type and the cost of the permit fee so a lot of effort went into that. A lot of cities are doing a variation of that, but the industry is moving towards that, the ICC table, International Code Council. If you look in your staff report, it’s a very rich staff report, you’ll find one of your attachments is the building, thank you, Packet Page 31. You have the construction types and you have the occupancy types and basically, based on a very clear definition of the building type and use, you get a cost per square foot. We will use that cost per square foot times the square footage of the building times our multiplier, a percentage that we determine is the cost of doing this work in Palo Alto, and we get the fee. It’s that simple. Council Member Holman: Could you say more about that, so you know, construction costs aren’t the same, and you said adding our multiplier, so the Palo Alto multiplier, so can you say a little bit more about what that formula is? Can you be a little bit more descriptive of what it is. Mr. Pirnejad: Sure. So, the permit fee multiplier is the Building Department budget over the total annual construction valuation. So, we take our annual budget, what does it cost to do our work, the Department’s budget, over the total annual construction value of all the projects that were permitted that year, the value of that construction, and you get the multiplier. And every city is going to be a little bit different because the amount of construction they do is different. The more construction, the more work that you should put into it. So, that’s how we come up with that number. We also, just for belts and suspenders, we went through a time and motion study to ensure that the permit fee that we came up with at the end of that valuation exercise actually corresponds to the total cost of doing that work. We looked at how many people touched that plan review, the plan checkers, the project coordinators. You know, we accounted for fully burdened costs in that calculation to compare the two to determine that, in fact, that number is the correct number. Now Dan is here. He can speak a little bit more to that, and how the industry uses that multiplier, if you want a deeper dive. Council Member Holman: That’s probably okay for now. The only thing is that, so it’s pretty clear, like if you divide how many projects and the staff and the overhead and fully loaded and all of that. But you did say like, the value of the construction activity over a year, but that value is it like the per square foot or is it, how is that calculated? TRANSCRIPT Page 15 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Pirnejad: Let me pass it on to Dan. Dan Edds, Project Consultant, Capital Accounting Partners: Sure, thank you. I appreciate the opportunity to be here. In a broader context, by using the current methodology of establishing value, which is, I walk in the door, I say my house is worth a million dollars, I’m charged a fee. Given valuation. The total annual valuation the last year was $394 million. By using the valuation table in the ICC table that you have right there, there total valuation is $276 million. For permit services, basically inspection services, yes mam. Council Member Holman: Where do those numbers come from, those 2 numbers you just used, where do those come from? Mr. Edds: Yes, good question. So, the $394 million simply means what we did was we looked at all the projects and the given value for each of the projects, there was 9 months’ worth of projects, and we extrapolate it out, you know, it’s my house, it’s Peter’s house, it’s Cash’s house, you add them all up over a period of a year, it comes up to $394 million. Khashayar “Cash” Alaee, Senior Management Analyst: Council Member Holman, if you look at Packet Page 31, the ICC has done a great job of laying out, you know, the permit fee multiplier in the second column and then an example of it, then how you calculate the fee, and then at the bottom they go through an example. Just in case that helps. Council Member Holman: It seems like no matter how you do it, though, you still have to work on some level of assumption. Because you have to start somewhere, and construction costs fluctuate. (crosstalk) and because we’re changing models, it’s like somebody could come in with a million-dollar project and a similar project could come in at $700,000. Mr. Edds: And that’s exactly the reason. That’s a perfect reason to go to the ICC table is you eliminate those kinds of fluctuations. So, as Peter pointed out, you have 2 houses, brand new houses, 5,000 square feet. You have the same number of bathrooms, the same number of bedrooms, the same kitchen, same number of outlets, everything is identically the same, but 1 house gets built based on Home Depot fixtures and furnishings and construction materials, the other one gets built using the latest, the highest- grade construction materials and furnishings from Italy. Those 2 construction values will be radically different. And the City will collect, right TRANSCRIPT Page 16 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 now the City will collect fees that are very different, even though the cost of doing the plan review and inspection is probably identically the same. Council Member Holman: That’s not my question. My question just really is, the basis of making the conversion, what’s the basis for how to do that value, which is still not 100 percent clear to me, but maybe it will as we go through. Mr. Edds: Well, so once we had all of 9 months’ worth of data that said, okay, here’s the current value. We also had the, we were able to go through that and make the, basically the connection between, on project by project, what the current value is based on the current model, and then pulling, calculating the value based on the ICC table. So, we looked at square footage, we looked at construction type, occupancy type and from that determined what the value would be based on the ICC table, and that’s where we got the $394 million versus the $276 million. Mr. Pirnejad: Does that make sense? The higher number was the number that we got when we just asked them how much is the construction, and then the lower number is the value we got when we looked at the ICC table. So, we’re trying to hone in on what the industry says it costs per square foot to build that type of construction, and the ICC table breaks it down by occupancy and building type. So, it’s very specific in terms of a house being built is totally different than a commercial office being built, and if you look at the valuations, they vary quite a bit. So, it’s a lot more refined than just asking, what did it cost you, what did your contractor say it was going to cost you. Maybe if we keep going, if it doesn’t clear itself up, we can dig a little deeper, and we have, like I said, our Assistant Chief Building Official, and she’s very well integrated with our ICC and the Bay Area, the Tri Chapter for the ICC. Evon Ballash, Assistant Building Official: Alright, this is Evon Ballash, the Assistant Building Official. I’ve been working with Chief Building Official George Hoyte and also with Dan Edds from fairly early-on last year in developing the model for this fee study, and just to clarify Council Member Holman’s question, what we did with the Building Division is, I had the plan checkers go through and for each of the projects that they reviewed and Plan reviewed, they actually documented in Excella the occupancy type, the construction type based on the ICC table, valuation table, and the square footage. So, we did that collection for 9 months and that’s how we came up with the basis for this model. And then we went through and did an audit to TRANSCRIPT Page 17 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 make sure that all the values, that all the data was correct between the Chief Building Official and myself. So, that’s the basis of that. Council Member Holman: I understand how you got there. It’s just, I’m going to have another question further on I think. So, we’ll see. Ms. Ballash: Okay. Thanks. Mr. Pirnejad: So, the ultimate goal in the valuation-based fees is to get the full cost recovery. That’s been our goal since the beginning. The methodology, the first part is the data. As we talked about, we looked at 12 months of staffing salary and revenue expense data. This is comprising our entire budget. It came out to somewhere around $13 million, and we took 9 months of current valuation data, since we hadn’t been collecting occupancy and construction type all this time. We had just been given the valuation we had to go back in time and collect that data and then do the calculation based on the 9 months of data that we had collected. So, we wanted to make sure that we were proofing the valuation methodology based on the given construction plans that we had been receiving and so we used the 12 months of staffing and then the 9 months of current valuation data to build into the model and then the – we used as our staffing salaries, we used fully burdened hourly rates. This accounts for everything, including pension and other benefits. The time estimates were based on activity levels and the reserve was included in that overhead as well. So, this includes everything from our rent to fully loaded compensation rate, as well as direct and indirect costs. So, City Attorney time, ASD time, etc., was all built in to the fully loaded rate that we used to build into the fee study. And then we set the fees from there. The reserve fund is based on a 25 percent target. This is going to be collected over a 5-year period, so each fee, both the valuation and the nonvaluation-based fees are going to be increasing by approximately 5 percent to capture that over the period of the 5 years. This is to account for unpredictable market adjustments, needs that may come up that weren’t budgeted for. It’s essentially to shield the general fund from any fluctuations in the market or departmental needs that we might have, in an effort to move towards an enterprise or special revenue fund which we’ve been working on over the last many, many years. So, this is the final step in trying to identify our costs and our revenues, our costs and our expenses in order to be able to be fully recoverable. And, the last step, the next steps would be going to Council with the public hearing. This would be an ordinance change as our fee schedule. We would have a second reading and then the fees would be adopted 6 days following that. And then we expect to, and anticipate taking a look at this and fine tuning it during every budget TRANSCRIPT Page 18 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 cycle. Knowing that this is the first year that we would be imposing this valuation-based methodology, we want to make sure to continue to study it and have a beginner’s mind as we continue to implement this, the special revenue fund or enterprise find we’re targeting for 2020. So, give us another fiscal year to work on and develop, work the kinks out of this process, and then work towards the enterprise fund in 2020. So, we have other things at our disposal if you have questions, but at this point I’d like to open it up for any questions you have. Chair Filseth: Thank you very much. Council Member Holman, do you want to (inaudible)? Council Member Holman: I’m going to go to a different topic. So, the staff report talks about, and thank you for coming forward with this reserve program. It makes a lot of sense. Okay, so I did have some questions as I was going through this. So, can you clarify – it’s like actually on the first page of the staff report and it’s in the bottom couple, three sentences of the last paragraph under background, and it says, “DSD is responsible for post entitlement activities on private property. It does not oversee or have authority over the entitlement phase of development or construction occurring within the City’s right of way, such as sidewalks or streets. DSD does support construction” (inaudible) blah, blah, blah. So, can you clarify what this means. So, of course, you know you’re responsible for the, your portion of the permitting and post entitlement activity on private property, but, so who then has oversight responsibility on construction in the City’s right of way? Mr. Pirnejad: That would be the Public Works Department. Council Member Holman: Okay. Mr. Pirnejad: So, the permits are issued out of the Development Center across the street, but ultimate authority lies in the City Engineer. Council Member Holman: So, that’s… Mr. Alaee: And then, Council Member Holman, Planning has jurisdiction over the entitlement phase. Council Member Holman: Right. TRANSCRIPT Page 19 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Alaee: So, it’s just acknowledging that Development Services has a focused narrow scope and then Planning and Public Works do the other activities. Council Member Holman: Okay, so when it says, above that where it says, “DSD is made up of key representatives and includes Public Works”, so there’s a separate group of Public Works that takes care of what’s in the public right of way? Mr. Pirnejad: So, let me explain. So, there’s Development-related work in the right of way and non-Development-related work. What we’re trying to do in this fee study is to make sure that all Development-related work is fully cost recoverable, that the permit pays for the entire fully burdened rate of all the people and activities and space that is required to do that work, and I’ll give you an example. Project A comes in over the counter. AT&T decides to rip up the street and put in a high definition line, some kind of dark fiber. That would not be Development related. It would be completely imbedded in the public right-of-way. They pay the appropriate fees and then get the permit and do the work. Now, in scenario B you have Chop Keenen building a brand-new building and he needs to tie into the sewer line, the water line and the electric line into the street, and he gets an encroachment permit to do that work, and he gets a street work permit, etc. He would pay the fully burdened cost to do that work and his Public Works fees would encapsulate that entire cost, including the cost of the Development Center rent, etc., because that is Development related. That’s how we distinguish. Now, the team at the Development Center issues both of those permits. We make sure that the Development-related permits are fully cost recoverable. Now, if you remember back many years ago, Walter Rossman brought together a report to the Council that identified the different recovering percentages for different types of work, and the Council had determined that Development- related work by private developers on the private property line should be at full cost recovery, and so we’ve been working off that basis. Council Member Holman: And so, if someone – I guess where the gap seems like potentially to me here is, if someone let’s say has a private project, private development project, they don’t get a permit but they end up encroaching on the public right of way, so whose responsibility is that. That’s what I could not discern here. Mr. Pirnejad: Well, we would work in tandem with Public Works, so if you’re building, like across the street, you have a house, ripping out the sidewalk TRANSCRIPT Page 20 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 and putting in a new sidewalk, that’s a collaboration between the Building Department, because part of that sidewalk is on the private property, and the Public Works Department, because the other side of that sidewalk is in the public right-of-way. So, we both issue permits, we both do inspections and we make sure that all that work is run seamlessly through the Development Center, and all the inspections are accounted for in the cost of construction. Council Member Holman: So, if they didn’t get permits, that’s what I was saying, if they didn’t get permits, you do still have authority and (crosstalk) Mr. Pirnejad: Correct, and Code Enforcement would get involved and then we would. Council Member Holman: Okay. I’ll try not to take too long with this. There was – also on the next page they were talking about something that this Committee talked about and the Council talked about, about the notion that new fees being higher than the product or fixture, but I didn’t notice any change in the – because one of the things I went to the, replacing a toilet because it was one of the things that came up. But I didn’t notice that fee went down, so it’s recognized but there wasn’t any change, as I saw it. Mr. Pirnejad: Right. The fees don’t all go up, some go up and some go down based on the time and motion study that we did, and so if you go through – we did a side-by-side comparison of the old versus the new, and a lot of the fees you’ll notice are going down. The reason that is, is because we added some new fees into this latest presentation to the Council. At the very, very bottom you’ll see them, and because of that, it distributed the cost of the overhead and the reserve across the entire subset of fees. And so, in some cases those fees went down from what we had previously proposed to the Council. Council Member Holman: Okay, I guess maybe I’m looking at the old one. I didn’t realize it though, but plumbing fixtures went up from $91 to $116, and I think those are the same numbers we looked at before. Mr. Pirnejad: Yeah, like I said, in some cases the numbers went up because we looked at, in those cases the reserve plus the overhead that was attached to them caused the fees to go up. You’re not going to see all the fees come down and you’re not going to see all of them go up. TRANSCRIPT Page 21 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Council Member Holman: Yeah, this is just one that this Committee and the Council both kind of pointed to, and so I was kind of surprised not to see it go down as a for instance. There was another one and it has to do with one that comes up a lot in the Committee and it has to do with discharge fees having to do with dewatering. Mr. Pirnejad: Did we change those fees, did we, Public Works? Council Member Holman: No, it says, “no change”. Mr. Pirnejad: Yeah. Council Member Holman: This is Packet Page 25. Mr. Pirnejad: Yeah, we didn’t change any of the Public Works fees. Council Member Holman: Okay. Mr. Pirnejad: Those just came before the Council. We’ll revisit those at the next, at the close of the fiscal year and see if there needs to be any tweaking, but at this time we are not proposing they be changed. Council Member Holman: So, even though they’re in here, they’re not… Mr. Pirnejad: You’ll see that there’s, all Public Works fees are the same as… Council Member Holman: Okay, because that’s one that, like I say, does get a whole lot of comment. So, the one thing I will say about, and this is a follow up to the last time we had this discussion, so in the meeting I was in prior to this I asked just for a show of hands, and it was 10 other people, and how many people know that, again, focused on what we talked about before, how many people know you’re supposed to get a permit for replacement of a toilet? No hands went up of 10. How many people would pay $116 for a permit to replace your toilet, now that you know you should get a permit? No hands went up. Just anecdotal. Mr. Pirnejad: We, just anecdotally, we went back and we did a survey of how many people came in for a toilet replacement. We had no record of anybody coming in for a toilet replacement because we consider that a like-for-like TRANSCRIPT Page 22 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 maintenance, so we wouldn’t go, we wouldn’t send Code Enforcement after the person that installed a toilet, just in case you were (crosstalk). Chair Filseth: I’m going to observe that if the fee were $110 instead of $120, you’ll probably get the same hand show both ways. Mr. Pirnejad: Yeah. Council Member Holman: Yes, yes. Like I say, I was just focusing on that because it was a topic of conversation previously at both Committee and Council. Mr. Pirnejad: Yeah, we came back to Council with an informational item that may or may not seemed - that explained that maintenance permits, just to clarify that maintenance type work doesn’t require a permit. And that would fall into that category. Council Member Holman: And even that gets complicated, because is replacing a water heater a maintenance item, maybe, maybe not. Mr. Pirnejad: It’s a bit more complicated because you’re dealing with a gas line, so we would prefer you get a permit. Council Member Holman: And, are you doing an upgrade or are you doing, you know. Chair Filseth: Council Member Fine. Council Member Fine: Thank you. Thanks for bringing this here tonight. A couple of questions about the reserve fund. So, one, how many reserve fund policies are unrestricted like this one? Because this one kind of reads that it’s a reserve fund but Council can move it around? Mr. Perez: The majority of your reserves are unrestricted. I’ll give you an example what’s restricted. We put money at PERS for the Section 115 supplemental pension. The only way you can utilize those funds as a Council is by sending them to PERS, so there is a contract that talks about all the restrictions, so that’s what’s defined as a legally restricted fund. So, the majority of your reserve is a discretionary reserve for the Council. TRANSCRIPT Page 23 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Council Member Fine: So, what about something like fiber, is fiber one of the restricted ones? Mr. Perez: It’s not restrictive within the purpose of the business. So, what you may be thinking of is that you, the Council, cannot just arbitrarily say, let’s take $5 million from there. Let’s use the electric fund. That’s a better example, from the electric fund and send it to the general fund without any nexus. Council Member Fine: Okay, thank you. That’s helpful. So, there would still be the nexus here? Mr. Perez: Right. So, the use has to be for the purposes of the Development Services. Council Member Fine: Good. And then, what does a 25 percent reserve fund look like for your department, like how much is that? Mr. Pirnejad: That comes out to about $3 to $4 million. Council Member Fine: Okay. And then my last question, we did a 1.8 percent surcharge to pay for Excella? Mr. Pirnejad: No, actually, it’s to pay for all the supporting services that continue to keep that technology up and running. There’s a lot of… Council Member Fine: Is it mainly Excella, or is it a group of, a suite of things? Mr. Pirnejad: It’s a suite of things. Council Member Fine: Okay, alright. Thank you. Chair Filseth: Council Member Tanaka. Council Member Tanaka: So, how do the fees compare to other cities? Mr. Pirnejad: We thought you’d ask that question. So, I will invite our Assistant Chief Building Official to come back up. Evon. TRANSCRIPT Page 24 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Ms. Ballash: Councilman Tanaka, we did sort of a brief review of what the neighboring jurisdictions had for their fees, and we looked at some sort of, as close as we could to some basic fees, like reroofing of residential, hot water, water heater fees, temporary power for residential and demolition, residential demolition. So, what we found is, it was kind of all over the board. For Menlo Park, for example, if I start maybe with what our current model for Palo Alto is, so for residential reroof Palo Alto is proposing $279, for Menlo Park based on their current fee, it’s $139. And then for Los Altos, they had a sliding scale, so depending on what the valuation, what the given valuation from the contractor was, the fee could be anywhere from $78.75 for a roof that was up to $3,000, to $727 for up to a $50,000 roof construction. Having just reroofed my house recently, I mean, the bill was over $40,000, so it could easily approach that, close to $700. Mountain View was similar. They charged $129 for a $3,000 reroof and up to $997 for a $50,000 reroof. So, Palo Alto, our current proposal would be $279 with no sliding scale. For water heaters, our current model is showing $199, which is an increase from the $110, and Menlo Park is showing $167. Los Altos and Mountain View, once again, are valuation. Los Altos is a valuation based, so, it’s anywhere from $78.75 for up to $3,000 to maybe $122.75 for $5,000. We looked up the average price of a residential water heater, a 50-gallon water heater was anywhere from $500 to $1,000 with no labor costs. So, you’d have to add maybe, I don’t know, 50 percent more or somewhere 30 percent to 50 percent more for labor costs. And Mountain View was lower. They came up to about $87.81, $88. And then for residential demolition, our current model is showing $498, Menlo Park is showing $550, so they’re higher. Los Altos is showing $289 and Mountain View is showing $195. So, we’re kind of, we’re not the highest, we’re sort of in that upper middle half. For temp power, we’re showing $173, Menlo Park is showing $131. Los Altos, once again it’s a sliding scale, so up to $3,000 worth of work they’re charging $79, $78.75. Mountain View is charging $71 or $72, $71.77. For furnace replacement, up to 100,000 btu’s Palo Alto, we’re proposing our current model $208. Menlo Park is going to be $205, so pretty close. Los Altos is, once again, based on a sliding scale, so $79 for up to a $3,000 furnace and $123 for a $5,000 furnace. And Mountain View is charging $55.62. So, we’re kind of in the middle of the pack at this point, with our proposed changes. Council Member Tanaka: So, I guess, my first question is, if you have the numbers, why not just put it in the report so we can see it, on a table? Ms. Ballash: Oh, because we just came up with these numbers at 4:30 today, sorry. TRANSCRIPT Page 25 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Pirnejad: We just decided today it would be prudent to do a little searching around. We knew very early on that they are very different. A lot of cities are using the given valuation methodology that we’re trying to get away from, so it wouldn’t be a like-for-like comparison. Whereas we’re using the ICC table, the valuations that we’re using are going to be much lower traditionally. Council Member Tanaka: Okay. So, it’s great you did a sample, but you only did about 6 or 7 items, right? I mean, how do we know that these aren’t just the ones we picked that were deliberately higher, deliberately lower. How do we know this is representative of the whole? Because it’s just like a list of, I don’t know, 200 or 300 items or something, or more, I don’t know. Like maybe 1,000, I don’t know. There’s a lot of items here so how do you know this is representative because this is such a small sample? Mr. Pirnejad: Well, we used fees for fixtures, the single type fixtures rather than using the valuation-based methodology. That you would get widely different stories. We would have to value a project and have the exact same value and run that fee through their department, and every situation is going to be a bit different. So, we talked to Dan about this and maybe he can speak to this, because he has done many fee studies in many cities. Mr. Alaee: Before Dan says something, may I say something? Council Member Tanaka, you know, I’m coming new into Development Services, so certainly I may not know all the details, and I would look to Peter and Terence to correct me if I’m wrong, but the way I understand it is that there has to be a nexus for the fees that we charge for our residents or any developer, and that nexus goes to Palo Alto’s costs of doing business. And so, and again, correct me if I’m wrong, but you know, that’s the most important thing here, is if, whether we’re not overcharging developers for fees. And so, I think that when you look at the cost of other cities, given their pension liabilities, health care costs, all the other inputs into staff costs, there is going to be a difference in fees. In addition to that, I think you have to look at when did those agencies do fee studies. So, you know, keep in mind Development Services had never done a fee study because it wasn’t a department. It only became a department in 2012, and, you know, prudently and with good public policy and good administration, the team has started to do the cost-of-services study. So, I think those are just some considerations to have in the background, and I would turn over to Dan if there’s any more specifics. TRANSCRIPT Page 26 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Edds: Thank you. It wouldn’t be impossible to identify a handful of projects, you know, I would probably say 100 square foot bathroom remodel, kitchen remodel. Be very, very specific, though in what you’re comparing because, as Cash mentioned, many cities will approach these fees radically different, and this is somewhat my opinion, I do a lot of these studies. I’ve done a lot of comparison studies. I just did one, finished one a few months ago for the City of Foster City and you know, very standard is to say, “well, how do our fees compare with other cities’ fees?” A very common question and I totally respect the reason for it. The challenge is, for you as Palo Alto, you’re somewhat unique. Your regulatory environment is, my observation, way more stringent than your neighbors, so coming up with a meaningful comparison is going to be challenging. And what I always tell my clients is, if you’re comparing fees, look at a trend. Don’t look at, you know, one line item, but look at the trend. Is the trend that single family homes, is it within a reasonable range, and if it’s a reasonable range, be happy. But, don’t be surprised if your fees are at the upper end of that range. Council Member Tanaka: So, I think you guys looked at 9 months’ worth of data. Is that right? Mr. Edds: Excuse me. Council Member Tanaka: Nine months’ worth of data. How many projects was that? Mr. Edds: Do you want me to answer that? Yeah, it was over 900 projects. Actually, each project could have as many as 3, and Evon you may want to jump in here. Every project line item could have had as much as 3 separate pieces to the project. So, 3 times 900 is what, 2700. So, it was a lot of projects and we took the 9 months of data, extrapolated it out for 12. We felt like 9 months of data was a reasonable sample size. Council Member Tanaka: And what percentage was residential versus commercial? Mr. Edds: In terms of valuation, in terms of numbers of projects, or what? Council Member Tanaka: How about both. Mr. Edds: I’d have to go back and look. TRANSCRIPT Page 27 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Pirnejad: I can tell you, essentially in terms of number of projects, it’s 50 percent of our projects are residential, but commercial projects tend to be higher in value. Construction is more expensive in commercial environments than it is in residential. Council Member Tanaka: Okay, thank you. Chair Filseth: So, thanks very much for this. I think, let me ask a question. So, essentially, if I understand what you’re doing with the multiplier, you’re normalizing for the amount of construction that we did last year, but you’re also normalizing for square foot. Is that right? Mr. Pirnejad: That’s right. Chair Filseth: Okay. So, I think what you’re doing makes a lot of sense. I can well believe that our costs will vary widely against somebody that does the old method, because you know, I reroofed my house 10 years ago, or something like that and the costs vary drastically with what you put on it, and also the pitch of the roof, right. But I would guess that that doesn’t affect the inspection effort very much, right? So… Mr. Pirnejad: That’s correct. Chair Filseth: I wanted to ask a couple of questions. So, I did notice that there were, before I leave this completely, I did notice there were a couple of things where there were some fees that changed very dramatically, right. It didn’t seem like there were very many, but there were a few. Is that unexpected or expected? Mr. Edds: Which one did you see that changed a lot? Chair Filseth: I’ll have to look it up. Hand on. I think motor… Mr. Edds: Okay. So, on those fees, we did take the opportunity to do another double check on our estimates of cost. As Peter said, we also added 25, 6, 7, 8, 9 new fees, which had the impact of spreading the overhead costs across a broader spectrum of fees. I think we actually, in some of those fees, we actually brought down the time estimates, but it’s just an ongoing process of reviewing our data and making sure the data is as TRANSCRIPT Page 28 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 consistent as possible. As well as, in some cases, reconfiguring the actual fee description to bring it more in line with the California Building Code. Chair Filseth: Yeah. Motor generator went from $75 to $450 or something like that. But that’s, you expect a few of those. Mr. Edds: Yeah. In 300 fees, there’s always going to be one or two. Let’s take another look at that one. Chair Filseth: I wanted to ask a little bit about the reserve, actually. So, you talked about market or cost fluctuations. What does that mean. Mr. Pirnejad: It’s the number of permits that come in. It could vary from year to year. Our trends are telling us that it’s starting to slow. In the event that it does slow, it will take us a little bit of a while to stop working on the permits that we already issued. Until those permits close out, we can’t scale down our contract staff, so we need a buffer there to be able to continue to offer the same service levels until those projects close out, and then we can slowly reduce our contract capacity. Chair Filseth: Okay. Is this a circumstance in which we do the work first and then we get paid for it later, so we have to finance the work? Mr. Pirnejad: We get paid first, ant then we do the work later. Chair Filseth: Okay. So, it’s not a financing issue. Mr. Pirnejad: No. Chair Filseth: So, I assume the need for a reserve fund probably doesn’t change, depending on whether we do valuation-based fees or ICC-based fees? Okay, so what happens if we don’t have one, because we don’t have one now, right? Mr. Pirnejad: Correct. We depend on the general fund in the event something happens. Chair Filseth: Okay. And, you’re looking for a reserve of, it’s pretty small actually, it’s $3 or $4 million. The general fund is $200 million or something like that. How often do we actually pull money in and out of the general TRANSCRIPT Page 29 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 fund? In the last 5 years, how often did we pull money in and out of the general fund that wouldn’t have to be done if we had a reserve? Mr. Perez: Council Member Holman will tell you quite a bit with budget amendments. But… Council Member Holman: (crosstalk) Chair Filseth: But that could go both ways, though, I mean, right? If you pull money out, you put money back in too. Mr. Perez: And we do at the end of the year. And so, you know, we stay within our target and any excess goes to the infrastructure reserve, which is close to $40 million over the last 5 years. Chair Filseth: I think there’s going to be some philosophy associated with this, but you know, the net effect you’re describing on our reserve doesn’t change the amount that we spend. It just pushes around in time a little bit, right? So, my own general inclination, but you may not get a unanimous on this Committee, is that in general you would sort of like to have fewer pots of discretionary money lying around than more. It sort of invites untransparency. So, I don’t know how other people feel. For me, you can take or leave the reserve. Council Member Fine: So, I guess that was what I was getting at a little bit earlier. Like, we’re establishing a new reserve policy fund and the policies behind it, but what’s our overall policy across the reserve funds? That’s where I was kind of getting at too, and if it is just a time horizon thing that we need this money 6 months earlier rather than doing a BAO. We’re balancing those 2 things and I’m not really sure how to balance them. Mr. Perez: Let me see if I can, if I’m hearing the, how you’re weighing this reserve. By setting up the reserve through Development Services and not, and protecting the general fund or shielding the general fund, I think it’s appropriate because the people that are pulling the permits or getting the service from the segregated amount are the ones bearing the responsibility. Versus the general populace that is not necessarily remodeling their house or improving their house. So, I think that’s one way you might want to consider it. That it’s the people that are costing the effect or the work to that particular type of service is in the way staff is proposing it is over a period of TRANSCRIPT Page 30 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 time, so it’s not one group of individuals all at 1 year. It’s over a series of years. Chair Filseth: And yet, you know, I assume that if we’re setting our fees correctly, and we sort of have the right amount of resources applied to this area, then in the long run there’s not going to be a net transfer from non- remodelers to remodelers or vice versa, right? Or is there going to be? Mr. Perez: Well, the goal would be to establish it as an enterprise, and then you treat it the same way as the airport. So, the airport, we’re lending the airport funds because it doesn’t have the capacity to fund itself, and we create a loan agreement and then get a repayment. So, the concept would be the same, that if the DSD enterprise fund, once it’s created, were to be short, then the Council could opt to provide it the funding with the agreement that it would be repaid. Chair Filseth: Okay. I guess it’s not exactly the same as a rate stabilization fee, right? Which is – generally I sort of think we ought to pass rate changes through the rate bearers, because they pay it sooner or later anyway. Mr. Perez: I think it might be because you are setting a fee to recover your costs, which is the same intent in the electric fund, and you’re creating the reserve for the fluctuation of the expense. So, if your commodity goes up in the electric, then you don’t have to immediately charge a rate increase. Chair Filseth: But you will have to charge a rate increase (crosstalk) Mr. Perez: Eventually. It gives you the bridge to get to that. Chair Filseth: Somebody’s got to finance it somehow, right? Okay. Council Member Holman. Council Member Holman: You can tell that look. So, in the interest of what you were talking about, about you know, keeping track of it and I think one of you mentioned transparency, is there – I don’t frankly recall this – if there is a place in the City’s budget where we have tracking for rate stabilization funds. You know, we keep track of the general fund reserves, but you know, couldn’t we just have like a place where we document on an annual basis, and, it’s funny, I’ve not noticed that, or don’t remember it somehow. TRANSCRIPT Page 31 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Perez: Well, we will look at the page somewhere and point you to it, and we do have it. We don’t have every single fund, because we have like 87 funds, but we have the prominent funds in there. Chair Filseth: Let’s see. Does somebody want to make a Motion? Go ahead. Council Member Fine: I’ll move the staff recommendation to adopt an Ordinance to adopt a reserve policy for DSD and amend Fiscal Year 2018 Municipal Fee Schedule to adjust DSD municipal fees based on Attachment C and based on the phase 2 COSA study. Chair Filseth: Do we have a second? Council Member Holman: I’ll second less the cost of a permit to put in a toilet. Chair Filseth: The one in the hall is public property. MOTION: Council Member Fine moved, seconded by Council Member Holman to recommend the City Council: A. Adopt an Ordinance to adopt a reserve policy for the Development Services Department; and B. Amend the Fiscal Year 2018 Municipal Fee Schedule to adjust the Development Services Municipal Fees, based on the completion of Phase Two of a Cost of Services Study. Chair Filseth: Care to speak to your Motion? Council Member Fine: No thank you. I think there are some follow-up questions here about reserve funds and what our policies are on them in general, but this does seem like a reasonable way to kind of buffer your department and insulate it from the general fund. Chair Filseth: Care to speak to your second? Council Member Holman: Just briefly, I think it is a prudent thing to do. I share some of the concern that the Chair has, but I think generally it’s a TRANSCRIPT Page 32 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 good and prudent thing to do. It’s a proactive thing to do. You can say we’ve done this after all this time, but still it’s a proactive thing to do before we hit the next hiccup. And there are some of the other fees that will come to Public Works that will need to be addressed, but okay. Thank you. Chair Filseth: So, I’m going to propose an Amendment. I propose we drop the reserve. Is there a second.? Council Member Fine: I want to hear more. Why? Chair Filseth: I think in general it doesn’t reduce the cost of services to anybody, right. It moves those costs around in time. It’s not very much money, so it’s not a huge deal. I think the general fund could handle it, right, if we run into trouble. But it’s more of a philosophical thing. Council Member Fine: No, but I’m actually interested in this too. When we’re talking $3 million out of $200 million, how much of an effect does it have on the general fund, and we actually didn’t answer the question earlier, how often have we done these transfers. Mr. Perez: Transfer out of the… Council Member Fine: From general to DSD. Chair Filseth: And in. Mr. Perez: So, we’ve done it over the last 3 years, we’ve subsidized from the general fund to the Development Services because some of it, to be fair, because the study had not been done… Chair Filseth: We’re going to fix that by raising the fees, right? Mr. Perez: Right, but Peter did mention that activity has kind of, what was your word? Mr. Pirnejad: Kind of softened. Mr. Perez: Softened. So, you know, that’s something to consider. TRANSCRIPT Page 33 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Council Member Fine: I would rather accept something looking overall at our reserve policy. I just don’t want us to go singling out DSD just because they’re here tonight. Council Member Tanaka: I’ll second it. AMENDMENT: Chair Filseth moved, seconded by Council Member Tanaka to remove Part A of the Motion. Chair Filseth: Council Member Tanaka seconds it. I actually spoke briefly to my Motion. Council Member Tanaka, care to speak to your second? Council Member Tanaka: I actually agree with the philosophy. Chair Filseth: We’ll vote on the Amendment, okay. All those in favor of the Amendment which drops the reserve? Motion fails on a 2-2 basis. AMENDMENT FAILED: 2-2 Filseth, Tanaka yes Council Member Fine: What would your department and what would Finance do if that had passed? Mr. Pirnejad: Well, I mean speaking as a department, we would have to, maybe I should have Lalo speak to this. I mean, essentially, we would be, we wouldn’t be a complete enterprise fund, because we wouldn’t have the ability to be autonomous because there’s going to be fluctuations in the market, in our expenses, and what’s to keep us from being completely cost neutral? I think having a reserve puts us, puts the burden of proof on us to really manage our expenses because we have to be completely cost recoverable, and we know how much reserve that we have to work within, so we’re going to have to be more prudent. On the flip side of that argument is if we don’t have a reserve and it’s difficult to be an enterprise fund because we can’t be held accountable for fluctuations in the market because we have to buffer. Mr. Alaee: May I, a couple of things too. You know, if you look at the reserve policy, any action with the reserve comes before the City Council through the annual budget process. And then, keep in mind that a lot of the projects we work with are, these are some serious buildings and decent buildings and decent projects going on in town, not only with the commercial side, but also TRANSCRIPT Page 34 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 on the residential side, right? And making sure that we have the consistency in inspection and in, you know, meeting the timelines has an impact on residents and on big business. And so, I think what the department wants to do is really make sure that we do stay agile and be able to react and adapt to changing circumstances, and given the overall pressures on the general fund, you know, a 5 percent increase over 5 years, it’s not that big of an impact. Chair Filseth: Thanks very much. I think that’s the pros. City Manager. James Keene, City Manager: If I could say one thing and then Lalo, I think, has an important point. I think for the most part this is really dealing with the fact that there are fluctuations in the volume and the work demands we have and the revenue we get in, right? And then it takes some time to sort of, believe it or not, actually sort of see that that’s a real trend. And then, 2, to make adjustments on the cost side, whether that’s whatever it is, reducing staffing or whatever. It’s not entirely true, but there will be many of the times when, if we have a serious drop in Development Services revenue, it could be connected to wider economic issues where we could have similar revenue problems in the general fund. I mean, there could be less spending and sales tax. So, we’ve got kind of a compounded problem that suddenly we’ve got to take money from the general fund to make up, when we actually may need it for the general fund. And then Lalo’s got a good point. Mr. Perez: Yeah, because you know, the next item on your agenda is to consider being a little more aggressive in funding pension. From a finance perspective, I would rather you have this cushion, because if you wanted us to send another 10 percent of the annual required contribution, guess what, it comes out to about the $3 million. I’d rather send it to pension than having to go to the DSD to subsidize the construction and development. Mr. Keene: And as we know, unfortunately, if we had a serious revenue decline, it’s not going to be matched by a concomitant decline in our pension costs to give us some relief. Chair Filseth: The Donald Trump negotiator. I mean one alternative, these kinds of things in general, I think to Council Member Fine’s point, one of the things in general is this is a sort, you know – I mean, at some level it’s philosophical. You could compensate, for example, by increasing the general fund reserve, right, to 19 percent instead of 18 percent, or something like TRANSCRIPT Page 35 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 that. You could do something like that, right. But, in any case, the amendment failed, right. So, we’re back with the main motion, and so why don’t we vote on that? All in favor? Motion passes unanimously. MOTION PASSED: 4-0 Chair Filseth: Thank you folks very much. I like what you did here. This is a better way to do it than we did in the past, although I would have saved a bundle, because we got the cheaper… 3. Review and Discuss CalPERS Pension Annual Valuation Reports as of June 30, 2016 Including Assumptions, Financial Disclosures and Next Steps. Chair Filseth: The next item on the agenda is to review and discuss the CalPERS pension annual valuation reports as of June 30, 2016, including assumptions, disclosures and next steps. Are there any members of the public who would like to speak this item? Seeing none, we will proceed to the staff presentation. Lalo Perez, Administrative Services Director/Chief Financial Officer: Thank you. First, let me give you a little bit of background to kind of set the path, I guess. This is a very meaty subject. It’s been going on for a couple of years and we envision multiple types of scenarios of meetings to go over some of the options that we will have to address this unfunded liability for pension. The reason it’s a little lighter tonight than originally expected for a couple of reasons. One, CalPERS typically doesn’t pull out their valuation reports until the October/November time frame. But, given the importance of the impact of the drop in the rate of return to 7 percent, even though it’s phased in, CalPERS staff made a commitment to get the report out in August, so, we got it the middle to late August. And they also made a request that, because they were so overwhelmed with the amount of work that they had to do early, that staff not call them until September with any questions. So, as a result we had a lot of questions and we were not able to get answers to all of our questions as of yet. And also, we typically want to have John Bartel from Bartel Associates with us because some of the items can get complex and it’s good to have somebody that we enlist in the pension actuary world here to help us explain, and he’s not available until the October meeting. So, in talking to the City Manager and Chair of the Committee, we decided let’s at least introduce the item, bring the reports to light and then give you some of the information that we have now, and then start collecting information TRANSCRIPT Page 36 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 from you that you would like to see. So, that’s coming forward in future meetings and we can address them. So, what I would like to do with that is point you to the slide presentations in front of you, and remind you of what you as the Finance Committee referred to the Council and the Council agreed with you and forwarded it back to you, as you requested. So, what we envision doing in terms of the structural revenue and expense growth and ensuring that it remains at or below that of the revenue, is to address it to the long-range financial forecast that will be coming to you in December. But we would be interested in hearing any thoughts or ideas that you had in regard to that as staff prepares for those reports. The unfunded pension liability is what we’re starting tonight, so I believe we’re on track for that. The other item that was part of the referral was to continue to review the Public Safety growth and the impact Citywide in comparison to the growth being 10 percent to 12 percent in Safety and Citywide about 6 percent, review of staffing levels and alternative modes. As you recall, staff put a recommendation to reduce the Fire budget by $1.3 million. We owe you specific details of that as we work through that. In addition, you did give staff direction on what additional methods you want us to explore, such as the conversion of some of the sworn personnel to non-sworn in certain capacities, and so staff will continue to work on that as we move forward. The last item there is the review of financial reporting in the unfunded pension liability. I want to assure you that we took your concerns and comments to heart, and we plan to address them in the upcoming budget and the financials of the City. Specifically, you were concerned about us not having enough detailed information in the budget document in terms of our, what we may call, what we believe is our unfunded pension liability versus what CalPERS believes is the number. So, we will create a section as an attachment to the transmittal letter section, which is the first major document in the budget, and we will include detailed information that will detail out such things as the rate of return assumptions at various levels, and it will provide some of those numbers. I’ll touch on them later on in the presentation so you get a better sense of what I’m specifically referring to, and in terms of the CAFR, our financials, we would enhance our notes to include the information. So, those are things we discussed with our external auditor, which is MGO, and they felt that it was appropriate and doable for the notes. Moving on to the next slide, it’s just a, not everybody that is watching may be familiar with the terms, so we thought we would go over them really quickly, a couple of the terms that we will be talking about tonight. Normal cost. When CalPERS sends us our calculation of our annual required contribution, which the name has changed and I’ll talk about that in a minute, it includes 2 factors. One is normal cost, and the normal cost basically is the cost of the contribution to the plan for current employees. TRANSCRIPT Page 37 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 So, whatever benefit valuation is for each one of us for that year. The unfunded liability is when the plan market value of assets is less than the value of the benefit. So, as you know, the value of the benefit is greater than the market value of assets currently. Then here’s where I was referring to, they changed from an annual required contribution to now an actuarial determined annual contribution. That is the new terminology that CalPERS is using to basically say what is our payment for both the normal cost and the portion of the unfunded liability. By portion, we call out that word because we’re not necessarily in agreement with the rate of return on how it’s calculated. And then the benefit plan, is that the City basically has 2 pension plans, one for miscellaneous employees, such as us, there in front of you, and then another one for Safety personnel, which is Police and Fire. For CalPERS purposes and the way that is discussed, discount rate and rate of return are almost the same thing. Technically we know they’re not, but it’s typically the same number, which is the expected rate of return on the investments. Going on to the next slide, it gives you an idea of the tiers that we have. I think one of the numbers that we want to point you out to in the miscellaneous side, if you look at the first box, tier 1 that is the most expensive pension plan that we currently have. The number is going down, so currently we have 58 percent of the workforce, or active employees, in that plan. Then we have 14 percent in tier 2, which is the 2 percent at 60, and then the PEPRA which is tier 3, is at 27 percent. Also note the notation that we put on the bottom of the chart there, that PEPRA employees are capped in the amount that is pensionable, so if you have an employee that makes $180,000, their pension cannot be more than $142,530 for this year. It is pegged to the Social Security number, and so that is one of the provisions that was added when PEPRA was put forward to try to minimize the cost impacts of pension. Chair Filseth: (no mic) Did you say that the pension payment is capped at $142,530 or the base from which it’s calculated? Mr. Perez: The base right, yes. And so that’s both for miscellaneous and Safety employees. At times, just to give you a balance of the equation, that can be an issue for us in recruitment because we implemented a tier 2, that 2 percent at 60 for classic employees. A classic employee is defined as anybody that was hired before January 1, 2013. If somebody comes in from another agency, they’re not eligible for 2.7, they go to 2.0 at 60. If they have no prior classic experience, then they go on to the PEPRA plan. Mr. Keene: Can I just state this, especially for the new Council Members, this is an important issue, right. We were one of a handful of cities in 2010 TRANSCRIPT Page 38 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 that took the lead on at least trying to create a tier with reduced costs and benefits, and as a result of that, we were punished under PEPRA which followed 3 years later, at least in the sense of being on a level playing field with other jurisdictions that did not impose a second tier. So, say I’m working in the City of Santa Clara right now, I’m a classic employee at 2.7 at 55, and they’ve got a job opening in Sunnyvale and I just go over to Sunnyvale and I’m still a 2.7 at 55. We have the same job open in Palo Alto, and that same person could be in a situation where they would come over at a 2 at 60, so when they’re comparing the jobs, obviously people will often say, “well, I’m not going to go to Palo Alto.” Now, what we did was still good from an actuarial and a pension basis, but from a recruitment piece, it’s an issue. Mr. Perez: And I think it kind of lends to the numbers, if you look at the reports in the statistical section, you’ll see that I believe it’s like 54 percent of the current workforce has 9 years or less, so it’s really shifted from what it used to be before, which was heavily on the upper end. We went on the next slide. We’re going to talk a little bit about normal cost and we’re going to look at the normal cost as CalPERS has calculated for us. So, these numbers that you see here are comparing the employee, excuse me, providing the employee normal cost and the employer normal cost, and as you can see, it’s increasing from 18 to 19, slightly. This is using an assumption of a rate of return of 7.375, and that’s of 06/30/16 demographics, and you’re seeing the increase in our unfunded liability payment as well. So, the total blended rate has gone from 30.20 in ’18 to 32.56, and you can see, because the benefit is greater on the Safety side, that it’s gone up roughly 6 percent higher for the total blended rate. One thing that we need to point out from the actuarial report, remember I said that they prepared them earlier than typically done. They had not finalized their investment rate of return for the fiscal year at the time of preparation. They knew that it was going to be at least or greater than the 7.375 assumption, so they just went with that dollar amount, and did not use the rate of return which ended up being 11.2 percent. So, these calculations are based on 7.375, so it would have been better in terms of benefit to us if they would have used the full amount. It’s not that we lose the credit, it’s just added into the next set of actuarial reports. Now I’m going to move to the next slide. Sure. Chair Filseth: So, if I look at the rows here, the first one is the employee component of the normal cost and the second one is the employer component of the normal cost, and those are percentages of payroll. And TRANSCRIPT Page 39 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 then that’s the sum of the 2. The next number says it’s unfunded liability. What is that number? Mr. Perez: That is the portion that CalPERS has determined is what we need to pay towards the unfunded portion. Chair Filseth: That’s CalPERS amortization cost? Mr. Keene: That’s a CalPERS cost. Mr. Perez: Exactly. So, because we don’t agree with that number, if we would have used 6 percent that number would be higher. Mr. Keene: Can I ask why we, I mean, we often typically convert this to a percentage itself, so we have a combined percentage. (crosstalk) Okay. Mr. Perez: So, that’s a good point. Let me at, we’re kind of getting a little bit into the weeds, but I think the weeds are important on this one. CalPERS was using a percentage of pay for everything, and they realized that they were not getting the full amount that they anticipated, because if payroll was less than expected or you had more vacancies than you though you would, they were not getting enough cash. So, they decided to make it a fixed dollar amount on the unfunded liability, so that’s why you’re seeing a dollar amount versus a percentage. Mr. Keene: So, technically they would collect more than they were under the old methodology for the same situation. Mr. Perez: Yeah, and so it’s brought it to light for us that we need to monitor this a lot closer, to ensure that we’re hitting that number that is expected by CalPERS, that we’re not short making that contribution, because maybe we have. Because policy decisions, a perfect example, Fire Services, right now we’re in negotiations with Stanford, so we’re leaving some vacancies there, right. Well, guess what, we’re not making a payment towards those vacancies. But if we note those and make them ourselves, then we can make up those amounts as if they were here. Chair Filseth: Okay. So just, this line unfunded liability, I keep calling it, I’ve been calling it amortization payment. What name should we use for that? TRANSCRIPT Page 40 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Because that’s one of principal payment issues, right, so what term should we use for that? Mr. Perez: CalPERS calls it an actuarial unfunded liability. Chair Filseth: But that’s not really, it’s really the amortization payment towards the actuarial unfunded liability. It’s the minimum payment. Mr. Perez: Yeah, it is. Chair Filseth: So, what’s a good name for it? Mr. Keene: (crosstalk) Chair Filseth: That’s the only thing, we have a lot of unfunded, we haven’t even talked about OPEB right, and that’s a whole other issue, right? Okay. Mr. Keene: Well, it’s part of that, yeah. It’s blended rates down here, I think it would still be helpful to actually just do the math in here so we have that percentage also. I mean I know we’re not using it. Mr. Perez: And, you know, we can obviously use terminology that will make sense to people. We know internally how to compare it to the CalPERS, so we welcome any other feedback towards that. Council Member Tanaka: Why don’t we just do as the Chair said and call it, like, the minimum credit card payment? So, put it in terms that people understand, because the problem when we use language that the public doesn’t understand, it’s misleading. Council Member Fine: So, just to build on that, the main thing I was coming away with from here, this being the first of our meetings on this, is that in a funny way this is actually a communications design problem. That we just don’t know how to communicate this among ourselves and to the public section. This is a really big issue. What do we call these things, how do we present them, how do we show them as percentages? I mean I’m just ballparking it here now, but it looks like the minimum payment in 2018 was 13 percent. It goes up to about 15 percent of the payroll in 2019. That should be significant to folks, right? TRANSCRIPT Page 41 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Keene: And it’s 55 percent in ’19 and the other projections we’ve seen, by 2023 go over 70 percent. Council Member Fine: Right, and to me that’s the bigger issue, rather than the breakup between miscellaneous and Public Safety. I mean, it’s the same problem across both, one is just more. Mr. Keene: I think the language that has been used by CalPERS has been intentionally confusing. Mr. Perez: Well, it made it even more confusing because (crosstalk) Chair Filseth: It took me 18 months to figure out what that was. Council Member Tanaka: So, why don’t we here just try to make it clearer, so the general Joe Public can look and understand what we’re talking about. Because I think the problem is when we obfuscate it with names that don’t mean anything people don’t know what’s going on. Mr. Keene: Yeah, I think we need to keep it, when we’re talking with CalPERS and doing some comparisons with others, but communicating amongst ourselves and the community, we agree with you. Chair Filseth: Unfunded liability payment, amortization payment, right? Kiely Nose, Office of Management and Budget Director: (crosstalk) Council Member Tanaka: Why not do it in a way that people can think about their own personal finance, like minimum credit card payment. People understand that, everyone understands their minimum credit card payment. It doesn’t mean you’re making payments towards the interest or the principal, you’re just like barely squeaking by, right? So, why don’t we put it in real terms of the way people think about their personal finance, because that way people will understand what’s going on. When you don’t, when you use language like, you know, blended employer contribution rate, people don’t know quite what that means. Mr. Perez: And I think we need to add something to that as minimum credit card payment based on PERS calculation, right? Because then we will have minimum payment based on our calculations. TRANSCRIPT Page 42 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Keene: I don’t want to make this so simple that there’s a sense that we’re losing what it is, but really, actually even to me it doesn’t matter what this so-called normal cost is versus what the so-called unfunded liability cost is. What we do know is, we have a required bill payment that we have to make to CalPERS every year. They determine it and by 2019 for Public Safety it will be the equivalent of 55 percent of payroll. And, then we also say, on top of that, we have this additional liability that we’re not required to pay, but it is sitting out there somehow in the future waiting for us. Council Member Fine: Just one thing, though. At least the way I think about it is like, if we give an employee $100 a year, right, what additional are we paying them. We have the normal cost, we have the unfunded liability credit card payment and then we have something beyond that, and I think that might be helpful for folks to understand. We pay an employee $100 a year, we pay an extra, whatever you call it, $30 this year and there’s more out there to go. Council Member Tanaka: But that’s just minimum credit card payment, that’s not everything else, right? Council Member Fine: I’m saying like if we’re paying the $100 and we’re doing the minimum credit card payment of $30, then there’s something else beyond that, and I think that would help folks. Chair Filseth: But I don’t think we should roll the normal cost into the minimum credit card payment. Council Member Fine: It’s almost like a separate, an additional… Chair Filseth: It’s an additional thing, because one of them has to do with Lalo’s payment this year towards his pension. The other has to do with trying to burn down the existing unfunded liability, right? It’s everybody else that’s already retired and all this other kind of stuff, which increases by itself 7 percent a year, right? So, I sort of want to keep those things a little bit separate, rather than stick them together. I mean, at the end of the day, Lalo writes one check to CalPERS, right for both, but we ought to keep them separate. And the other thing I was thinking is that there’s the minimum amortization payment to CalPERS, and then we may decide we’re going to have our own amortization schedule that’s different from theirs, right, discount rates and so forth, right? And there’s going to be a payment on TRANSCRIPT Page 43 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 that, but it’s not going to be a minimum payment, it’s just going to be the mortgage payment, right? Mr. Perez: Right. So that’s a good analogy. That if we refinance our mortgage and we go from a 30-year amortization to a 15-year, you know. So, a lot of people understand that because they’ve done that. Council Member Tanaka: Because I think if we put everything in terms of a personal finance, in normal language, people will start to understand what the problem is. Because right now it’s so complex, at least the terminology, that people don’t understand what’s going on. Everyone understands minimum credit card payment. That doesn’t mean you’re actually paying down the principal. Everyone understands what it means to pay the principal down, right, or to pay down your principal so your mortgage, you’re actually making some headway on your mortgage, right. I think it has to be put in that kind of language, otherwise, maybe just people in this room will get it, if we’re lucky, right? Mr. Perez: The next slide. Mr. Keene: This one I like. This is the new normal cost. And it’s not even truly the new normal. (crosstalk) Mr. Perez: Yeah. This is to try to ferret out what our really minimum credit card payment would be, right? Showing you the 7.375 as compared to a 6 percent, and you can see the difference. This is one of the things we need to validate, one of the questions that we need to check in with CalPERS. For now, we assume that the employee normal cost stays the same. We believe that’s the case, but we want to validate that. Because the way that it’s set up, and if I’m going way into the weeds, pull me back, do you remember we talked about tiers 1, 2 and 3. So tier 3 is PEPRA. Tiers 1 and 2 are preset to the employee contribution at 8 and 7. You have negotiated with us employees to contribute additional on the employer side, so keep that in mind that there’s also a contribution of that. Tier 3, the way PEPRA law is set up, is that the employee and the employer share 50/50 the cost of normal cost. So, we know that if we change from 7.375 to 6 percent, it’s going to change for PEPRA people. So, that’s another disadvantage for PEPRA employees, that their rate if fluctuating depending on the normal cost calculation on an annual basis. TRANSCRIPT Page 44 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Council Member Holman: So, it’s an adjustable mortgage. Mr. Perez: You go it. There you go. It’s a good way to say it. So, but for now we kept it simple and left it at that, just so not to confuse the matter. Chair Filseth: If I can comment on that. I think there’s really 2 issues and we should be careful not to mix them up at this point. One is the accounting, right? Which is we have this fundamental accounting problem. I mean, we have this sort of don’t ask/don’t tell problem with CalPERS, and even as the gentleman, Richard, yesterday pointed out, he said, “You know, we know one thing that cities came to us and said, don’t lower it that far because we can’t afford the cash flow.” But there is sort of this don’t ask/don’t tell thing where CalPERS says our returns are 3.75 percent, 7.375 percent going to 7 percent and most people think in practice that’s aggressive. But we don’t really have any way of keeping books, right, where there is one CalPERS one and one that’s non-CalPERS one. So, I think that’s one issue is sort of sorting that out and just being transparent. The other is, how does that, what actions do we take and how does that work with sort of our labor and our other expenses and our outside contractors, like Stanford Fire contract and other agencies and stuff like that. That’s a whole different thing, right? I can well imagine that we will get into a discussion on this PEPRA thing as well. Which discount rate do we use, you know. But that seems like other stuff, and that’s downstream. It’s the other side. At the moment we need to focus on sort of what are the 2 scenarios, right? Mr. Perez: Yeah, and so I think, and that’s exactly to the point that I was making earlier in my opening remarks, that we would want to show that in our budget document and our financials to your point. So, here what you see is that if we were to use the 6 percent rate of return assumption, it would mean for the miscellaneous side we would have to come up with an additional $5.4 million, for Safety $2.55. Mr. Keene: That’s next year, so the 2019. Mr. Perez: Correct. Thank you for that. (crosstalk) ’19. Mr. Keene: ’19, so we’re in ’18 right now, so next year it would cost us $8 million more if we went to 6 percent and we would be about $5 million hit on the general fund. TRANSCRIPT Page 45 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Perez: The general fund is about half of the 5.43, so the total is about roughly $8 million, right. Additional, combined Safety and miscellaneous, and about $5.3 million to the general fund. Mr. Keene: That’s easily absorbed. (crosstalk) Mr. Perez: So now, you see that this is clearly one path, this is clearly one path to discuss as an option. We’ll have multiple options for you to consider, but we want to kind of lay it out for you. So, what does it do to the numbers? Again, keep in mind that this is using 7.375, not the actual 11.2, so the numbers are a little different there. So, right now if we were to add our unfunded actuarial liability for both miscellaneous and Safety, it now adds up to $404 million combined. Those numbers are in the report, not on the slide. It increased the unfunded liability by about $66 million. It would have been less if they would have used the 11.2. I’m sorry to keep repeating, but I think it’s important to just keep that in mind. If we assume a 6 percent rate of return, such as we did there, our unfunded liability would go to 609 from 409, to roughly $205 million more. And so, one of the things that CalPERS did not provide in the report, which was a little interesting, but I had a chat with the Deputy Chief Actuary to maybe help us and provide those numbers in the future, or at least some template for us to calculate it. So, they’re going to give it to us in a couple of weeks, because we just had the conversation about a week ago, when we respected their wishes to leave them alone for a little bit. So, we’ll give you those numbers as we meet, at the next meeting. So, what do we have in mind in terms of a potential timeline? Again, these are suggestions and we’re willing to work with you. And depending on the decision-making process that you opt for and which options you want to consider and what questions or data you may need, it could alter our calendar. So, the top is the City Council pension referral process that we’re calling. So, the next meeting that we have scheduled for this topic is Tuesday, 10/17. We want to review the strategies that we’ve come up with, address the pension costs, and then have Mr. John Bartel with us. And as we noted there, we anticipated that you’ll want to have more meetings, so one of the things we could do at the end of the night is discuss the potential dates that staff and the Finance Committee could coordinate to start calendaring those meetings if you so wish. The thinking is that we would tie it into the ’19 budget process and we would have some kind of scenario or multiple scenarios in the long-range financial forecast that we bring to you in December to account for it. So, one assumption is, you say, we’ll use the 6 percent scenario, and you know that the $5.3 million is the TRANSCRIPT Page 46 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 general fund impact. How are you going to make that work? It’s as simple as that. (crosstalk) And then, assuming that you were to choose that path, just for assumptions here, we could come back in January or February to the full Council and talk about that path and get direction or approval from the Council. You may have more than one path, because we’re going to try to give you options. So, that could delay the discussions, both here at the Finance Committee or at the Council. Our goal would be to try to incorporate it into the development and balancing of the City Manager’s proposed budget, so staff can then figure out how it would incorporate those changes. We may come back with options for you to stage it in, for example. I’m making something up a little bit on the fly with you, because we need to work through this with staff and then with you as well, that this could be a 3-year phase in for example. I’m not saying that’s the recommendation, but just something for you to consider. Or that we bite the bullet and we do it, what are the impacts to services if we were to that. So, we would be able to make an informed decision. And then have those discussions with you in the May Finance Committee or the Finance Committee during the budget process. Mr. Keene: Well, so your last year is going to be, go down in history, or something. So, when I was just listening to Lalo about this, I was thinking one kind of key policy actually, or strategic decision for us is to say, are we going to adopt an ad hoc kind of opportunistic approach. If we have some money we put it aside versus are we going to identify some systematic approach, you know, to make this like a required and/or almost sunk costs that we really, and I think we should run some alternative scenarios that can show you what really happens over time in that. Now, are we on track with your plan to bring Gov Invest in, or whatever? Mr. Perez: Yes. So, what the City Manager is referring to is there is a firm that has developed an actuary software. So, typically you have to hire an actuary or beg and plead with CalPERS to run calculations for you. So, you’re dependent on an outside consultant to run this, and so there’s a product on the market now that’s been utilized by other cities. The one city that we’ve been tracking is Newport Beach, because their Council is on the same timeline and I would say almost mind frame as this Council, where they want to address this unfunded pension liability by being aggressive on the rate-of-return assumption and putting money aside at PERS as well. Council Member Holman: And what’s it called again? TRANSCRIPT Page 47 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Perez: Gov Invest. Sorry. Chair Filseth: That sounds like a really good reason for the entire Finance staff and Finance Committee to go meet those folks in Newport Beach. Mr. Perez: Well, the funny thing is that they’ve had John Bartel and Joe Nation come to speak to them and educate them, so that’s why I see the alignment to us. And so, in speaking to my counterpart in Newport Beach, he’s found it very useful and we believe then that could be a useful tool for us. Mr. Keene: Could I just jump in. In seeing the previews with Lalo and Kiely and their team, it strikes me, it’s actually pretty, I don’t want to say simple, but it’s quite responsive and it’s something we could do. I mean, so it could very, we could very easily get in a situation. Let’s just say each year, we can run it any time we want, but each year we could run the let’s say 7.3, whatever the number is percent scenario and the 6 percent scenario. We can identify how much we’re putting aside. We could start to immediately see what the impact that is on both what the true liability is each year. We could also break it into subsets, to be able to identify it by bargaining groups, what the cost is technically. We could even break it down to the individual employee level to be able to generate full cost reports, which is something I think that we want to really move towards doing through HR, so that almost from the time someone comes on board they understand the situation and understand what the full costs of being here are, and they understand why us making these tradeoffs is personally important to them, as opposed to some abstraction. Mr. Perez: Yeah, so it’s definitely a tool that we’re interested in pursuing. We’re close. We’re working on contract language at this point, and once we do that, then we have to work on CalPERS to get the data that we have. Newport Beach has opened the gates and persuaded CalPERS to do the data in the manner that is needed to load into the system, so we believe we should be able to get the same service from CalPERS to be able to go forward. Mr. Keene: I really would commend Lalo really for – I mean, this isn’t sort of like something that everybody is picking up and doing, you know, on both sourcing this out, doing the research, bringing them up and advocating this with us for why we should do this. It can be a game changer. TRANSCRIPT Page 48 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Perez: One last thing before I get to the next slide, just to kind of get you thinking about options. So, you saw the scenario of 6 percent. We don’t have a slide for you on refinancing the mortgage, but refinancing the mortgage, and we will show you the numbers of what it means. Actually, CalPERS did them. They have them in the report that you have in front of you for both the Safety and miscellaneous. It tells you on a 15-year amortization and a 20-year what the payments would be. What we will provide you with is the difference in the payment, which is not included in the report. You have to do math, and so we did it for you. We will provide it in the October report. One of the things that we saw is that there is an uptick in the first year, and then I would call reasonable payments for the next several years, and the balloon payments at the end. So, it’s very enticing, but one of the things we need to think about is future staff and future Council, that they need to prepare for those balloon payments. So, one way to do it is for this Council, this staff to start thinking about putting the money in PARS. We had the conversation earlier about restricted funds, so once they go in there, they’re restricted. You can’t pull them back, and it would be set in there and growing towards those future balloon payments. So, we’ll talk more about that, but I just kind of wanted to get you thinking of the way that we’re looking at it, so you’ll have various ways to try to address the issue. It’s Page 17 of the actuarial report, not the packet page, and you’ll see, it’s called the 30-year amortization schedule and alternatives. Chair Filseth: And they assume 7 ½ (inaudible, no mic) Mr. Perez: It’s 7.375, correct. So, we would want to see it at the 6 percent or whatever rate you decide that’s the number you want to see. So, yes, good point. So, lastly, I think the last slide, you see our recommendations for tonight and we’re open to questions or comments, directives. Mr. Keene: In addition to comments, is there, again just restating what Lalo said at least twice, any specific feedback or request that you want in advance of the, or for the October meeting. Chair Filseth: Council Member Holman. Council Member Holman: By me. Chair Filseth: Council Member Fine. TRANSCRIPT Page 49 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Council Member Fine: I’ll start off (crosstalk). I guess for me I’m going to keep on coming back to this point, that I think Greg was making, that we do need to make this communicable to folks, both us internally and externally, and so there were a few things that kind of stood out to me. One, just all the numbers in here, it would be nice if we could have had better titles, better graphics, and it’s just a challenge, right. I think before we actually, on the slide where we had the schedule, get to like propose solutions and strategies, I don’t feel we’re there yet, and I’m not, I don’t feel terribly under the gun about this. I think we should do this right. There are also a few things I just saw in my packet as I was looking through it. At what year, you know, do we essentially spend an extra 50 percent on this problem on top of salary? I think that’s a pretty easy to communicate thing, like, hey, you’re paying $100 for salary for a City worker and we’re paying another $50 for all this other stuff. So, those kinds of calculations would be helpful. Any ideas there? I know it’s exceptionally broad, but I really do think this is principally about communications and trying to… Michelle Flaherty, Deputy City Manager: Can I just ask a point of clarification? Are you saying you would like us to simplify how that’s presented so that a member of the public could figure it out, or we can explain it in English? Because that’s buried in there. It’s in there, just you would have to spend all weekend with it. Council Member Fine: And it may be like, you know, expanded pie charts or something. I really don’t know. Mr. Perez: Let me, because I want to make sure we get this right, so thank you Michelle for asking for clarification. If you go to Packet Page 106, so this is the projected employer projection, if you look at the table, I’m sorry, it’s Packet Page 106 of your Packet, or Page 5 of the Safety Plan Valuation. See the table there how it shows based on the 7.375 it shows the increases and how it’s gone from 55.6 to 76.2 in ‘24/‘25. Is that what you meant? Council Member Fine: Yeah, I think that’s a really important stat to show, right? That we’re paying this additional, in 10 years we’ll be paying an additional 76 percent in payroll, just for pension and OPEB. Mr. Perez: Yeah, so these are exactly what we want to show in our budget document that I mentioned earlier. So, we would show it, sorry. TRANSCRIPT Page 50 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Council Member Fine: So, that’s great. It would be great to see it in the budget documents. It would be nice to see what are the other points here too. We just went through some of the COA evaluations and there were some questions about, gosh, well we can do this and this on increases. What does that mean for our pension problem. So, it would be nice for us to see where are the different places this touches, and each time we’re seeing a payroll number, what are the additional costs incurred. Chair Filseth: If I could comment on this one, these numbers assume 7.375 percent (crosstalk) where at 6 percent the numbers will be significantly different. Council Member Fine: So, that gets to our strategy, right, and that’s another point. It’s like, what are the different strategies? Do we want to as an organization just assume 6 percent and work with that across the board? Chair Filseth: I think one of the places that, I mean, I’ll chime in and then Lalo can talk. I think one of the places that Lalo is carefully leading us by the nose is, you know, I think there is general agreement, not just here but in the entire known universe that 7.375 percent is an unrealistic number. The question is, what do we want to take as a realistic number. Is it 6.875, is it 6.5, is it 6.0, is it 5.8? Mr. Perez: 6.2, that’s CalPERS. I don’t know what they said today. Chair Filseth: So, I was going to make a comment, and I think we have to decide, but one of the things I like about 6.2 is that in November of 2015 CalPERS consultants, Wilshire Associates, projected 6.2 percent as the number for the next at least 10 years. CalPERS then went back to their stakeholders and there is actually some kind of funky language in here that says that, in their report it says, well, we went back to our stakeholders and we had some more discussions. We decided that 7 percent was the right number. Well, we know which stakeholders they went back to. So, I don’t know whether 6 percent is the right number or 6.5 percent is the right number. I don’t think 3 percent is the right number, although I understand where that number comes from, right. But 6.2 percent has the benefit that it’s the CalPERS consultant’s number. So, as we cast around for which number we think is the right one, I kind of like that one. Mr. Perez: To add to that, because it might be helpful as you’re making your comments, today the Finance Committee, the equivalent of you, the board TRANSCRIPT Page 51 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 of CalPERS met. We couldn’t watch the whole session. I can tell you in another area that it’s good on the rate-of-return assumptions in a minute, but unfortunately, we were preparing for other meetings, so we will follow up. But there were a couple of things on the agenda. One was the discussion, a legislative request, a legislation’s request to calculate what would happen to the trusts if they were to suspend the COLA for current retirees. And then they’re going to look at the rate-of-return assumption again and they’re going to look at the demographics, all of this within the next several months, to get in front of the board in February 2018. Chair Filseth: Is that constitutional? Mr. Perez: It’s, I might need Terence to help me, but my understanding is that each agency enters into an agreement with CalPERS and picks that COLA number, so it’s a contractual obligation that each agency has made. Mr. Keene: Ours is what, a minimum? Mr. Perez: Up to 2 percent. Council Member Holman: Are you saying that’s adjustable, though. Because of the agreement that we have with CalPERS, we can adjust that? Is that what you’re saying? Mr. Perez: I’m not sure the answer to that. Council Member Holman: Because you’re talking about suspending it? Mr. Perez: So, let me be clear. The legislation said, give us a calculation of what it would do. They didn’t necessarily say suspend it. They said let us see what the impact, financial impact would be. That’s what they asked for right now. So, that was on the agenda today, but we didn’t get a chance to look at it. To your point, to make it clear, that we show the numbers and show maybe various scenarios with assumptions so people can understand the impacts and see it years out. Council Member Fine: So, I guess just to finish up. I’m sure I’ll have more comments. One, I think we should be a little more clear on the costs about what these are and in terms that are explainable to people. And then when you come back to us with strategies, then we can begin to match those TRANSCRIPT Page 52 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 right? Because then we’ll be looking at things, like, what’s our discount rate, what can we expect from bargaining, what could we expect to push from the general fund to our 115, things like that. I just don’t really feel we’re ready for the strategies at the moment. We have a few ideas around them, but I won’t be able to connect the dots until we can kind of explain this in a succinct way. Mr. Perez: That’s helpful, because the reason we were working on the strategies is because we heard some comments saying, well, what are we going to do about it and what can we do about it. And so, you can dictate when you want those. Mr. Keene: Just one other one that’s (crosstalk). I mean, just to refresh your memory on this, Terence pointed out to me that the distribution of the costs between the employee and the employer is not set in stone. That can be renegotiate and actually in some ways we’re behind some other jurisdictions as far as shifting more of the growth in the increasing costs to the employee. Still a challenge and an issue, but obviously, it’s a who pays question. Chair Filseth: Council Member Holman. Council Member Holman: So, a couple of things. One is, something we do think about, is, I’m going to borrow from Council Member Tanaka here, so where are we in relation to other jurisdictions in terms of proportionate contribution? You know, employer versus employee? You don’t have to answer that now, but I’m just saying, if we’re looking for avenue so that we don’t come forward in the next meeting or the next 2 meetings with only this black veil over the meeting. Mr. Keene: (inaudible no mic) Mr. Perez: I think Council Member is referring to the employee paying into that. Mr. Keene: Well, we can easily bring you data. Chair Filseth: (inaudible, no mic) Mr. Keene: But as one look at this, the situation. TRANSCRIPT Page 53 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Perez: That’s a good point, and you, we need it and you need it to set the next set of directives for negotiating the labor contract, because a lot of them are coming up, so it’s an important point. Council Member Holman: Well, it’s important not only for our negotiations, but also important, like you mentioned earlier, attracting employees and such, so that all weighs in to that too. Do I remember this correctly or not, Jim, that a few years ago we wrote CalPERS and gave input, for whatever it was worth, did I remember that correctly? I mean, it was a few years ago, but didn’t we? Mr. Keene: Do you remember what the subject was? Council Member Holman: I don’t specifically, but trying to influence. Mr. Perez: So, actually that’s one of the discussions that board member Kostigan, Richard Kostigan, the Chairman was referring to was saying, look, we’re having the Finance Committee meeting tomorrow, and it’s like, you guys need to attend this meeting and let us know the impacts. So, I can tell you that the majority of the city agencies that go and speak, based on his comments, right, or his observations and shared to us are the ones that are saying, we can’t afford for you to make any more changes, because you’re going to send us into financial destitute. I don’t think it would be out of line if you wanted us to attend a session or send a letter to the Committee in terms of a position you, the Council, has taken and we could attend a meeting and give us 3 minutes. The League went today and I haven’t watched the tape again, so I don’t know what was the position. But it’s a mixed bag because some of the agencies that want to deal with this issue have a different position. I think the beauty of what we have in front of us, and the tools, is that we don’t have to wait for the board to make those decisions. You can make those decisions and fund it. And so, we don’t have to worry about the aggregate concern of this, because I believe the aggregate is not going to be in favor to move to a 6 percent. So, for that reason, I think it’s okay. Mr. Keene: And I would just sort of suggest that if we were to say, look at the pension tracker report, and then we would compare that to the behavior of cities across the state who are going to CalPERS pleading not to make any reductions, those 2 things just don’t jive. I mean, for being so bad off, we’re in a situation where we have the ability to have this conversation. Not saying it’s not without some real challenges and risks, and we have to ask, why is TRANSCRIPT Page 54 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 that. And, you know, one of the components of that is, one, we have a healthy economy in comparison. Our general fund budget is a third of our budget. And I want to say on the miscellaneous side, 50 percent of our employees are general fund and 50 percent are in the enterprise funds, which is a very different situation than cities, some of which could have almost 100 percent of their employees in the general fund, so that these pressures on them immediately and directly hit existing services. So, one of the things I think as we go through this is to look at this as, how do we start to control for some of the differentials we have on the funding side, just given that we’ve got direct tax supported services which actually are quite limited in many ways in the constitution in California. And we have enterprise funds that are, where the Council working with the community, but ultimately has more local control and freedom to make adjustments if you need to. Not saying that those things are easy, but it’s not (crosstalk) but it is not the same as being faced with an impossible choice that says, are we going to, literally some communities could say, are we really going to reduce our Police force because we’ve got to pay so much more in the pension costs. That’s a really difficult situation for some communities to be in. Council Member Holman: I would say not only easy, but hardly desirable, having to do with the enterprise funds. Chair Filseth: I think that’s an excellent point. Chuck Reed’s presentation yesterday afternoon basically went into that. They actually did have to make that choice. Council Member Holman: I’m going to pass the speaking baton to the heavy bean counters over here. Chair Filseth: Council Member Tanaka. Council Member Tanaka: So, one question is, how was Bartel chosen? Mr. Perez: We did a competitive process, RFP, request for proposals, and chose him over the others on experience and cost. He tends to be a leading person that is mostly used, especially in litigation as a witness, expert witness. He has been the minority in terms of speakers against CalPERS assumptions. TRANSCRIPT Page 55 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Council Member Tanaka: The reason I was asking is because I talked to some of my colleagues on the Council in Sunnyvale, and maybe just the people I talked to did not have the best opinion of him. I was told that he kind of tells you what you want to hear, but doesn’t really help you fix the problem. So, I don’t know, to tackle this problem, that he’s the right choice. Mr. Perez: Well, I think where we depend on him is to help us make sure we have the calculations. I think the policies, he not going to advise you on that. And I think that’s probably the observation. He wants you to make the choice with the information that you need to make that choice. Chair Filseth: I would concur with you. He has stayed away from radical policy recommendations. Mr. Perez: He’ll tell you, I’m not an attorney, I’m not a counsel. Mr. Keene: He can tell you that if you smoke cigarettes, you have a really good chance of getting cancer. He’s not telling you you have to quit smoking. Council Member Tanaka: So, just to close off on the thread that Adrian started, which I think is a really good one, which is, so I was thinking about this a little bit more. I definitely think that we need to frame this from the viewpoint of someone’s personal finances. Because literally if you think about it, and I’m going to use the Stanford website, the debt that every household has on their credit card is roughly $39,000 according to the Stanford website. You guys could debate it and use different numbers, but let’s just use this for now. So, the story you could talk about is, every household has $39,000 on this credit card debt, and we are making a minimum payment on that and what that means is the principal, this $39,000 is growing every single year, and you can see what happens is you cannot wait for a while. You get tremendous crowd out. You get, basically all you can do is pay the minimum interest. Mr. Perez: Negative amortization, actually. You’re going negative. You’re not even paying your principal. Council Member Tanaka: And I think the analogy that Council Member Holman said, which is, it’s also like a variable mortgage. This credit card debt we have is not a fixed rate credit card debt, it’s a variable rate, right? It kind of goes up and down. TRANSCRIPT Page 56 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Perez: To use your analogy, I’m sorry to interrupt you, but I think that it’s important that we have this dialogue to make sure we get in the right, you’re paying the interest and not the principal in a way. Council Member Tanaka: Well, we’re not paying all the interest. We’re paying some of it, that’s the problem. And there’s more interest getting piled onto the principal, which is the big problem, right. So, it’s getting bigger and bigger until it’s causing bigger crowd out. So, I guess my suggestion would be to make this so, to frame it in a language that everyone, the common man can understand. Just about everyone has a credit card, and everyone understands, well $39,000, well to me it seems like a lot of money, maybe not to the rest of you guys, but to me it seems like a lot of money. And to have the idea that we’re letting this principal accumulate on purpose, right, I think. So, what I would suggest is, in the transmittal letter, to frame a story about every single household has this debt and we’re making this minimal payment and this unpaid interest is getting added to the principal, which is making the payments even bigger. So, I think I would frame it in that frame, because I think most people understand credit card debt, understand minimum payments, and it’s a similar analogy, so that’s what I would suggest, because I think everyone could understand that frame of view. So, to me, I think this is, from the Finance Committee, probably our most important work, because thousands of employees work for the City with a promise that they will get a retirement benefit. My dad worked for the City of L.A. He’s retired, he has a pension and relies on that. You know, the scary thing is that if we don’t actually deal with it, a lot of employees, especially young employees may not get anything, or not get the promise or some that live a long time, will not really get what they thought they would get, and I think that’s incredibly unfair and so I think it’s our duty to do right to the employees who gave service to the City. So, I think one thing that we need to do also, is, and so I asked a bunch of people, and I’m glad you guys went to the (inaudible) yesterday, but I asked a bunch of people the question that Adrian asked. So, if an employee makes $100,000, what is the true cost to the City? And like I said, I heard debate with the numbers, but a lot of people told me 2X. Now you may think that’s way too much, but in terms of the true cost to the City, it’s about that, right? Maybe, depending on what (inaudible) do, it’s you know, who knows what, but it’s something on that order. It’s an easy number to remember. I think that’s really important to know because when we’re looking at legal cost, whether we should do it in house or outside council, you have to remember you have to multiply everything by 2, because that’s really what the cost is, because I heard debate what it really is, but I think when we look a salary increases and we’re negotiating with the unions, whatever we do, I think we need to look TRANSCRIPT Page 57 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 at it in our true costs. We can’t pretend that there is no pension liability, because there is, and when we do that we are fooling ourselves. We are not being honest to ourselves, to our employees, to our residents who are paying the bill. So, I think that’s really, really important to have every figure for labor framed in our true costs. The true costs, end costs fully loaded, right. Assuming they don’t die at 65, they live till 80, 90, right, I think that’s really, really important, because if we don’t do that, we are, it’s misleading and we can’t make honest decisions and we need to make honest decisions about like, should we outsource? Is it cheaper to outsource or do it in house, because when we start actually realizing what our true cost is, it doesn’t make sense to do all this stuff in house? We want to outsource as much as we can probably because of the tremendous cost of all the benefits that we’re doing. Chair Filseth: Well, in my mind, if I can chime in on your point. Just to make sure, I want to understand what you’re asking for. Just to be really specific, I mean, right now the way we calculate the costs, and I don’t think of this, at least the first, I think it’s actually a very important thing. The first thing I think about is not sort of, do we do this internally or externally, but are we fully recovering our costs from the external agencies we do business with, such as Stanford Fire, right. You know, other Fire associations when we send guys out to put out fires in the Sierras, a stuff like that. Are we actually fully recovering the costs associated with that, or are we picking up a big cost on their behalf because of this. So, with that said, I think when we start doing multipliers you’ve got sort of wages and then on top of that you’ve got benefits, which is how we report total cost, and then you have a new cost on top of that, okay, which is the unrecognized cost. I think that’s the one you’re driving at. Council Member Tanaka: I want everything. Chair Filseth: You want all of it. Council Member Tanaka: And I asked everyone, okay, what is it really? Chair Filseth: That’s why we’re here, to figure, to work with Staff to figure that out. Council Member Tanaka: But I think we should have an honest estimate every single time, so that when we give someone a raise, we know how much it really costs. TRANSCRIPT Page 58 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Chair Filseth: Well, we do know what it costs, except we don’t know the uncost, right? And actually, there are 2 components of that. One is the unnormal costs, okay, the gap normal cost. And the other is (crosstalk) OPEB. (crosstalk) But if Greg gets a raise, the amortization of the existing UAL doesn’t factor on that right? Ms. Nose: It factors as a certain component of it, so the actuarial reports do have some level of assumption of wage growth. So, the question becomes, what central assumptions do we as an organization want to make when we bring forward these kinds of additional, you know, unbudgeted or not yet recognized liabilities. Chair Filseth: But he’s really asking, what’s the whole cost, including the component we don’t recognize. Ms. Nose: Right. So, part of that is, right, our assumptions behind that, so when you look at the actuarial studies, when we do that obviously Lalo has told you it is based on that 7.375. Chair Filseth: That’s why we need a 6.0… Ms. Nose: Right, so as an organization, do we want to choose to do it as 6. So, let’s say we just adopted a policy as an organization, we wanted to model total costs at 6 percent, then we can show you the base wage, we can show you the benefits, which would tell you, include what CalPERS assumes is your annual required, or actuarial determined, sorry, annual contribution. And you can do that third level that you’re talking about, which is what we as an organization want to recognize as additional true cost. Mr. Keene: I just want to say, first of all I think this is where the whole Council has been tacking towards over the past year or two, and why the Council has referred this to the Finance Committee to really start to dive deep on this. So, you know, in one sense most of putting this together is pretty easy for us to do and to communicate with the exception of what the, what I call the unfunded liability, the uncost. And I think that is, you know, we’ve also essentially identified that we would see the Finance Committee, at a minimum for planning purposes, but potentially also for specific recommendations of actually how to pay down that, would make, set your own policy separate from CalPERS. That’s what you’ll do and that’s what we will work for. Now, we haven’t done it in the past couple of years, but for several years, every year for example we gave every employee a TRANSCRIPT Page 59 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 personalized statement that was designed exactly to say, oh, no your salary isn’t just this. You get this much in salary, you get this much in health benefits, you get this much in retirement payments. I mean, easily, even back then when we were doing it, it was over 50 percent combined. So, everyone said, look, you don’t make $100,000. I mean, the City’s investing $150,000 in you. And then Greg’s point is, okay and good. So, when we do a 5 percent raise or a 10 percent raise, just to make the math even easier, that compounds again those additional costs and is increasing our principal in a sense. Council Member Holman: Is there a reason that doesn’t happen anymore? Mr. Keene: It just was some transition and some staff support, but it’s something that we do think is really good and clearly, going back to this Gov Invest, our ability to give very specific data when we’re in collective bargaining. To be transparent and honest and direct with our employees, for them to understand what is at risk, and I can tell you that can be a challenge. You know, our ability as human beings to sort of ignore what’s looking us in the face is… Chair Filseth: I’ve got to look at that. Somebody said yesterday about, it’s hard to believe something that your salary depends on (crosstalk). Council Member Tanaka: So, yeah, I think definitely as we go to labor negotiations, it’s really important to have this. And until we have a better number, I think 2x is probably a fair multiplier. It’s easy to remember. But I think it would be really great to have it actually calculated out, so that we know what it truly costs, fully loaded. What is the present value of all the retirement benefits, as well as for another 40 years after retirement, which is not unrealistic these days. People live to 100 all the time. So, I think this is… Mr. Keene: (inaudible) Council Member Tanaka: You might live to 108. Chair Filseth: It’s an actuarial problem, right. Because your spouse, too, right? TRANSCRIPT Page 60 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Council Member Tanaka: That’s right. So that’s the thing, people are living longer, longer and longer. If everyone died at 65 we wouldn’t have a problem. Mr. Perez: I was just going to say, one quick thing to keep in mind in the calculation on the beneficiary, that it’s also dependent on their age and you take a significant drop, if you choose a beneficiary, the numbers change a little bit, but to the point, the life expectancy is still there. Council Member Tanaka: So, and I know the discussion about, well, gee, if we treat these benefits, during the negotiations if we offer less benefits or lower salaries, we’re not going to be able to get, attract labor or talent that we need in the City. And that’s actually a very valid concern, right, because if any other city is pretending that the pensions are free money and not accounting for it, it makes us uncompetitive in the labor market, which isn’t good because we do need talent. But I think if we actually know what our true cost is, how much do all these pictures cost us, which is nearly double the salaries, then what this will allow us to do is do things like, well, maybe we should just give people massive signup bonuses, because if you think about how much the true cost is, giving someone a massive signing bonus is nothing compared to what we have to do if we have these unsustainable pensions. So, that’s why I think it’s really important for us to understand the economics of what’s really going on, what it is truly costing us fully loaded, because then we can make more rational decisions. Because most people, most employees are probably discounting the heck out of their pension, about the pension they will get. The fact that they get 80 or 90 percent for the rest of their life. They’re probably discounting the heck out of that, and maybe they should because it’s not really funded, so maybe they’re right about that. But, people treat the bird in the hand more than 2 in the bush, and they probably should, and so a signing bonus, I think, could make a really big difference in terms of getting the talent we need here in the City, while other cities pretend that there’s not a problem. Chair Filseth: I think that’s very much right. We’ve got to get our finances to the point where we can actually do that. But once we do that, once we get there, right… Mr. Perez: Let us do some homework on that, because my understanding is, I believe for PEPRA and again off the top of my head, we need to look at it. For PEPRA the bonuses don’t count, but for the tier 1 and 2 they are pensionable. TRANSCRIPT Page 61 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Chair Filseth: His larger point is, move the compensation now when people value it and can spend it on their rent, okay, as opposed to paying them a vast amount when they leave. Council Member Tanaka: You know, they’re getting 90 percent of their pay for the next 40 years after they retire is way more money. If you’re talking like a Battalion Chief, he gets $200,000 a year. He’s going to get 80 percent or 90 percent of that for the rest of his life, for 40 years. That’s like several million dollars. If we just paid to someone a $50,000 sign-on, we could probably still get him to join, right. Mr. Keene: So, these are things we could run for you. My knee jerk reaction is it works obviously much easier and sort of brand new, younger employees than if we’re hiring somebody seasoned who is already calculating what their pension is going to be. Council Member Tanaka: But still, I think cash in hand, especially I think as word gets out about the shell game that’s going on in terms of, there’s not really money for this. We pretend there’s money, but there’s really not money. I think people are going to start really (inaudible) the cash in hand. Chair Filseth: I want to inject a point of process just here and then go back to Greg, which is, since it’s starting to get late. I think one of the things that we ought to be thinking about before we break tonight, is what specific things should we ask Finance for at the next meeting. So, we’re going to go back to Greg here, but the rest of us, think about that kind of stuff, right. Council Member Tanaka: Okay, so my asks are pretty simple. We have a story of our pension problem in the frame of reference of a personal credit card, right, per household, which is about $39,000 in debt. We, going forward, telling what is the true cost, so I think Gov Invest is probably not a bad idea. But I think the other thing we should do is, and I don’t see this on the agenda, but I would like to see if we could get it on the agenda, is, we’re blessed by having a world class university just a few blocks away from us, who does a lot of research around pensions. In fact, they held the workshop yesterday, who are chomping at the bit to actually help us with our costs. So, I cannot see why we don’t invite them to attend one of our meetings to help us with this problem. I was talking to Professor Joe Nation yesterday after the conference, and he mentioned that he was talking to Lalo about getting some data to do a calculation. I mean, we could buy Gov Invest. That’s probably good too, but he’s willing to put resources on trying to TRANSCRIPT Page 62 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 calculate this down to the decimal. Like, really, what is the cost for us, and what he was saying was he was getting a lot of resistance from the staff, from basically I think your staff, Lalo, in terms of getting the data, and I couldn’t understand this because we should be incredibly open and welcoming for help. They are not asking to be paid. They are not like Bartel where we are having to pay them gobs of money. They are just truly trying to figure this out, and why would we not be open with our data to allow them to do that? So, when they ask for data, I don’t understand why we would stonewall them? Mr. Keene: Is that something that we should bring back? I don’t know that we can answer all of these questions tonight, but if you want to okay, go ahead. Mr. Perez: I think we need to have a face-to-face meeting. He did this over an email, and it’s more complex than he knows. Because he wants 10 years of detailed data. Council Member Tanaka: So why don’t we give that to him? Mr. Perez: Because it’s, that’s what I mean. We need to sit down and understand it. Because he wants to compare the pension as a percentage of our total budget, and to me that doesn’t make any sense, because we have huge expenses that are not really relevant to the comparison. What do I mean? Commodity expenses. We have a budget of, you know, $600 (crosstalk), yeah, and so he’s going down a path that he is going to have a comparison, and the number is going to look so miniscule. Council Member Tanaka: We’re not paying them, right? They’re doing this out of the goodness of their heart Mr. Perez: But I’d rather he do it in a manner that is going to help him and us when he does a comparison. So, we were looking into trying to do that, and I asked him what his timing was, and he had a very short window. But, I would be more than happy to follow up with him and see how we can discuss it, and maybe together we can come to a path where it really helps us. Council Member Tanaka: I believe in transparent government. I think we should be open with our data. We should have nothing to hide. We have researchers who are willing to, free of charge, to just help us to understand TRANSCRIPT Page 63 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 and give us more transparency about what’s going on. So, for us not to be open and willing… Mr. Keene: It’s not that we’re not open. Excuse me. We don’t just say, go in and why don’t you get on our computer, log in to SAP and do all the research. We’re talking about what it takes us to be able to prepare the data, to assemble it, to put it together in a way where we have a fiduciary and a public responsibility to be absolutely certain what we’re putting out is accurate. So, all Lalo was saying is, it’s more complicated than it sounds. It’s more of a burden than it sounds. And I think what we ought to do is ultimately have some discussions about, and how often do we want to do this? Is this a one-shot thing or is Karen going to come in some time and say, well look, I met somebody who is doing a different thing and we want you to do the same thing. We’re not resistant at all to this, but I think we should also accept that the methodology we want to pursue is a collective agreement that this would be the best place to sort of focus our work in the near term, that’s all. We’re just asking it to be transparent also about what we’re trying to achieve, and the true cost of us doing it, that’s all. That’s what he’s saying. Council Member Tanaka: Well, what I would like to see is for us to get them that data, and then for us to have a meeting with them, where they could present it to us and discuss what are the issues, and… Council Member Holman: So, I understand trying to pursue a free resource, but I’m going to suggest that it’s not free, because it takes a lot of staff time to compile the data and if there isn’t a clear understanding of what the information is, as Lalo described earlier, then the “free” information that’s going to come back is going to consume time from staff and this Committee trying to understand something that isn’t relevant to our situation. So, it’s not just, we’ve got, respectfully, it’s not just a free resource that somebody wants to do this to help us. It’s not that clear cut, and it’s not a matter of transparency. Mr. Keene: If I could just say one other thing. I mean, this might be a down- the-road decision. I don’t mean to be presumptuous, but it already seems to me that the Committee’s interest in looking at potentially establishing a new return on investment number, let’s say the 6 percent per year, that we already in 10 minutes of looking at it can start to realize that has significant impacts on us as a City, that that’s a good starting point for us to start to get at least a little more facile in more detail with what we already know, to TRANSCRIPT Page 64 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 see what that is. I’m presuming that this other work is actually designed to take us even beyond that, given what I’ve seen before. And, I think we’ve got our work cut out for us to more to 6 percent, at least in the near term, and to understand how to communicate what this is going to be, and I’ve had concerns again about how we ultimately translate that into how we bargain with our bargaining groups. So, having some of this other data to be able to be usable and effective, I do think that there’s going to have to be some heavy vetting of the assumptions that are used in any methodologies that we use for us to be able to use it effectively to make some changes. So, I’m just saying, for the next couple of months, looking at the Finance Committee work, I think our folks have plenty of work to be responding to where you already are, not putting off the fact that we may want to dive even deeper in the future. You may say that’s not enough. Or, you may say, you know what, we’ve done this and we actually think we can somehow manage this, so now let’s look at what it takes to go even further than that. Chair Filseth: Let me sort of take a swag, weigh in on this too. I’m sort of going to come back closer to where Council Member Tanaka is by the end of this, but that said, I think exactly as you said, right. We have to guide this ship ourselves. We can’t have Stanford on the critical path. We can’t have us reliant on a third party, even a well-meaning one, like our colleagues across the street (inaudible) for what we need to get done. So, I think that has to be the focus, right. That said, I think it is worth a small amount of effort, working with them to support what they want to do. Now, how much is small? I mean, I’m sure we could devote Lalo’s entire team fulltime, if things went that direction. I don’t think that makes sense either. And if I understand what you’re saying, you are a little bit concerned about sort of random information floating around out there getting misinterpreted and published by people who don’t really know what it means. And then that confusing our other contractual relationships with various (crosstalk) including themselves. Well, that’s an interesting thought. That hadn’t even occurred to me. That should have. I wonder if there is a firewall between those sites. (crosstalk) So, that is an interesting thought. So, let me weigh in on that one. I think the approach we need to take on that one, I think we need to be upfront, transparent and honest with them, okay. So, we shouldn’t be going, well, here’s our numbers and they’re going, well, here’s our numbers and so forth. We should not get ourselves in a position where that’s likely to happen. So, I think my urging to the City would be, let’s error on the side of transparency on this, and have a little good faith that if we give them data, they won’t fake newsify it and use it against us. So, I think that’s what I would hope would happen. TRANSCRIPT Page 65 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Keene: Go ahead. Mr. Perez: I was just going to say, they have the information. It’s not that we’re not transparent. What he wants is an automatic load. That’s what he wants. Chair Filseth: But it’s the effort on your team to assemble it? Mr. Perez: Right. Chair Filseth: And the associate’s waring of, be careful because here’s all the reasons it might not be what you think it is, and so forth. Mr. Perez: To go back to an earlier consultant (crosstalk). That’s what it was. And so, my concern was, you heard the gentleman that was here earlier. He said, well Palo Alto is special and unique, I think he said. We’re the only agency west of the Rockies that has the funds that we have, so we need to have a dialogue. Chair Filseth: But that’s one thing and clearly the difference between us and other cities on this, and we actually had a bunch of discussions with various places on this yesterday, we ran Utilities. So, for the same set of services, right, we have a different number of people covered by PERS than some other city would that, you know, uses PG&E. So, I think that’s a fair one. But that’s sort of the major caveat, right. I mean… Mr. Perez: Well, it is because the $39,000 you’re comparing to is not apples and apples, because guess what, you’re paying the pension of PG&E people, but you’re not seeing it in the pension, you’re seeing it in the utility bill. Chair Filseth: We are seeing it in the Utility bill, right, but so be it. I mean, at the same time we’re saying, well, our Utility costs are this and PG&E’s are up there. Mr. Perez: And they’re not the same. Mr. Keene: So, if I might suggest, I don’t want to sound like we’re closed off to it. As a matter of fact, we actually do a lot of work with different folks at Stanford. We’re working with the Sustainable (inaudible) system folks, saying, hey let us be lab rats for stuff that you guys want to do. We’re right TRANSCRIPT Page 66 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 here. Why don’t you let us go back with this in advance of the next meeting? We can talk with folks over there also. We can tell you what it basically takes for us to support the work of the Committee in all the various ways, including this idea of, okay, what would it take to work with Joe Nation and these folks in a particular way, and just so we can bring back an informed response. I mean, the Council is entitled to make these suggestions. You also owe it to us as your staff to let us go back and not just say yes or no, without us just diving a bit deeper and being able to tell you what it will take for us to do something and when we could do it and what impacts it has on other things. Because one of the things we don’t want to overall – you haven’t adopted the schedule that Lalo roughly suggested and laid out, but we are taking seriously that you’re going to want to be able to make some real recommendations to the Council to deal with these systemic issues in fairly short order. I mean, within the next 4 or 5 months, really. (inaudible) That would be one thing we could bring back for the next meeting, an assessment really of… Mr. Perez: We’re definitely open. Council Member Tanaka: Well, I’d like to do more than that, which is, I think we should invite them to our meeting, because this is a complex issue. They’ve spent a lot of time talking about this. Probably one of the foremost experts in the country on this topic, and for us not to take advantage of that, I can’t understand why we would not do that. So, I think what I would like to see is, in one of the meetings between now and the January, February City Council meeting, that they get on the agenda and we hear them out, hopefully with the data so they could actually present their version or analysis. I would imagine we would have to have the same kind of data for Gov Invest as well. I can’t imagine, that’s got to be just as big an effort to use Gov Invest. Chair Filseth: Between now and February I think it ought to be a 2-way thing. I think we ought to go, here’s what we’re thinking about doing. What do you guys think? Council Member Tanaka: Sure. I think we have a world-class research university next door. Why not take advantage of it, and hopefully maybe by January or February, if we do have Gov Invest, it would be another number we could look at right. We could look at the Stanford number, look at Gov Invest. We have 2 points of comparison. It’s better than nothing, which is what we have now. We have the pension tracker, which you guys all like on TRANSCRIPT Page 67 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 the web, right, which says we have $1.2 billion of debt, which maybe is a high number, I don’t know. But it’s a number we don’t have. Mr. Keene: Yeah, and we can get to the point where the assumptions that are made in there are transparent also, so that when we see the conclusions we can say, is that it? I mean, if there’s a 3 percent rate of return or something like that, that’s a key factor and we really would have to say, do we really believe that’s viable or not. Council Member Tanaka: And that’s why I also support the Gov Invest approach, right? So, if the Gov Invest is our internal number, we can see what Stanford comes up with as the third-party number, and at least we have some basis for making decisions and understanding the (unintelligible) of the problem. Mr. Perez: And I agree with you. One of the suggestions I think that the directive that we would like as staff is for you, as policy makers, to give us what you think that number is. If we want Joe Nation to run a scenario, I want him to run the number you select too, not just his number. To run Gov Invest I need you to tell me what number you want me to run. So, that’s the task that we put in front of you, what is that number that you’re going to select in order to run these scenarios, because I can tell you, today also on the agenda for CalPERS was the terminated agency trust. Remember they talked about when you get out, so their rate of return for that is 2.44 percent. Guess what… Council Member Tanaka: Why isn’t it 6 percent, or 7.375, why not that number? Mr. Perez: Because they’re going to take the academia approach to be super conservative, just like the insurance companies. You want to know what the funding ratio for that trust is, 213 percent. So, to me you need to make that call as to what that number is, and not just go with the academia number, go with another number so then you can have a good comparison and then a policy decision. Chair Filseth: Go ahead. Council Member Tanaka: Okay. That’s all I had. Thank you. TRANSCRIPT Page 68 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Chair Filseth: So, thanks. I had a couple of things. Many of them have been talked around before, I think. So, how do we adjust our loaded cost to include the UAL impact at the 6.x percent scenario? Exactly which number, 6 or 6.2 percent or 6.5 and so forth, we sort of talked about a little bit. I would like – so, back on the normal cost issue, so we’re saying that for the fiscal 2019 budget that the gap between 7.375 percent, in 2019 haven’t we dropped it to 7.125 percent or something like that? Mr. Perez: They use 7.375 for ’19. Chair Filseth: For ’19, okay. The gap between 7.375 and 6 looks like it’s $8 million, right, of which 5 is in the general fund. So, I’m going to guess that it’s actually a pretty similar amount in fiscal 2018, right. (crosstalk) Mr. Perez: At 6 percent you mean? Chair Filseth: At 6 percent. I’m going to bet it’s not a lot less than 5 in 2018, right? Mr. Perez: I think it’s less in 2018 because they were still using the 7.5 percent. Chair Filseth: Perhaps, right, but you know, the conclusion from this is, I mean, not even including the amortization and the change in value in the UAL, is that if we recognize this in 2018, then instead of breaking even, including a $4 million drawdown from the reserves, we would have lost $4 or 5 million in the general fund. Mr. Keene: If we built in an adoption in the budget (crosstalk) Ms. Nose: We would have to rerun the numbers, but I mean, it is definitely a safe assumption to assume if we had done 6 percent in ’18, our costs would have been higher than what we have. Mr. Perez: Yeah, we would have had to either draw more or reduce budget, yeah. Chair Filseth: Well, or run a deficit (crosstalk) or accrue whatever the difference was, right? TRANSCRIPT Page 69 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Perez: Yeah, if we didn’t make a payment, yeah. Chair Filseth: I’d love to see a quick tabulation of what that would have been for ’18. I mean, we’re looking at ’19, I’d love to see a quick tabulation what that would look like for ’18. So, that was one. Mr. Perez: I’m sorry, Council Member, I just want to make sure, are you looking for that for the October 17 meeting? Chair Filseth: If possible. If it takes 20-man weeks of work, then it’s more sophisticated than I’m looking for. Mr. Perez: No, but a matter of whether we can get it from CalPERS. We’ll have to go through Bartel. Chair Filseth: Can we do it ourselves? Mr. Perez: I’d rather give you a good number. Because I think it’s important enough that we don’t want to make a mistake on those type of actuarial type of calculations since we’re not actuaries. Chair Filseth: Okay. Let’s see, what do you want to do about OPEB. So, if we have $150 million, is there an OPEB normal cost? Is there an OPEB you know, credit card payment? Mr. Perez: So, we’ll put that on a future agenda shortly. We’ll treat that as a separate item, not less important or more important. We are in the midst of having Bartel and Associates run the actuarial report. So, every 2 years we’re required by GASB to run this versus the pension that’s done annually. And so, once that report comes out, then we’ll come and do the presentation and update the numbers and then… Chair Filseth: OPEB is also at 7.375, right? Mr. Perez: No, it’s at a higher number, actually. I think it’s actually like 7.61, off the top of my head. I have the report out, I could probably look real quick, but there CalPERS does offer you 3 options. And what we’ve asked Mr. Bartel before is to provide us the payment requirement based on the different assumptions of rate of return, so we will do the exact same thing and provide you that. TRANSCRIPT Page 70 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Chair Filseth: Okay, and if we’re doing 6 percent on the pension, can we do 6 percent on the OPEB too? Mr. Perez: It’s preset by CalPERS what the scenarios are, but I guess we could ask Mr. Bartel, say, hey, we don’t agree with any of those. Use this number. Chair Filseth: Okay. And then, on OPEB, I mean, are they the same concept? Is it the same concept of a normal cost and an amortization payment? Mr. Perez: Yes, it’s the same thing. And it’s the same issue. Chair Filseth: Because we don’t have the normal cost for OPEB on here either. Mr. Perez: No, we focused all on pension. We thought it was a big enough item that... Chair Filseth: The reason I have no idea is because it’s taken me long enough to figure out the pension stuff. I haven’t even tried OPEB. By the way, your $1.2 billion on pension tracker, does that include OPEB or just pension? Council Member Tanaka: Just pension. Yeah, so that’s why it came to 2x. The 2x included that. Mr. Perez: Yeah, if you use, CalPERS actually gives you the number, if you use 3 percent. Council Member Tanaka: Talking about the fully loaded, so, I asked 5 different people yesterday at the thing you guys were at, so if someone gets paid $100,000 by the City, how much does it really cost, fully loaded, OPEB, unfunded pension liability, everything? They said roughly 2x. Mr. Keene: What does 2x mean? Does that mean… Council Member Tanaka: $200,000 total, if you include everything, like the full shebang. TRANSCRIPT Page 71 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Keene: Yeah, that’s probably overstated right now, but in a couple of years it won’t be. Just so you (inaudible). Chair Filseth: So, let’s see. I’ve got for 2018. Amortization plan options, when do you guys think that, when do you guys think you will have some sort of suggestions about that? And I actually think that’s not the most urgent one. I think some of this other stuff is actually more interesting. Mr. Perez: Just to make sure we’re talking the same thing, this is refinancing the mortgage? Chair Filseth: Yeah, refinancing the mortgage. Mr. Perez: We were prepared to bring it to you on October 17th. And then you can look at it and make calls as to when you want to address it. Chair Filseth: Okay. So, that was my list. So, so far what I’ve got on my list so far is, an explanation for all this that people can understand and some names, right, the true full cost per employee, right. How should we use Stanford? The FY 2018 PNO, and the refi of the mortgage options. Is that too much? Mr. Keene: Can I just make a general statement on the PNO, I mean that aspect of it? What we’re also, at least what I’m hearing from the Committee, is that regardless of what we do strategically on the actual funding changes that we make as far as budgeting, we want to build into our reporting system, into our financial reporting system, clarity of information really about – that’s also accessible in an understandable way, right? To be able to sort of see what the risks are that the City is facing. And that’s something that, as we talked about it, we’re getting with the long-range financial forecast, right, not to pressure us. It seems to be that ought to be something we really could, we could wrap that up by the end of this calendar year. You know, to be able to start to figure out how that would be, at least how it would be and where it could be reported without – the numbers may change some, you know what I mean. But for us to be very clear, and so the Committee also has a chance to say, yeah, that’s accessible, that’s transparent, that’s clear. I mean, that’s an important step and it doesn’t cost us anything, really, to do it. I mean it takes some effort. TRANSCRIPT Page 72 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Chair Filseth: I think that’s really high value. I mean, even if the numbers change a little bit, because right now, even if we had the right numbers, it’s sort of not clear what to do, right? Others. Council Member Holman. Council Member Holman: Yeah, along those lines, can I suggest that to make it real, if you could do a Joe Smith, Mary Smith, then again using whichever numbers we decide to use, is it 6.2 or 6 percent or whatever, if you could put in tabular form what somebody making you know, $100,000, $150,000 you know, what that table looks like in terms of salary, this benefit, this benefit, this liability, this liability, because that makes it real. So, it’s not just looking at, you know, it’s 150 times what the salary is or 175 times, or 1.75 times what the salary is. It makes it real. I think we’re all pretty consistent on having to find the language that people can understand and is utilitarian. I mentioned earlier, so that we don’t have just a black veil on this, having some things to look at that might be helpful to potentially pay some of this. I sent a note to you guys, just to say like, if there was any response, but one is Palo Also is one of the very few cities, I think, that provides lifetime dependent health benefit, and I don’t know what the total cost of that is, or I should say true cost. I don’t know what the total cost of that is or how much that would help to be applied or what the consequences are of, it’s a negotiation, of course. But, it’s a lot of money and it’s not like a competition would put us at a disadvantage, because I think we are one of the very few that offer that. There was another one. Oh, if we, a little bit further investigation with CalPERS about, you know, suspending the COLA or if we could adjust the COLA, you know, if that’s something that could be done or if it’s something that we should suggest or support or lobby for. I mean, how earnest are they in that discussion? Mr. Perez: I think they’re planning to just let a request, basically, but we’ll confirm and we’ll definitely provide you any input that, what the board – the committee decides whether they comply with the requests or not. Council Member Holman: Because what that could give us is more latitude on providing merit raises as opposed to, you know, just a straight, off the top COLA increases. I see at least 1 colleague who is supporting that. It’s not to say people don’t get raises, it’s not trying to say that. It’s just trying to apply some kind of a more meaningful, rather than automatic increase. Chair Filseth: Sort of dipping our toe into policy a little bit here, as opposed to, which I think we’re going to be hot and heavy with, you know, in the early part of next year, right? TRANSCRIPT Page 73 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Council Member Holman: Yeah, but these are things that… Chair Filseth: Nail down the accounting is probably 80 percent this quarter and 20 percent policy or changes the other way after that. Council Member Holman: Yeah, but if we’re looking at ways that, you know, we can balance the checkbook so to speak. Chair Filseth: I just want to figure out how much we owe first. Council Member Holman: There’s that too, so I think that’s my list. Chair Filseth: Council Member Fine. Council Member Fine: Really quick, so I agree with most… Council Member Holman: Excuse me just a second. So, the thing about the dependent health benefit, that’s not just a way to take that and help pay down the credit card bill. That’s also outlay, so it’s both things. Chair Filseth: I assume it shows up in the OPEB calculation. Mr. Perez: It does, and so you can choose to, if you were to consider that, to be part of the solution for that. Chair Filseth: It probably should be right? Council Member Fine: So, 3 quick things. I agree with the Chair, most of the list he had there. On the Stanford issue, I am happy for us to share data and work with them, but frankly, I’m more interested in seeing us build up a capacity in house here to approach these problems that gets to the accounting piece. And then just one final thing. I’ve been running down the big terms I’m kind of hearing and so I’ll just go through them. So, one, there’s kind of like a problem, right. We can’t pay this forever. It may impact recruiting, things like that. Two, there’s the actual costs in terms of the accounting that we want to get to. Three, there’s assumptions in terms of how long the benefits go for, what discount rate, all those kinds of things. Four, there’s strategies we may use to address this, right? Whether it’s drawing down certain areas or reducing benefits. And then finally, I think Council Member Tanaka actually said what’s most important to me are the TRANSCRIPT Page 74 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 opportunities, right? If we can recruit a better staff by reforming the system and actually being able to offer incentives that are better in the marketplace today, that’s important too. So, that was kind of the story I was drawing out. It’s like problems, cost assumptions, strategies, opportunities. That’s one way of thinking about it, but I think that strikes a lot of the things we’ve been touching on tonight. Mr. Perez: Let me add something. I did not hear signing bonus earlier, so (crosstalk) it was about a bonus and not about a signing bonus (crosstalk). Chair Filseth: That’s policy stuff. That’s next year. Council Member Fine: If we’re just paying less down on our pension and OPEB stuff, maybe we can offer people money upfront. Chair Filseth: Yeah, the larger, yeah, the broader downstream of what he just said is, generally, how do you move money from out in the future where people don’t value it as much to now, where they do. Okay. So, there’s not any motions here or comments? Mr. Perez: No, I think you’ve given us enough to work and let us see what we can do for the 17th, and as I mentioned, we kind of anticipated that there was going to be a lot more work to be done and recognize that. And so, part of it is to inform you that because we had a lot of things to do to prepare for the budget, balance the budget, the CIP budget, as you may recall, is off balance. Chair Filseth: Hey, we had a 3-month vacation, didn’t we? Mr. Perez: So, I think, we’ll at least give you a path of what we think it will take, and then after deciding on, we can speak to the calendar and see what your pleasure is. Chair Filseth: Go ahead. Council Member Tanaka: So, I don’t know if you were there or you guys were there for the ones where Chuck Reed talked about the pension crowd out or when Joe Nation did his presentation, but (crosstalk) I put it on twitter, so if you guys want to see it, you guys go to twitter. So, what’s interesting is, you know, Chuck Reed, former mayor of San Jose, talked TRANSCRIPT Page 75 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 about why they had to do pension reform. And it wasn’t because, you know, we actually have the luxury because our backs aren’t against the wall. In 2011 their back was against the wall. They had no choice and it was much, much harder for everyone because of that, because they had no choice. I think we have the luxury in some ways, that our backs are not against the wall. We can make more rational choices, more reasonable choices, not just for our residents, but also for the employee. Because the slide that really, if I was (unclear) probably motivating to try to fix this problem, is the slide that Joe National put up, and I don’t know if you were still there at the time, but it was the one where he showed that for the miscellaneous employee, which is pretty much everyone right here, there’s only enough assets to cover the retired employees, not for you guys, not for the guys that haven’t retired yet. If I was an employee, I would be incredibly keen on trying to make sure that when I retire, that the benefits promised to me are actually going to be paid, and so you know, I think while it may sound like we’re really trying to just protect our residents, I think, I also view it as really important to make sure that the people who committed to the City, who put time to make the City great, also really get the benefits that they are owed. So, I think it’s critically important that we try to really clear this up, and fix it. Chair Filseth: Have you got the one that Professor Bulah showed with the CalPERS discount rate? Did you take a picture of that one? Because I did not. Council Member Tanaka: I might have. I don’t know. But anyways… Chair Filseth: That was an impressive one too. I didn’t realize this, but San Jose was actually, Ed’s not here, but San Jose was actually losing police for a few years before Measure B. I didn’t know that. I thought it started with Measure B. Apparently, they were losing cops even before that. You were there, weren’t you? (crosstalk) Mr. Keene: So, just for the future let me sort of complicate all of this. So, we’ve been dealing with this on whatever, the demand side. And, I mean, there is a supply side to all of this too. It’s a conversation we haven’t talked about at all, and we haven’t at all talked about the real-life realities, which are ultimately more political than anything else, about implementing changes that force reallocations, even outsourcing in and of itself, can be quite challenging to the community, particularly when you’re not in a crisis mode. I mean, we all just know human nature. The thing is, well, why are TRANSCRIPT Page 76 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 you guys doing all of this? Why do I have to have a contract street sweeper? It was so much better when Public Works did it, whatever it was. I mean, there will be a hundred issues like that, potentially, as we implement things to sort of steer some of our attention in this area. So, I’m not saying that to say we shouldn’t do it, I’m just saying we will be distracted by a lot of other commentaries too. Chair Filseth: So, I totally agree, right? So, here’s my 2 bits on that one, again, right? I think the accounting strategy at this time is more important than the funding strategy, right? And what I mean by that is, let’s get the numbers right. Let’s get the numbers right, okay. Because, you know, once the other stuff starts, once we start our funding strategy, you know, even the numbers, there’s going to be a tendency to try to politicize those, right? So, let’s take advantage of the fact that we’re not under that kind of pressure now. Let’s get the numbers right. Let’s get the accounting right. Let’s build the structure, let’s figure out how to account for CalPERS saying one rate and we’re saying another one. Let’s just get all that stuff clean, okay? Because it’s just going to get harder once we get into the other stuff. Mr. Perez: I think if the Committee is in agreement, then we’ll focus the 17th report on that, you know. Chair Filseth: Mostly what we talked about here. Mr. Perez: Right, right, and that way we’ll be better focused. Chair Filseth: That concludes Item 3. NO ACTION TAKEN. Future Meetings and Agendas Chair Filseth: Next item is future meetings and agendas. Are there any public comments on future meetings and agendas? Seeing none. Lalo Perez, Administrative Services Director/Chief Financial Officer: It’s in the back of your agenda, the calendar. If you would turn to that page please. As you can see, on 10/17 we have 2 items, the paid parking study recommendation. It’s a meaty subject. And then we’ll have our continuation of tonight. The meeting starts at 7:00. And then on 11/7 we’ll have the HRC TRANSCRIPT Page 77 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 recommendation for the fiscal year ’18/’19, give us (unclear) allocation. So far that’s the only item, so… Chair Filseth: (unclear) because that’s usually a short item. Mr. Perez: Right, so it’s hard for us to turn around a report on the 7th to continue pension, but if it’s a continuation of discussion of a report you already have, we could consider that. So, that’s an option. Then, we request that we reschedule the 11/21 meeting, because if you look at your calendars, that’s smack in the Thanksgiving week, and staff and you may have challenges, so we would love to hear dates that you could consider as options. You know… Chair Filseth: The obvious ones are the 14th and 28th. Mr. Perez: Correct. And I’ll ask David to check to see if there’s any other concurrent meetings that I don’t have the schedule on, but assuming that there are no other meetings, those could be optional dates and… David Carnahan, Deputy City Clerk: The 14th would be Policy and Services. Council Member Fine: The 28th works for me. Chair Filseth: I can do either or we can do both. Mr. Perez: Okay. We just have different rooms on the 14th and 28th, so whatever the Committee prefers. Council Member Holman: When’s the League Conference, I forget. What are the dates of the League Conference? Chair Filseth: Which League, the California Cities? Council Member Holman: In North Carolina. Council Member Fine: That’s the 15th to 18th. Council Member Holman: Fifteen to 18, okay. TRANSCRIPT Page 78 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Chair Filseth: Is anybody going to that? Are you going to that? Council Member Holman: I’m thinking about it. Chair Filseth: Anybody else? Is the 20th or 28th a better day? (crosstalk) November 28. Council Member Tanaka: (inaudible) Chair Filseth: Which? The 17th? So, we’re not doing the 17th. Oh, it is the 17th. You have a conflict that day? Council Member Tanaka: Yeah. (inaudible) Well, what day were you talking about? November? Chair Filseth: Fourteenth or the 28th. November 14th or 28th. Council Member Tanaka: The 14th, I actually could do that. Chair Filseth: How about the 28th? Council Member Fine: The 14th is better for me. Council Member Tanaka: I can do the 28th. Chair Filseth: Karen, how likely is it you’re, well Carolina as you say, which dates is it? Council Member Fine: The 15th through 18th. Council Member Holman: That sounds right. Chair Filseth: So, you wouldn’t be here the evening of the 14th? You would be flying. Council Member Holman: I would be flying, yeah. I’m not positive I’m going, but I’m seriously looking at it. TRANSCRIPT Page 79 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Chair Filseth: Why don’t we do the 28th? Which day is Thanksgiving? That’s like the 23rd? Mr. Perez: The 23rd, yeah, and so the meeting is the 21st right now. Council Member Holman: Did Greg have a problem with the 28th? Chair Filseth: No. Council Member Holman: Okay, alright. Chair Filseth: Greg has an issue with the 17th, so the 17th, what time are we starting? Mr. Perez: 7:00 and we’ll start with paid parking. Chair Filseth: What time do you think you could be here on the 17th? Council Member Tanaka: It starts at 8:30 but I’ll try to duck out early. Kiely Nose, Office of Management and Budget Director: My suspicion is you have 2 consultants coming that night, potentially Dixon for paid parking and the 17th is Bartel. Chair Filseth: Yeah, although if we got the consultant coming for paid parking, that’s probably going to last awhile. Ms. Nose: I’m not certain. I’m not certain that they’re coming, but I will check in with Planning staff. We may want them… Chair Filseth: It’s tough to reschedule Bartel. Mr. Perez: It is. Right now, he’s extremely busy. Are we okay then on the 17th? So, then we go to… Chair Filseth: Greg will come when he can. TRANSCRIPT Page 80 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Perez: So, then we go to December 5th, we have the CAFR and the long- range, so that’s a pretty meaty night. Can we ask you for a backup? It could be either for… Chair Filseth: I could do the 12th. Mr. Perez: The 12th. Council Member Tanaka: What day? Mr. Perez: It doesn’t have to be a Tuesday, by the way. Chair Filseth: How about the 19th? David Carnahan, Deputy City Clerk: So, the 19th falls within Council’s winter break, and is not an option, unfortunately. Mr. Perez: That’s why we were looking for a backup, because the 19th was your regular scheduled meeting, but you’re on break. Chair Filseth: Let’s, so a backup for the 5th, how about Wednesday, the 4th? Council Member Tanaka: December 4th? Council Member Holman: Do you mean Monday? Chair Filseth: Oh, is that a Monday? Ms. Nose: December 4th is a Monday. Chair Filseth: Wednesday, the 6th? Mr. Perez: Well, I think we’ll have a 5th meeting. We’re looking to have a potential second meeting. Chair Filseth: A second meeting? Mr. Perez: Yes. TRANSCRIPT Page 81 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Chair Filseth: You’re gone, what dates are you gone in December? Council Member Fine: I think the first 2 weeks. Chair Filseth: So, Adrian is toast the first 2 weeks. The 6th or 7th doesn’t matter, right? Mr. Perez: So, we just need to make sure we have 3 of you or the Mayor fill in if there’s 2 of you, because we’ve got to get our financials in before December. Chair Filseth: What about the 12th? Council Member Holman: Before December? Mr. Perez: I’m sorry, before the end of December. Council Member Holman: Okay. Chair Filseth: What about the 12th? Council Member Tanaka: It works for me. Chair Filseth: It works for Greg, it works for me, Karen? Mr. Perez: The 12th as a backup, okay. And it will serve as a backup either for one of these two items, or pension item. And any of these meetings that you believe that we could start earlier, it’s up to you. We’ll stick to 7 for now, but if you believe there is a window that gives you more opportunity to discuss the topic, so we can look at it as we go forward. Council Member Holman: For me, it’s the 3rd Tuesdays that are a challenge for me. The other Tuesdays are fine. Chair Filseth: So, what about November 7th? Council Member Holman: That’s fine. Chair Filseth: We do that at 6? TRANSCRIPT Page 82 of 82 Regular Finance Committee Meeting Transcript: 9/19/2017 Mr. Perez: Six, okay. Council Member Holman: Sure. Chair Filseth: You and Karen are the 2 that had trouble earlier. Mr. Perez: Seven? Okay. That’s all I have. Council Member Holman: 7:00 on, okay. Chair Filseth: Okay, with that we’re adjourned. Thank you very much. ADJOURNMENT: Meeting adjourned at 10:28 P.M.