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HomeMy WebLinkAbout2017-10-17 Finance Committee Summary MinutesFINANCE COMMITTEE FINAL TRANSCRIPT MINUTES Page 1 of 77 Regular Meeting October 17, 2017 Chairperson Filseth called the meeting to order at 7:05 P.M. in the Community Meeting Room, 250 Hamilton Avenue, Palo Alto, California. Present: Filseth (Chair), Fine, Holman, Tanaka Absent: Oral Communications Chair Filseth: If there are no public speakers, we will proceed to agenda item 1, and then we will do oral communications on Item 1, and then we will proceed with the staff presentation, if that’s okay. Are there are any public speakers to any item not on the agenda tonight? Seeing none, we will proceed with the first action item. Agenda Items 1. Review and Recommend Strategies to Address the City’s Pension Liability. Chair Filseth: The first action item is review and recommendation of strategies to address the City’s Pension Liability. We have a couple of public speakers. There at least two that I know of. Are there any others? (crosstalk). Let us do Mr. Martin first, since he has actually filled out a card, and then let’s do Mr. Nation and then Mr. Bulow, if that’s okay. Can you come down here where there’s a microphone? We normally do three minutes of public communication. Wayne Martin: Wayne Martin, 1125 Byron Street. I’ve been interested in this topic for a long time. I’m pleased tonight that this has been scheduled for the Finance Committee, and I dropped down just to provide my encouragement. I don’t know how many people here are actually residents, FINAL TRANSCRIPT MINUTES Page 2 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 but I’m guessing I’m one. I think this topic is long overdue. I think it’s rather complicated. I don’t think you’re going to get it solved and I hope that you look at breaking it down brick by brick and laying it out over a couple of years, because I think there are far more issues associated with, with I’ve seen with your presentation about just looking at aggregate multipliers against certain kinds of baseline data you have now. I’ve sent a lot of emails out to you, the people on the Committee, asking them some questions. I don’t expect you to get to them tonight, but I would like you to get to them in due time. And I wanted to point out, with some of the material that I sent to you, that there’s a spending side to this issue, not just a revenue side, and that if you look at the spending of the City over the next 20, 30, 40 years, some of the numbers really grow to, I think, beyond unsustainable numbers, and I sent out some salary data today from 2016, and I would hope that as you look at this stuff, you take some of these numbers and multiply them or at least inflate them, over the next 20, 30 years at 3, 4 and 5 percent, and see what you come up with. Police have been getting 5 percent pretty much on average every year, and before long you’re looking at $3, 400,000 if you get down to 20, 25 years out. I’ve lived in town 40 years. I can only report to you that it’s gone by pretty fast, and I’m guessing the next 40 years is going to go by just as fast. And if you don’t start thinking out longer time frames than we’ve seen Council do in the last 40 years, this problem is just going to get to be really bad. Anyone who is not familiar with it, all they have to do is go to Google and type in “pension crisis” and items from all over the country and all over the world just pop up in the results. And I would encourage you to spend some time looking at these problems. There’s a website “Pension Tsunami” where a daily posting of 10 or 15 of these news items can be found, and I would encourage you to subscribe to it and start getting this email notification, if you’re not already. Thanks for your time. Chair Filseth: Thank you very much. The next speaker will be Joe Nation. Joe Nation: Hey John, how are you? Greetings. I’ll be very brief, and unfortunately, I have to take off. I have to grade about 15 more memos for my Health Policy class that solve the healthcare crisis in the U.S. (crosstalk) and I’ll let you know how that works out as well. I’m here just to make sure that you all are aware of the things that we’re doing at Stanford. Jeremy Bulow is here, and he will talk in more detail as well. I was sort of drafted into the pension world, the public pension world, about seven or so years ago, when a group of students of mine did a project for Governor Schwarzenegger, and Schwarzenegger had come to us and said, “Some people tell me we’re in a real mess, and some people tell me we’re okay.” FINAL TRANSCRIPT MINUTES Page 3 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 And so we did this project and the students came up with a number that was far, an unfunded liability number for the State, that was far greater than what anyone else was talking about. And so, I’ve been working on this and working mostly on CalPERS agencies out there, but also doing some CalPERS work as well. Three weeks ago, we had a, and I think at least a couple of you came to our workshop at Stanford, and it was initially a media workshop to educate the media on this issue and we had about 20 folks from the media there. The purpose of that was just to go through some of the fundamentals of pensions, and you know, how they’re funded and to make sure the folks in the media and others understood them. I certainly don’t have all the answers. Jeremy has 99½ percent of the answers, or maybe more. There are other folks at Stanford who know this pretty well, as well. And so, I just want to make sure that you all know that we’re available as your neighbor, to work with you on this. The last thing I will say is that I’m glad to answer questions about the report. I’ve met with your Finance Director earlier this evening to go through the report. I did 14 case studies across California that looked at the, what we’re calling service crowd out. I was glad to talk about that. The last thing I’ll say is that the one thing after seven years of working on this topic that’s heartening to me is that we seem to be getting some traction. I was asked to come up to meet with a bunch of city managers and finance managers in Sacramento a couple of weeks ago, and the people there highlighted the challenges that they face. And sometimes cities like yours that are thought of as high well cities or cities that are in great shape, but everyone’s facing challenges out there. And so, we’re going to continue to work with those cities and counties and special districts and school districts. I was just interviewing the superintendent of the San Jose Unified School District earlier today to talk about the challenges that they have there. So, this is not just something that is affecting Palo Alto. As you know, it’s across the State. I’m glad to answer questions, and again, I apologize for not being able to stay, but I would be pleased to meet with you all later to discuss any of that. Thank you. Chair Filseth: Thank you. Next speaker will be Jeremy Bulow. Dr. Jeremy Bulow: Thanks very much. I’m an economist at Stanford. Actually, one of the three essays in my Ph.D. thesis back in the 1970’s was about pension funds, so I’ve been involved in this topic on and off for a long time. The actuality is that the economics of pensions is not that complicated. If you look at an actuarial report, you would think it’s unbelievably complicated, but for an economist, it’s just not so complicated. So, let me just explain briefly how we would think about it, and then what we would propose going forward for Palo Alto in terms of due diligence. Each worker FINAL TRANSCRIPT MINUTES Page 4 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 has a pension plan where their pension is based on some kind of formula tying together their salary over the last few years, their years of service and so forth. From that formula, you can calculate how much of a pension they have earned if they left today. What economists would say is just like with a defined contribution plan, like a 401k plan, that’s the number you want to start with. And so, what you could do is take the pension plan, calculate how much, what the worker is owed. Let’s say they’re owed $25,000 a year starting at age 65, adjusted for 2 percent a year inflation, you could write a spreadsheet which says, how much does the City have to, is the City going to have to pay if this person leaves today and all the future years up till, you know, over the next 100 years, by which time presumably, without some medical breakthrough, we’ll all be replaced. And then, there is a separate issue about the interest rate to discount back the liabilities. We’ll get to that in a minute. The other thing that we would say is, okay, that’s how to figure out what we owe today. We do this spreadsheet, we calculate how much money we would owe each year in the future. And then we would say, okay, well, we’ve got a new deal for this coming year. We’re going to pay the workers some more in salary. That’s part of our current cost, but the other thing that’s going to happen is, if they work an extra year based on the formula, they will be owed a greater annuity. So, maybe that person who was due $25,000 a year if they left today, if they stay an extra year, perhaps they’re going to be due $27,000 a year. So, what we as economists would say is, what they have earned as part of their compensation for working that extra year, is they’ve got an extra $2,000 annuity because they’re getting $27,000 now instead of $25,000. And so we would say that $2,000 a year, we put that in the spreadsheet for all the future years, and we would say that was part of the compensation they got for working this extra year, in addition to their salary and medical benefits and so forth. And so then the only thing that’s left is saying, well, how should you discount those future flows, because it’s money that’s going to be paid in the future, it’s a debt of the City. And there’s a lot of agreement among economists about that. It’s not just economists, by the way, it’s the pension benefit guarantee corporation thinks about this exactly the same, and the insurance companies think about it the same way, and even CalPERS, if Palo Alto asks, what do we have to pay to dig out of our obligation, and just be done with it and switch to a 401k for the workers going forward. And that is, we say, well this is a debt of the City. It’s more or less the equivalent of like the pension fund is an insurance company that owes a deferred annuity to these workers, and basically it’s a high-quality debt that we expect to be paid and the way in which it should be discounted is basically the value of that liability is more or less the same as if we went to an insurance company and said to them, what will you charge us to take this liability off our hands. And the FINAL TRANSCRIPT MINUTES Page 5 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 number they would give you is an interest rate these days on the order of between 3 and 4 percent, let’s say 4 percent. The PBGC if a private company goes bankrupt will say 4 percent. An alternative approach is to say, what if we bought high-quality corporate bonds to offset the future payments, what would that cost us, and again, that would be around 4 percent. Or alternatively, if you opened up the Berkshire Hathaway annual report and said, what does Warren Buffet, how does he discount his future pension liabilities and, again, it’s going to be 4 percent. So, that’s kind of the number that we think is probably right. Now, what we would do in terms of getting, what Joe and I would like to do in terms of getting data from Palo Alto, though, is say, we know that number is controversial. I explained in the paper that I think Greg passed out, why I think the CalPERS alternative approach is, I’ll just, crazy. But, what we would like to do is essentially create the spreadsheet I just talked about to you for each employee. We’d actually prefer it if CalPERS just did it and gave it to us, where the City would be able to see, okay, if we happen to terminate everybody today, if everybody left today, what would we owe each year going out to the future. And then we could decide on our own, or the City could decide, we could see, what is that liability worth if we discounted it at 4 percent, what is it at 5percent and so forth, that would be just a simple spreadsheet calculation. And so, that’s what we would really, what we would like to do. Then once the City has that data and they’re able to future out, both what the debt is and what the cost of any new contract is, then it becomes the job of you folks sitting at the table, the City Council, armed with the information about what the pension plan is costing and what the liabilities that have been accrued are, to decide how they want to proceed. What salaries and benefits you wish to offer in the future, or you know, how you would like to use this information in negotiations with workers. But, Joe’s and my focus is to try to help you get the best possible information, so that when you’re making your decisions as decision-makers for the City, you have the ability to base it on the best available, best possible data. And, hopefully, that data could be kept up to date. CalPERS, as you know, it’s like 300 years ago. Today, you’re more or less just getting the information from June 2016. Can you imagine if your 401k plan was giving you the data 14 months late? There’s no reason for that really, so we’d also like to see if we can find a way to get it so that you could have the information when you need it to make decisions, rather than years late. Chair Filseth: Thank you very much. With that, we’ll move to the staff report. FINAL TRANSCRIPT MINUTES Page 6 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Lalo Perez, Chief Financial Officer: Thank you Chair Filseth. Lalo Perez, Chief Financial Officer. Tonight, we have John Bartel here with us to walk you through a presentation of their review of our latest actuarial information and provide you some additional details of items that you requested, such as using a different discount rate and so what we’ll do is we’ll have Mr. Bartel do the presentation, and I would encourage you, if you have questions to probably ask them, because it’s a lengthy presentation, to, if you don’t mind John. And then after Mr. Bartel finishes, then Kiely Nose, our OMB Director, will have a short staff presentation as well. Chair Filseth: Welcome John. John Bartel, President of Bartel Associates, LLC: Thank you very, very much. I do my best to try to say this every time I’m talking to Council Members, whether it’s council meeting or Finance Committee meeting like this, it is absolutely my honor to talk with you all. I will second what Lalo said. I will very, very much encourage you all to interrupt and ask questions. I think that will, first of all, I’m getting a little bit older, that will actually make it easier for me to answer the questions. I promise you I will appreciate that. So, you all have a printout of the discussion outline I’m going to go through. I have a tendency, if I don’t get questions, to probably go a little quick, so if you need me to slow down, please, please let me know that. If you need me to speed up, please to that as well. So, slides one and two in the presentation go through definition of terms. With your permission, I’m just going to skip over those and wait until we get through the numbers, get to some numbers, and then define the terminology that we’re going to use. So, what I’d like to do maybe, is start out with what I kind of refer to as the, how we got here. It’s, we are in a position in California today where the order of magnitude of the unfunded liability, regardless of how you determine that number, is big, and the future contributions to pay that unfunded liability off in particular, are going to be budget challenging for an agency. So, all the time I hear people talk and they go, it’s the fault of this, it’s the fault of that. I’m going to give you my opinion as to how we got here. I really think there are four issues. I refer to number one as, investment losses, but that’s kind of a big umbrella. It’s not just historical investment return below what CalPERS thought it was going to be. It is, where will future investment return be. I’m not an investment advisor, but I pay attention a lot to what investment advisors say, and they are telling, the outside independent investment advisors, are by and large telling CalPERS, don’t plan on getting the returns that you have gotten; expect to get something below that. And so, reason number one is investment losses. Reason number two is, and by the way, these are not listed in order of FINAL TRANSCRIPT MINUTES Page 7 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 magnitude. These are just kind of, they all play some part and it’s actually very, very difficult to figure out which one is the single most important. But, enhanced benefits absolutely had an impact and we’ll go over kind of the detail of that. And then, reason number three is what I refer to as CalPERS contribution policy. Several years ago, Prop 162 gave the CalPERS Board the plenary authority to tell you all how much you should be contributing and for the last decade or so, I think they have not been telling you to contribute enough. And if you think about this like a, you know, like a credit card debt for a moment, if you’re not paying interest on the credit card, what happens? The balance goes up. We’ll quantify that a little bit. And then demographics. Almost every city in this State, not everyone, but almost everyone, has a very large retiree population compared to active population, and so the liability is associated with people who are not working at the city anymore, has a big impact on these numbers. We’ll go through that a little bit. So, let’s talk about historical number one, if you will, investment return. This shows CalPERS investment return over the last 20 years. We kind of have this black line there of 7½ percent. CalPERS assumed the return is no longer 7½, but nonetheless, it’s just kind of important to recognize when you’re looking at actual investment return, you have to look at it in the context of the expected return. So, for example, 2009, back then CalPERS was expecting actually to get 7¾ return. They got minus 24. That’s not a 24 percent loss. That’s almost a 32 percent loss. And then, similarly, if you go to a couple of years later, 2011, some folks are pretty fond of saying, gee, minus 24 plus 21.7, everything has evened out. Nice try. It’s only evened out if you thought they were going to get a zero return. So, again, you have to compare that 21.7 with the expected return. If you look at the average return over the last five, six years, quite good. But if you go back a decade, the actual average return below what they thought it was going to be, if you go back over the last 20 years, below what they thought it was going to be. Chair Filseth: Just a question about this chart. Do I understand that is net of contributions and outflows, because it says, market value of assets? Mr. Bartel: No, this is investment return, not ignoring contributions and benefit payments. Net of expenses. Okay? Chair Filseth: Okay, thank you. Mr. Bartel: So, it’s not gross of the fund, if you will. So, in some years contribution was higher than benefit payments. That’s not taken into account here. Right today, it’s probably the other way around. Benefits payments are FINAL TRANSCRIPT MINUTES Page 8 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 likely higher for most agencies than contributions going in. Okay? If you go back 30 years, the average return is higher than they expected, but all of the investment advisors I hear talk say, don’t expect to earn what you’ve earned over the last 30 years. Expect much shorter enhanced benefits. So, at CalPERS, not true by the way, for 1937 Act or other stand-alone systems around the State, but CalPERS took the position that if you enhanced benefits went to a more valuable benefit formula, you had to do that, not just for future service, you had to do that for prior service. So, pretend for a moment, you had a police officer at 25 years of service. You moved to 3 at 50 from 2 at 50, they get that 3 at 50 benefit for all prior 25 years of service. So, that creates an unfunded liability that partly contributes to the problem almost without exception. There were some exceptions, but almost without exception, when enhanced benefits were negotiated, there was rarely cost-sharing negotiated associated with the benefit enhancements. So, with the City, there was a tier one for miscellaneous 2.7 at 55 benefit formula, and safety 3 at 50, and then tier two was put in before the law was changed at the State level with miscellaneous folks going to 2 percent at 60, safety going to 3 at 55, and the with PEPRA, anybody hired on or after January 1 of ’13 who was not already in the system, moved to that PEPRA formula 2 percent at 62, three year final average earnings, and 2.7 at 57, three year final average earnings for safety. So, this is a little simplistic, but you all in some ways did your own version of pension reform when you negotiated the tier two formulas. There is not as big a savings going to PEPRA for you folks as there might be for some other cities around the State. Old contribution policy, I would tell clients almost any opportunity I could, that the old contribution policy beginning with the 2003 valuations had a slow recognition of investment losses. So, if you had an investment loss, it took 15 years to recognize it, and then even once you recognized it, it was paid as a rolling 30-year amortization. Those numbers, if you sat and calculated them, are substantially below expected earnings on that number. So, that approach works extremely well as long as your expected, as long as you have gains followed by losses, gains followed by losses. So, if your gains and losses kind of even out, that approach works extremely well. The problem is that after 2003, that approach did not work well, particularly in 2008, 2009 when we certainly had a – I’m not sure whether I would call it a market correction or by and large, the decrease in plan assets in 2008, 2009 when you are paying off investment losses, you’re not really catching up. There is a big gap. Your payment is substantially below interest on your unfunded liability, and you’re really, even if you have extremely good investment return, you’re not catching up. You’re going to see that in a couple of slides. Yes? FINAL TRANSCRIPT MINUTES Page 9 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Council Member Fine: So, is that 30-year amortization, is that just CalPERS policy or any agencies do something different than that? Mr. Bartel: Yeah, not very many though. So, we work with a lot of agencies around the State. Agencies always have the option to go to CalPERS and say, we would like to pay more. We didn’t have very many that did that. We didn’t have very many clients that did that. So, some certainly did, it just was not common. So, this approach was designed to smooth contribution rates, was not really designed to pay the unfunded liability off that was really a secondary thought. It had a major impact on mitigating contribution volatility, until the downturn of 2008, 2009. Demographics around the State, there is a large retiree liability compared to active liability, and when 2008, 2009 hit, we have a significant number of clients who decreased the number of their active work force. So, I know this may not be a popular term, but I think of what your contribution is, is sort of a burden on payroll. You’re a service delivery organization. You’re not building widgets, you’re delivering services, and to the extent that you have a contribution that is a high percentage of payroll, you decrease your payroll, that percentage of payroll actually goes up. The dollar amount may not go up that fast, but as a burden or as a rate, something associated with your budget, it can be a heavy impact, particularly with a declining population. For the City, your miscellaneous liability for retirees is 57percent of your total liability. Your safety liability for retirees, 73percent. Those are, in particular your safety number, a big number relative to many of our other clients. That means that you fall into the category of what I think of as a mature city. You’ve been around for a long time. You’ve had a lot of people earning these benefits for a long time. And the analogy that I try to get people to think about is, pretend for a moment you’re saving for your own retirement. When you’re 25 years old, you’ve got a long way to go. If investment return at age 25 is really high or really low, you’ve got a lot of time to really make that up and, oh, by the way, maybe at age 25 you don’t have that much in the bank anyhow. The closer you get to retirement, the more susceptible you are to volatility of investment return, and that’s really what this number represents. This represents sort of a, how close are you to retirement. How susceptible are you to volatility, in particular in the investment market, and how problematic is it to have investment return that is significantly high one year, significantly low the next. What does that do to your funded status, to your ability to go ahead and make those contributions. James Keene, City Manager: Eric, could I just ask a sort of simplistic question? So, what that chart was saying, John, is that 73 percent of our FINAL TRANSCRIPT MINUTES Page 10 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 costs in Public Safety as it relates to our liability is due to living employees who are already retired from the City. Mr. Bartel: That’s correct. Mr. Keene: And that there would be a factor, or the fact that if the demographics are such that we’ve had people live a long time, that’s one factor. I would be curious to think if we could look at a slope of the increase, say in overall benefits over time, I would assume that we would see that that has accelerated, and then lastly, that liability number is also affected by the fact that those employees make to contributions towards the liability, correct? Mr. Bartel: That’s right. Mr. Keene: So, in other words, active employees have a liability also. We are, we’re asking employees to make contributions, so then we have been asking them also to make increased contributions towards that liability, which reduces it. Okay? Mr. Bartel: Yeah, so some of my statements are editorial in nature, and I’ll apologize for that. But there is, to the best of my knowledge, no way to go to retirees and say, give us a couple of dollars, because your benefits are higher, they’re more expensive than we thought. So, CalPERS changes, I am on record as saying that I am a fan of the things that CalPERS has done. I absolutely believe they are, they have moved in the right direction. And thing number one that they did, I refer to this as contribution policy changes, what this is, is they will very shortly tell you to contribute more than interest on your unfunded liability. Even during the current fiscal year, ‘17/’18 and ‘18/’19 you will still be paying less than interest on your unfunded liability, but really beginning about 1920, that’s the point in time at which that will begin to shift. And if you think about this for a second, if you’re going from a position of paying less than interest on your unfunded liability to a position where you’re paying more, your contribution has to go up, and when we look at the slope of the line of where your contributions are going, it doesn’t matter whether we’re looking at dollar amounts or contributions as a percentage of pay, they’re going up. And that’s the budget issue that all of our clients are struggling with. So, I’d be happy to give you the detail of this. I actually think the last bullet, last round bullet under the first square bullet is the important one. It was included in the ’13 valuation, first impacting ‘15/’16 rates, but they’re phasing this change in over five FINAL TRANSCRIPT MINUTES Page 11 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 years, so the full impact will really be 1920. Second thing, they made some assumption changes. Generally speaking, the assumption changes were minor, except for one. And the one is, they are now building in an expectation that people will continue to live longer. How do I say this? Ever since, by and large, we’ve gotten indoor plumbing, people have continued to live longer, and actuaries have been slow to recognize that we have a pattern here. CalPERS began to recognize this in the June 30, ’14 valuation. If you think about this, if they’re expecting people to live longer and continue to live longer, that means contributions, liability has to go up, contributions have to go up. They first included that in the ’14 valuation, full impact ‘16/‘17, excuse me, first impacting ‘16/‘17 rates, full impact ‘20/‘21. Council Member Fine: What is CalPERS estimate of mortality today, numbers around different classes of employees? Mr. Bartel: Let me give you my typical actuary comment before I give you something that you might be able to use. The typical actuary comment is, they are expecting younger people to have a generally speaking a longer life expectancy than people who are older, if you will. So, somebody age 60 today is going to have a shorter life expectancy than somebody who is going to be 60 ten years from today. But generally speaking, they have seen life expectancy at sort of an average age of death of the retirees gradually move up and they’re probably in the neighborhood of 84 or 85. Probably a little higher than that for women, a little shorter than that for men. And that’s gone up about a year every three, four years. And so, it’s, actuaries sit and debate this sort of stuff. Lots of newspaper articles about the opioid epidemic and whether that will slow down. I can tell you what my opinion is. No, and the reason is, the people who are having trouble with, you know, who are having issues with opioids are not generally public-sector employees. It doesn’t mean it’s not going to happen in the future, but when you look at the CalPERS experience, it’s not consistent with that cohort, if you will. CalPERS Board, third thing that they did was, they lowered the discount rate for the next three valuations, so they dropped it from 7½ to 7 3/8 in the June 3016 valuation, going to 7¼ in the June 30 ’17 valuation and then 7 percent in the June 30 ’18 valuation. Really, each of those is phased in over five years, so you’re not going to get the full impact of the lower discount rate until we get out to ’24, ’25 fiscal year. Chair Filseth: Can you explain how that works for a second. I mean the initial and full? FINAL TRANSCRIPT MINUTES Page 12 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Mr. Bartel: Yeah. So, let’s talk about June 30 ’16 valuation. In your current valuation we’re going to look at your unfunded liability in a minute. What they have done is they have said, let’s measure the obligations, so one of your speakers was right spot on in the way the actuarial numbers work, is they’re doing a projection of what the expected benefit payments are going to be and then they’re discounting them. In the June 30 ’16 valuation they’re using a 7 3/8 discount rate, so they’re determining your unfunded liability using that – pardon me? Chair Filseth: Got that. What the initial and full? Mr. Bartel: Well, initial means that the June 30 ’16 valuation determines your ‘18/’19 contribution, but because they are phasing in the impact over a five-year period, think of it, it’s not exactly right, but about one-fifth of that impact is in your ‘18/’19 rate. The full impact of the 7 3/8 is in ‘22/‘23 fiscal year. Chair Filseth: Ah, I did not quite understand that. And so, if I understand what you said, okay, it is that our 2016 amortization payment is based not on 7.375percent, but on some number that’s between 7.375 and 7.5, is that correct? Mr. Bartel: Yes. Again, I’m so sorry. I’m going to apologize in advance for this answer. The actuary in me tells you, no that’s not quite right, but if you look at the numbers, you’re right. So, if you think of it that way, it won’t make the actuary in me comfortable, but you’re really very close to being right. Chair Filseth: But what we’re saying is that the amortization payment is lower than it would be under 7.375 percent? Mr. Bartel: Yes, we are saying that. That’s exactly right. Chair Filseth: Does that also apply to the normal cost? Mr. Bartel: No, it does not. Full normal cost at 7 3/8. That’s right. Chair Filseth: Okay. FINAL TRANSCRIPT MINUTES Page 13 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Mr. Bartel: So, there’s a pretty strong argument, there’s an element of not really paying full interest, if you will, again, with that change. Council Member Tanaka: Question. So, you heard the prior speaker talk about how he thought the rate might be more appropriately 4 percent. Mr. Bartel: I did. Council Member Tanaka: And what’s your thoughts about that, versus 7 percent? Mr. Bartel: Yeah, with all due respect, I think he is not, how do I say this. Everything he said, when it comes to what people are doing was right. It just was not the whole story. So, for example, accounting requirements for private-sector entities do require entities measure the obligation using a settlement rate. So, that might be 3, 4 percent. But, when those same entities determine their contribution, when they look at what their investments are going to be, they don’t use 4. They use a discount rate that is a function of what their long-term rate of return will be. The way I kind of think of this is, if you were a participant in a public-sector plan, you might think of the value of your benefit as being discounted with a low discount rate. It might be perfectly appropriate for you to think that way. When the actuary is giving numbers to a plan sponsor for a public-sector entity though, that’s not what their calculating. What they’re trying to calculate is, what is the appropriate cash flow to set money aside to take care of those obligations. Let me give you an overly simplistic example. Pretend for a moment you will owe $1,000 a year from today. Um, if you have money invested where you think you’re going to earn 7percent, to get to that $1,000 you take that $1,000, you discount it with 7percent. Maybe you get, let’s just call it, it’s not but let’s call it $930 to get to that number. If on the other hand, you think you’re going to get 4percent on that money, you would, then instead of needing $930 in the bank, maybe you would need $960 in the bank. In my opinion, you are doing the taxpayer a disservice if you think you need $930 but you tell them you need $960. I think that is not being straightforward to the taxpayer. You should tell the taxpayer the expected return. I think there are two issues here. One is, should you use a settlement rate to determine your funding. That’s issue number one. And issue number 2, which I have to tell you I’m a little sympathetic with is, is the long-term rate of return, is that 7 percent? So, I absolutely think 4 percent is the wrong number. The expected long-term rate of return that we are hearing from all of the investment, independent investment advisors is FINAL TRANSCRIPT MINUTES Page 14 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 not 4. It’s much higher than 4. But it’s also not really 7 either. It’s below 7. I think there is a strong argument that the discount rate should be below 7. I think it would be inappropriate to use 4. So, that was a long-winded answer. Council Member Tanaka: What number do you think it should be? Mr. Bartel: So, I have a slide that talks about that. I’d be happy to go directly to that slide now (crosstalk). Council Member Tanaka: Hold on. So, you just kind of trashed the 4 percent number. So, I actually want to hear Jeremy’s, I guess retort to that, if we can. Dr. Bulow: So, again, it’s not so complicated. Let’s say you went and got a mortgage on your house and let’s say it was $100,000 mortgage. That’s obviously not Palo Alto, but okay, you got a $100,000 mortgage. The interest rate today basically is going to be around 4 percent and that mortgage is a low-risk security. You pretty much have to pay that back. The bank is pretty sure of getting that money back. Now, you borrowed the $100,000. Let’s say you then take that money and say, oh, you know, I am going to put it in the stock market and I expect that my mutual fund is going to make me, my CalPERS mutual fund is going to make me 7 percent. So, I borrowed $100,000, but if I just put $60,000 away into that mutual fund, and my mutual fund really makes 7 percent, I’ll have enough to pay back my mortgage. So, if I’m CalPERS then I say, so I’m going to think of it like I owe $60,000, but I think normal people who are not actuaries would say, I borrowed $100,000. If I want to pay it back tomorrow I have to pay $100,000. And if you went to CalPERS and you said, you know, that’s great. You calculated my liability as only $60,000. Can I give you a check for $60,000 and be in the clear, they would say no, no, no. You borrowed, according to our calculations, you borrowed $60,000 but you’re also committed to having to pay 7½ percent or 7 3/8 percent interest until that liability comes due, which on average for a City like Palo Alto is about 13 years in the future. So, you’ve got to pay the 7 3/8 percent interest until the debt comes due and there’s no early repayment. And the fact that you’ve gone and in order to make 7 3/8 percent, you’ve got to go take a lot of risk in the stock market, you know, investing in a mutual fund and something safe like a mortgage, we’re just going to call that a zero cost. So, that’s the actuarial approach. It’s not good economics. (crosstalk) FINAL TRANSCRIPT MINUTES Page 15 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Mr. Bartel: With all due respect, that’s not the actuarial approach. I’ll defer to the Committee as to whether or not they want me to respond to that, but I think there are some, it’s not true that we’re taking that $100,000 and discounting $100,000. That’s not correct. That’s not what’s going on. When we start looking at the numbers, with a little bit of luck you’ll kind of see that I can explain that that’s not what’s going on here. I’ll go back to my example of $1,000 and you can kind of see that’s not what’s going on. Chair Filseth: I think we ought to proceed forward. Mr. Keene: Yeah, moving ahead, because just anticipating where the Committee was the last time we were together, right, at least for planning or reporting purposes, there’s been an interest in trying to settle on identifying what we think that actual rate of return number will be. So, that was sort of an important part of the discussion, so it seems like that would be something you will definitely be talking about later anyway. Chair Filseth: So, there are a couple of slightly differently sort of thoughts going through this. One is, what’s the expectation for CalPERS rate of return. The other is, what is an appropriate discount rate for the liability. Now in the CalPERS world they are the same, but there are a number of people who argue that actually they should not necessarily be the same, which I think Dr. Bulow is one of, right? Which of those should be the case? I think we could spend many, many meetings discussing this, right? It’s a debate that there are multiple opinions on. Mr. Bartel: And probably not come up with a satisfying answer. Chair Filseth: So, I think that it’s unlikely we’ll resolve that dispute in this discussion, in this meeting. I think we should bear it in mind as we proceed forward, and I think we should continue with Dr. Bartel and the issue of, I think we are going to come back to the issue of what’s CalPERS expected return rate, and I think that’s material. And I think we don’t need to tie up John with a discussion of, if there’s a different discount rate what it should be, because his time is expensive. Mr. Bartel: And in the interest of full disclosure, I am not a doctor. Chair Filseth: Although he’s not (not understood), though. Thanks Dr. Bulow. Yes. FINAL TRANSCRIPT MINUTES Page 16 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Council Member Tanaka: I guess, I do agree that it’s probably not something we can settle necessarily in this meeting, but this one number is almost everything, right? This number determines a lot, and so… Chair Filseth: It will determine, it will be material on the discussion of, you know, how we amortize it. Council Member Tanaka: Yeah, so I mean, to be honest I feel the Professor’s explanation was quite compelling, so anyways, I guess I’m okay with moving on, but I just think that’s something we do have to settle somehow. Mr. Bartel: I’ll take 30 seconds on this. What I would do is have a conversation with the Professor about my simple example of you owe $1,000 a year from today, how much money do you need to cover that obligation. I think that’s a reasonable question to ask the Professor, and if we were having a debate, I would ask him that question, so… Chair Filseth: Well, you took 30 seconds and all, 10 or something like that. I think the issue of the relative risk of both sides is more complicated than can easily be explained with how much do I need to cover the $1,000, and I think that’s sort of the crux of the… Mr. Bartel: Correct. Now I absolutely agree with that. Chair Filseth: And also, your aversion to risk as well. Mr. Bartel: I understand that. So, to one point, I will also make about those assumptions is, CalPERS is reviewing their capital market assumptions, so it’s important to understand the actuaries really use the information provided by their outside investment advisors in terms of what they think the investments will earn, both over a short and a long time. They’re in the process of doing an analysis on that. I have an expectation. I don’t know whether I’m right about this or not, but I have an expectation that the capital market assumptions from their outside investment advisors are going to say that the long-term assumption of 7 percent is appropriate. I think it will also say that the shorter-term assumption over the next decade, 7 is too high and they expect investments to return to historical norms, and they are expecting a higher return than the 7 percent. So, when we talk a little bit later about discount rate and how do you do that, one of the things that we will talk about is, what is one of their significant outside investment advisors, Wilshire Associates, what are they saying the expected return will be over FINAL TRANSCRIPT MINUTES Page 17 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 the next decade. So, we will talk about that, and why all discount rates are not created equal. So, we’ll go over that a little bit. Slide nine. Of all of the changes CalPERS has made, in my opinion, this is the single most important one. They refer to it as risk mitigation strategy. Let me go back to your saving for your own retirement, and it really does get to the issue of how much risk can you tolerate. When you’re young, you can tolerate more risk than when you’re old, and the maturity of the systems, the amount of money that has been set aside in the system gives every indication that the amount of risk, the investment risk that is in the system is higher than might be appropriate, so CalPERS staff agreed with that, went to the CalPERS Board and by and large said, we think the equity exposure that’s in the system is higher than it should be. We think that ought to be changed and the policy that they came up with, we believe, and just so you know, that this is not in writing, but we believe the logical can ultimately drop the discount rate from 7 percent down to 6, not because they think they’re going to earn 6 with the current investment mix, but because the current investment mix will be changed to be made more conservative, less equity exposure. Chair Filseth: Okay, so given that, they expect it’s 7 percent now, but it’s likely to get to 6 percent, okay over the next 20 years, so let us say for the sake of, let’s say we followed that, let us say for the sake of argument that you thought actually they were going to get 6percent now, either because of conservative investments of because nominal risk with interest rates are half what they were in the 1960’s or something like that, if that were the case and we were to base our plans on 7 percent, then we would pile a massive amount of liability on top of what we’ve got now. Is that correct? Mr. Bartel: Yeah, the unfunded liability would certainly be bigger, yes, that’s right. I might not use the word massive because I don’t know what massive means to you, but it would certainly be much, much higher. Council Member Fine: Would we do ourselves a disservice to go at 6percent today versus going at 7 percent, taking off 5 points over the next 20 years? Mr. Bartel: I would love it if you could hold that question, because you will hear me say I think it would be prudent to be conservative. The question is, how conservative do you want to be? I have an opinion, but I would like to talk to you a little bit about the numbers later on. (crosstalk) How conservative do you want to be? And so, if you don’t mind, I would like to answer that later. FINAL TRANSCRIPT MINUTES Page 18 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Council Member Tanaka: So, don’t these bullets kind of support what the Professor was just saying in terms of his view of the discount rate? Mr. Bartel: Well, I don’t think 4 and 6 are the same, so I would say no. And I don’t think you should be, in my opinion, I think you are, you would make a significant mistake if you thought of the numbers as we should contribute, we should set money aside, we should budget at the settlement obligation, and here’s why. Very simply, here’s why. I’m not hearing investment advisors, any investment advisor say that over the next decade, CalPERS will be happy if they get 4 percent. I’m not hearing them say that. And so, to measure the obligation, to set the rate at 4 would be, I think, higher in terms of how much you should budget, higher in terms of an unfunded liability than I think is appropriate. Council Member Tanaka: Okay. Well, one thing that it sounds like everyone agrees on is that it’s definitely not 7 percent. Mr. Bartel: Let me, just so you’re not putting words in my mouth, I would not say definitely. I will tell you I think it’s below 7 percent. You won’t hear me say, because, you will hear me say, if I were the CalPERS chief actuary, I would not be recommending 7. I would be recommending something below 7. I don’t think it’s remotely close to 4. There’s an argument as to whether it should be 6 of 6½ of 6¾. I will agree that I would recommend less than 7, but there’s a big difference between 4 and 6. Okay. Chair Filseth: Thanks for putting up with all our questions. Mr. Bartel: No, I don’t mind. I seriously don’t mind. In fact, in the interest, I love it when people ask me questions. That means they’re engaged in their thinking about what I’m saying. I absolutely do. I also like it, by the way, when people disagree with me. (crosstalk) Here is the challenge with the risk mitigation strategy. CalPERS Board has suspended it for two years. You’re hearing me say that the single most important thing that they have on a go- forward basis is this strategy, and they kind of put a hold on it. I hope that they don’t dismiss it. I think that would be a major mistake. So, if you take a look at slide ten… Council Member Holman: Before you go there, why are they suspending it for two years? FINAL TRANSCRIPT MINUTES Page 19 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Mr. Bartel: Well, what they said was, I can tell you what they said. I have an opinion as to why they did it. I can only tell you what they said though. What they did was to drop from 7½ down to 7 was really a negotiation among the Board members. They did not all want to do that, so they sat, negotiated a drop from 7½ down to 7, and somebody said, well, wait a minute. If risk mitigation kicks in, if we get a good investment year, it looks like we might have a good investment year, to not, as long as we’re decreasing the discount rate, we’d like to not have some of that good investment return be pulled off the table, and that’s really what risk mitigation is doing, and so I think they, kind of a back-room deal, that they didn’t want to pile on. Their comment was, they don’t want to pile on the public agencies by pulling some of the investment gains off the table. That’s their logic. Chair Filseth: Can I try? When politics collides with science, politics usually wins, until it doesn’t, and then there’s a big, big mess. Mr. Keene: Can I ask a follow-up question, or comment on that. So, one of the things I think that we will be interested in, John, when we’re thinking about how to position the City for the long term, is to what extent are we going to be kind of erratic over time. Sort of helicoptering in saying, let’s set aside some extra money versus very systematically adopting a perspective in funding that. And so, along those lines, you don’t have to answer now, but I would imagine that if you think that a postponement by CalPERS of that recommendation was folly, your advice to us as we’re thinking about our strategy would be to ignore CalPERS’ approach and begin to make commitments, funding commitments as if that strategy were in operation. f Mr. Bartel: So, I’m pretty careful about my words. I would not say the suspension is folly, because I can see the logic of saying, if we get a good year, we want to give some people some relief. So, I’m a little sympathetic to that argument. I have lots of meetings with lots of clients who look at where the rates are going to go, and the words they’re using are not particularly polite. And so, some of my clients would have thought that was piling on. They think what’s happening with rates is piling on. I absolutely believe that every one of my clients should recognize there is potential volatility, both bad and good in terms of where the rates are going to go, and the more risk you have in the plan assets, the more volatile those investments are. And so, I am a fan of mitigating that risk sooner rather than later. But, I’m also pretty sympathetic that you can’t do, you can’t change everything overnight, and so I would tell you the same thing that I really tell all of my clients, and that is, look at where, you can believe we’re FINAL TRANSCRIPT MINUTES Page 20 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 being too conservative or not conservative enough, it kind of depends on your point of view. But, think about that volatility and think about what, how problematic it is if I’m wrong and think about saving more money, because it’s problematic. It’s not going to be problematic if I’m wrong, if our numbers are too high. It’s going to be problematic if our numbers are too low. So, think about setting some money aside, if things turn south, you won’t get that bill immediately, but you will get that bill and so being a little conservative, that’s kind of my advice to everybody. I don’t know whether that really answered your question. Mr. Keene: I mean, I don’t really want to get off on this track, but we’re talking about all of these things in the abstract, without thinking about what the implications of any of the numbers are on all the other things we want to do as a city, whether it’s, you know. Mr. Bartel: One of the advantages and one of the disadvantages, it’s the same thing that I have is, I’m myopic. I’m looking at your pension plan only. I don’t have to do your budget, and so that’s an advantage for me, because I can talk about the pension plan. It’s a disadvantage for you, because that’s not your job. You can’t just think of the pension plan. But I think it’s reasonable to think of where things are going to go and be conservative about that. So, slide ten shows the, where we think the discount rate will go over time, and what you really see is a solid green line there. What we did was we did a stochastic analysis. The green line represents what we think of as the 50percent confidence line. Half of our projections for where the discount rate is going to go are above that green line, half of them are below. If investment return is better than expected, they will get to 6percent sooner. If investment return is worse than expected, they will get to 6percent later. And so, this kind of represents that stream with the circles representing the 5th and the 95th percentile, meaning 5 percent of our trials were outside of the upper and lower end of that range. The squares represent the 25th and 75th percentile, and you’ll see those 25th and 75th percentiles a little bit later, when we project your contribution rates. So, we’re projecting the 7 on average to get to 6 in a little over 20 years. Let’s look at your demographics, so Slides 11 and 12 look at your miscellaneous plan. Back in ’96 you had 781 active employees, 821 in 2016. A modest increase, but 402 folks receiving a benefit in ’96 and 1,061 receiving a benefit. These are your non-sworn safety members, so miscellaneous members. Graphically, Slide 12 just really shows that. Yes. Council Member Tanaka: So, did you get, I guess from Lalo or from the City, all the data, all the employees, all the wages? FINAL TRANSCRIPT MINUTES Page 21 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Mr. Bartel: No, what we’re doing is pulling all of this historical information out of the CalPERS valuation reports. So, this does not have, we did not replicate the CalPERS valuation to come up with this. We’re pulling the numbers out of the CalPERS reports. Council Member Tanaka: I see. Chair Filseth: CalPERS had the data. Mr. Bartel: CalPERS had the data. We do not. That’s right. Now, you can get that data, but I don’t think you can get the current information. Council Member Tanaka: No, we could have if, I mean, both professors talked about getting this data to actually make the calculation, and we talked about it at the last Finance Committee meeting, getting them that data. So, I was just wondering if you got it already or not? Mr. Bartel: No. Mr. Keene: CalPERS has to get their data from you. (inaudible) Mr. Bartel: Yeah. So, the data the CalPERS has is what I’ll refer to as massaged data. They take the raw data and try to fix any errors. The June 30 ’16 information, you could get that from CalPERS. June 30 ’17, I don’t think CalPERS has that data ready to go yet. The City might have it. The City might not, though, have information on retirees. So, that’s the challenge you’re going to have in getting the data. Mr. Perez: That’s correct. Council Member Fine: One question. This is kind of for Staff a bit more. One of the challenges we’ve had here is kind of weaving a narrative about what this means for our public and our community, and I’m just looking at the graph and I’m wondering if at any point, like in or around 2009, was it reported to our community that, hey, suddenly we’ve got more folks receiving payments than actives? Is that kind of stuff reported to us? Mr. Keene: Yes and no. I mean it’s like how we reported it, but we certainly began – first of all, I mean, Lalo and I really did community-tour talking about the City’s financials with neighborhood groups and others all together, FINAL TRANSCRIPT MINUTES Page 22 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 and we began to talk about, I would say almost that we have a shadow organization we’re carrying through time with us. That’s how we described it. Council Member Fine: I guess this is just the kind of graph that I think is helpful to our community, so just a comment there. Mr. Bartel: For me, anybody can look at this graph and see the demographic information. The challenge with this graph, though, just so you know, is it does not talk about liability for your retirees. Not all of your retirees are career employees, and so you might have folks who only worked here for two or three years in that retiree count, and some who worked here for 35 years in that retiree count. And those two folks have very different liabilities. So, this is counts only and when we talk about the liability for retirees, we’re not talking about counts, we’re talking about actual liability for people, active employees compared to retirees. And then slides 13 and 14 looks at your safety plan. Your safety plan is remarkable in a couple of ways. Number one, the number of active employees decreased a bit, from 205 to 174. Your number of retirees went up appreciably from 241 to 417. Now, one of the reasons why your safety plan is remarkable is because you had more retirees back in ’96 than you did active employees. It’s not unheard of, but we don’t have a lot of clients who have that, and when you look at that same graph on slide 14, you know, the blue line just kind of keeps going up. Blue line, excuse me, the blue bars. That dark red bar is relatively flat over that same period of time. So, for me, for the actuary, I like those earlier graphs. I like those, but what I want to know is, how big are the benefits? What’s the order of magnitude of what you owe to retirees and what you owe to active employees, and what is really your unfunded liability? So, let’s talk first, we use the acronym here, AAL. AAL is the actuarial accrued liability. That’s, the best way to think of that is the value of benefits due to service that’s already been rendered. Yeah, it’s what you owe today. I wouldn’t put any caveat on that. It’s not, if you terminate the plan, it’s what do you owe for service that’s already been rendered. It does not include service that is expected to be rendered or services to be rendered in the future. So, I think of this number as, it’s a deferred compensation number. Chair Filseth: So, if you look at the giant stack of paper, you see a net accrued liability and an entry age normal liability, and that one looks to me like the entry age normal liability. Mr. Bartel: It is. FINAL TRANSCRIPT MINUTES Page 23 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Chair Filseth: What’s the difference? Mr. Bartel: It depends upon how the net accrued liability number is calculated. The entry age normal number anticipates future pay increases. The, what some people refer to as the prior service piece or the accrued liability, would not take into account future pay increases. So, if you go to, an example, somebody making $100,000 a year today, 20 years of prior service, that person is expected to retire in another five years, just for sake of argument, the entry age number presumes that that person is going to get pay increases over the next five years and is factored into that number. Council Member Fine: So, this includes pay increases for our today’s… Mr. Bartel: Yes, that’s right. It would include anticipated cost of living adjustments for retirees, so retirees are expected to get a 2 percent COLA, the numbers you see there would anticipate future 2 percent COLA’s. The traditional kind of depends upon which accrued liability number you’re talking about. The typical private sector accounting number would include cost-of-living increases. It would not include future pay increases. I’m being a little simplistic, but that’s the way, that’s the primary difference between the two. So, if you just kind of stop for a second, that active number, if you had Joe Schmoe who had worked here for 20 years, and that person leaves today, just literally walks away, how much do you owe that person ignoring, you would not owe them future salary increases, unless they went to go work in another California public agency. So, somebody who terminates and goes and works for a private sector company, you gain because their liability would be lower than the number that’s here. Council Member Fine: Would this be the same number to buy ourselves out of CalPERS today? Mr. Bartel: No. The buy yourself out of CalPERS number, yeah, buy yourself out of CalPERS number would be different, and I don’t necessarily agree with what CalPERS is doing, but I can explain to you why it’s different. If you walk away from CalPERS, they’re going to take your assets, your $469 million, and they will immediately invest that money differently. I say immediately, they will invest it like an insurance company would invest it. Generally speaking, shorter duration, high quality investments. A little longer duration than City investments, but it’s going to be invested in things that they would not expect to earn that higher return. And the reason is that if you walk away, and you said, don’t want to look over my shoulder, I don’t FINAL TRANSCRIPT MINUTES Page 24 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 want to ever talk with you again, that by and large means they can’t come after you for more money. So, what they will do is the same thing an insurance company would do, if you went to buy an annuity with them, is the insurance companies are not generally speaking high-risk corporations. They’re low risk and that means they invest the money conservatively and they give you a conservative number, because they don’t want to be wrong. CalPERS, if CalPERS is wrong, they don’t have any place else to get the money from. Mr. Perez: Let me give you the numbers, just so you have an order of magnitude, for exiting the plan. It’s in the actuary report, so these are numbers CalPERS provided. For miscellaneous it would be about $682 million. Mr. Bartel: Unfunded liability, right? Mr. Perez: Unfunded liability, yes. The unfunded liability contribution that we would have to make on top of the assets we already have there. For safety, $389 million, so about a $billion 70. Sorry, $682 is miscellaneous, $389 (crosstalk) right, it’s a $billion 70. So, let me (crosstalk). Yeah, that’s at 3percent, but let me give you what their actual pool is earning and how their funded. So, this is terminated agencies only, so there’s a pool for them (crosstalk). So, they have as of June 30, 2016 a 2.44 discount rate, 2.44. And the funding status is 213 percent for that pool. Council Member Tanaka: So, what would this look like, so we talked about different discount rate scenarios. There’s like the 7.5, there’s 7, 6, 4 percent. How do these numbers look with these different discount rates? Mr. Bartel: So, we don’t specifically have those numbers. We have the contribution rates on those. We have, in your report there is information about it. What I would like to do is take that same question, file it with your question and hold it until we get to the discount rate. And the reason I want to do that is because I’m going to say this again, not all discount rates are created equal, and so if you tell me no, I want to talk about that now, I’m happy to talk about it now. I’m just going to – my request is that we wait to talk about it. Keep going? Okay. So, for your miscellaneous plan $469 roughly million dollars, unfunded liability $262. Of that $730,265,000 for active employees, that’s the portion that anticipates future pay increases. The retiree liability of that $730 million, $418 million is for people who are retired or beneficiaries. These are people receiving benefits. You also have a FINAL TRANSCRIPT MINUTES Page 25 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 category of members, people who used to work at the City, they are no longer working at the City anymore, but they have not yet retired. Their liability, a smaller portion, somewhere in the neighborhood of 6, 7 percent of the total number, $47 million. Your safety plan, Slide 16, total liability $393 million, market value of assets $255 million, unfunded liability $143 million, active liability $96 million. So, let me just kind of say this again. You’ve got an unfunded liability for safety of $143 million. Your active liability is less than that. What that really means for your safety plan, if you used assets to take care of your retiree liability, which is what you might think of doing, you don’t have enough assets to cover the liability for your current retirees, and you would have no money set aside for current active employees. So, that’s a funk, that really is a direct impact of the volatility of the investments in 2008, 2009, followed by the fact that you really didn’t pay that investment loss off as quickly as arguably you should have. Council Member Tanaka: So, in other words, you’re saying that, like for safety, that if you take the $249 and divide it by 392, that essentially, we have about 63 percent funded? Mr. Bartel: Yeah, that’s about right. We have a slide that says that. That’s exactly right, and we’re not expecting that percentage to jump up any time soon. Council Member Tanaka: Well, no, it would go the other way, right? Mr. Bartel: For the next few years we think it’s going to go the other way. We do think, as CalPERS’ contribution policy kicks in, we have an expectation that it will gradually move up, but it will take a while, with some graphs that show that, where we think it’s going to be. Council Member Fine: Just in layman’s terms, is that the kind of metric that we should be looking to push on, if we wanted to “solve this problem” for our City. Should we be looking to increase our asset value against that? Mr. Bartel: People differ on the answer to that question. I’m going to give you my answer. My answer is, I think unfunded liability is important to pay attention to. Historically I have thought it was more important than I think it is today, and the reason is, historically your contribution would not have paid your unfunded liability off. CalPERS is moving in the direction where I believe you will pay your unfunded liability off. So, I think what you ought to be thinking hard about is not the unfunded liability. It’s where your FINAL TRANSCRIPT MINUTES Page 26 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 contribution rate is going to go and what is the volatility associated with those. Because that’s where everything hits your budget. I’ve changed, since CalPERS changed their contribution policy, I now feel I really think it’s more important to look at where the contribution rates are going to go and what does that do to your budget. With some, I’ll say this again, with some modest level of conservatism in those projections. Council Member Holman: You have told us this before, but how does CalPERS return compare to, I’ll call it private market investment returns? Mr. Bartel: Yeah. I’m going to give you my best recollection as to the answer of that, and I know we can go back and figure this, give you a better answer, but because I’m not an investment guy, I don’t keep that stuff in what little room I have in my brain. I think historically they have been, it kind of depends on who you compare them to. If you compare them to other public-sector retirement systems, my sense is they are very slightly on average below the median. I don’t think they’re a lot below. There might be some years where they were below and some above, but generally speaking, I think of them as being slightly below median. I don’t know that I have a great explanation for that. For example, June 30 ’17 investment return 11.2. Other systems, I think, generally earned a little bit more than that 11.2. Council Member Holman: And there are risk tolerances associated with this, but what about just an asset management as opposed to a retiree or retirement fund management. Mr. Bartel: My sense is, if you looked at all of this net of expenses, my sense is you would get the same answer relative to CalPERS. If you took a, if you looked at a mutual fund with a similar mix of investments, I have this expectation that CalPERS would be a little bit above that. I don’t think they’d be a lot above it thought, by any stretch of the imagination. And I’m saying that just kind of off the top of my head. I never ever looked at that, so I don’t know the answer to that for sure. Okay. So, the big deal for your safety plan is, $286 million liability for current people in payment status. Slides 17 and 18 look at that funded ratio for your miscellaneous plan. I think this, for me this graph and the next graph inform a lot about what has happened at CalPERS. When you look at your funded ratio in your miscellaneous plan, credibly well-funded in the late 90’s. In the late 90’s there was a strong push for benefit improvements to use some of those excess assets. Three things arguably that could have happened in the late 90’s. Thing number one is, you use some of those excess assets to improve FINAL TRANSCRIPT MINUTES Page 27 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 benefits. Thing number two is, you do nothing. Thing number three is you make the investments more conservative because you’re seeing a retiree population that is becoming larger and larger. In wisdom around the State, option number one was chosen. I know there were people who talked to the CalPERS Board about doing something other than option one. Unfortunately, those voices were not particularly loud. But you’d look at those funded ratios, the significant drop to 2003. Dot com bubble hit that plus benefit improvements. You see kind of a leveling off. You get to the point in 2007, modest increases, you’re right at about 100 percent funded, 99 percent in 2007, and then two years later, in 2009 you were 58 percent funded. The thing that is crazy to me that I think pushes back on CalPERS contribution policy is the fact that even though investment return has really been very good since 2009, the funded ratio really is not any better, and we’re really expecting it to be kind of flat. Slide 18 is the exact same graph, it just looks a little bit differently. The red bars are your liability bars, the green bars are your asset bars, and when you look at your unfunded liability, that’s the difference between the red and green bars it really is bigger. Today we’re expecting it to be bigger, we’re projecting it out to June 30 ’18, so the June 30 ’16 numbers are from the CalPERS report. The ’17 and ’18 numbers are projections of ours. We’re not seeing really a reduction in the unfunded liability. Again, that’s despite some pretty good investment returns during that period of time, all because of the contribution policy. Slides 19 and 20, the exact same graphs, but for your safety plan. If it wasn’t for the Y access on the left-hand side, it really looks very, very similar to the miscellaneous plan. High-funded ratios in the late 90’s, significant drop in 2003, not as far, to 80percent, and then you go to peak back up at 100 to 104 in 2007, and then the drop down to 61 in 2009. Again, we’re projecting 63 at June 30 ’18. Same graph, Slide 20, red bars the liability, green bars the asset bars. Again, the difference between the asset and the liability bars, we’re not expecting that to come down any time soon. The one comment that I will give you is, one of the challenges with maturity in the CalPERS system, this is particularly true for your safety plan, not so much for miscellaneous, is historically the contributions going in have always exceeded the benefit payments, so they had cash to go ahead and make those benefit payments. When they have a particularly bad investment return year, they don’t have enough cash to make the benefit payments, so they run the risk of having to sell assets in a particularly bad investment year, so if you’re selling assets in a plan, if you have to do that a couple years in a row, that can have an impact on your, you’re typically selling investments that have done well rather than poorly, and so it can be a problem on the system. So, there is a strong argument that in addition to doing the right thing by changing the contribution policy, there is a strong argument that they’re doing that to FINAL TRANSCRIPT MINUTES Page 28 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 infuse cash to mitigate the difference between benefit payments and contributions coming in. Chair Filseth: And that chart, that chart is each year by itself, because we did not have zero unfunded liability in 2007. Mr. Bartel: Well, your safety plan had an excess of assets over liability of $10 million, so I don’t know… Chair Filseth: Not the numbers I got. Mr. Bartel: So, we need to be careful whether we’re talking about fiscal year. These are not City fiscal year numbers. These are CalPERS valuation year numbers. So, I don’t know what you’re looking at. I can tell you your CalPERS report has that information. Let me also tell you, these are market value of asset numbers, and back in 2007 what you were reporting is probably different than market value numbers. They also would not be, 2007 would not be market, would not be, the 2007 numbers here are not City 2007 fiscal year numbers. Chair Filseth: My numbers come from the City’s 2009-10 comprehensive annual financial report, so if mine aren’t right then we’re going to jail. Mr. Perez: We’ll loop back with you. Mr. Bartel: You might be looking at actuarial versus market. Mr. Perez: Yeah, that’s correct. That’s one of the issues with Stockton. There were two numbers, the market and an actuarial number, and they were tremendously different. The market was much higher. And so, when Stockton said we have an X dollar problem, it was really a Y dollar problem. And so, that’s what we would have to look to see what we were reporting at that point. And since then it’s been cleared up. They got rid of the market. Mr. Bartel: That’s right. Really beginning in 2013 is when they stopped using the actuarial value. So, ’21 and ’22 look at your City contribution, the history of your City contribution rates. ’21 is miscellaneous. These do not include member rates. They don’t include any pickup that you might have. These are really the employer rates straight out of the report. ’22 is the safety historical, I’m sorry. FINAL TRANSCRIPT MINUTES Page 29 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Mr. Perez: No, you’re fine. I just wanted to add a point here that while we did improve the pension benefits at that point for safety, when we received the actuary reports and basically said, no contribution required, we charged ourselves the rate from a couple of years before that and accumulated about $23 million during that time, and we set that aside to pay for retiree medical liabilities that we were seeing building. So, in March of 2008 we opened, remember the Section 115 Trust we did for pension? We did it for retiree medical in March of 2008, and we, our initial deposit was $32.8 million. So, yesterday it’s now $100 million that we accumulated in assets as a result of that. So, it was me. I can’t take credit for it. My predecessor was the one that saw this and made this recommendation to the City Manager and the City Council, so that was, I think, a wise move to not use those funds. And then John, help me out here because my recollection is that now with PEPRA, if you get into a fully-funded position, you will still be required to make the normal contribution? Mr. Bartel: Yeah, that’s absolutely right. So that normal cost, that value again, I think it’s really good to think of the normal cost as sort of a current year compensation. It’s a deferred compensation, and so the light green line with the triangles represents that as a percentage of pay for safety. Again, it doesn’t include the member 9percent of pay, but you see in several years there, the CalPERS requested contribution was below that number. PEPRA will not allow, if that happens again, and I think it will someday, you will not be able to contribute to CalPERS less than that light green line, the normal cost rate. And less of a big deal for safety, a pretty big deal for miscellaneous because of, you know, you had seven years where your contribution was below the normal cost rate. So, Slide 23, there’s a fair amount of information on Slide 23. I really kind of want to point out a couple of things here. We are projecting anticipated investment return and we are using what CalPERS outside investment advisors are saying investment return will be, we’re using 6½ percent over the next decade assumed investment return, and we are assuming a higher return beyond that ten- year period, again because that’s what the investment advisors are saying. We are taking into account volatility of assets, so you’ll see contribution with some volatility. We’re also taking into account that you will be hiring folks into classic employees into the 2 @ 60 miscellaneous and for 3 @ 55 for fire and police. We are not factoring in any employer-paid member contributions. I don’t believe you all have that anymore. In addition, we are assuming about 30 percent of your 2013 new hires will be classic tier two for miscellaneous and safety and about 70 percent will be new members and it assumes the classic members will decrease over the next 10 years to 0, excuse me, 20 years for miscellaneous, 10 years for safety. We also, for FINAL TRANSCRIPT MINUTES Page 30 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 purposes of these projections, we understand you’re in the middle of negotiations, but we’re assuming just for projection purposes, that your miscellaneous employees will be at a 1 percent additional cost sharing by December 1, and safety will be at 3 percent by June 30 or effective immediately if you will. So, this is our projection of the rates without employee cost-sharing, so your current ‘17/‘18 fiscal year, you’re at about 30 percent of pay. We think that’s going to cap out at a 50 percent confidence level at about 43 percent. The 25 percent confidence level would be about 47 percent and the 75 percent confidence level, 75 means if investment return is particularly good, 25 is particularly bad, and we expect that 43 to come down modestly, but you still will, we have an expectation that you’ll be paying substantially more than what you’re currently paying. The long-term projection, again without cost-sharing, we expect you to kind of get up to that 42 percent and then sort of fits and spurts, come down. So, long term we are projecting a relatively good news, unless investment return is particularly bad, that’s the hollow squares. Particularly bad, by and large means long-term returns of low single digit, particularly good investment returns are long-term returns of low double digit. So, your hollow squares are the, sort of the bad news, the solid squares the good news. And then when we break down that 50 percent confidence level number, your normal cost rate, sort of that value of benefits being earned during the year, it’s going to sit, we think, right around 10 percent of pay. And the reason your contribution rate is going up is the red line, that’s the payment on the unfunded liability going from 20 percent of pay to 32 percent of pay, and then gradually coming down, with the green line being the total number. Slide 29 is the same as slide 28, except, excuse me, 27, except we’ve inserted the assumption for 1percent employee cost sharing. Normal cost is the same. Unfunded liability payment is the same, but the total payment 1 percent lower. Slide 30 shows the exact same information as 29, except we are showing it as thousands of dollars. So, for example, in the ‘17/‘18 year, we’re expecting you to pay about $23 million for miscellaneous. Of that, a little less than $16 million goes to pay off the unfunded and $7.9 million goes to the normal cost with cost sharing of about $619,000, and projected that $22, $23 million is expected to grow to be about $40.5 million out in ‘28/‘29 fiscal year. Okay. And then, safety again without cost sharing, slide 31, you’re at slightly below 50 percent of pay. Total employer rate not including cost sharing, increasing over the next decade or so to 77 percent of pay with that volatility being between 90 and 65 percent of pay, depending upon investment return volatility. Again, I didn’t say this on the miscellaneous slide, I really think this slide and the miscellaneous slide are kind of the good news, because what it really does is, it says long term the contribution policy gets you to the point where you are paying your FINAL TRANSCRIPT MINUTES Page 31 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 unfunded liability, will take a much longer period of time, and you will have more contribution volatility with your safety plan, but I think in the long run, you’re getting to the point where you really will have your unfunded liability paid off. So, for me the issue, I think this is true for miscellaneous as well as safety, is when you look at where these numbers are going to go, particularly with cost sharing, the question is, from a budget standpoint, how do you factor those in without having an impact on services to taxpayers. And 35 is the contribution rate, net of cost sharing. Thirty-six is the dollar rate net of cost sharing. So, cost sharing sitting right about $700,000 increasing to about $900,000 normal cost rate unfunded liability, so again, the reason your contribution is going is because you will be paying that unfunded liability off. So, that red line is really what’s driving your contribution rate up. Slide 37 is where we are projecting your discount, excuse me, your funded ratio to go. These, again, take into account the same investment return projections. We’re not expecting your safety plan to be 70 percent funded absent great investment return for several years. There’s a potential that it could be mid-50’s depending upon the investment return, but regardless, even with poor investment return, we’re expecting your funded ratios to grow. Again, a little more volatility on your safety plan. We’re expecting, we’re not expecting you to get to 70 percent for safety for a decade. If CalPERS gets those expected roughly 6½ percent returns during that period of time, we think the odds are excellent it’s going to be a very slow progress towards improving the funded ratio. Slide 39 really just looks at your current normal cost rate for each of your benefit tiers; 39 is miscellaneous. Tier 1, the total normal cost rate is 19.4 percent. That number right there, if employees pay the additional 1, they’ll be paying 8 plus the 1, 9 percent. I sort of think of the normal cost rate at 50percent of that number as sort of a target number. PEPRA kind of talks about that. 50percent of the total normal cost is 9.7. If you’re at 9, you’re within shouting distance of that 9.7 for Tier 1, and at Tier 2 you’re going to be at 7 percent plus the 1, 8, and your total normal cost will be 15.1, 50 percent target would be 7.6. PEPRA at 7¼ will be above the 50 percent target rate. Chair Filseth: I thought on PEPRA we’re splitting the normal cost 50/50. Is that not correct? Mr. Perez: We are, and I guess the question you’re having, Chair, is because you see 4.92 versus 6.25. Mr. Bartel: Yeah, so what happens is, you are splitting it, but you only adjust the rate when there’s a big enough chance in the rate to adjust it down. So, we would not, so there was not a big enough, it has to change by more than FINAL TRANSCRIPT MINUTES Page 32 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 50 basis points to bring it down, so it did not. So, let me say this again. PEPRA, we’re factoring in here that PEPRA employees would pay 6¼ without the 1 percent cost sharing. Without the 1 percent cost sharing, the 4.92 would be 5.92. Chair Filseth: Okay. So, it’s 5.92 versus 6.25? Mr. Bartel: That’s right. Mr. Perez: And also keep in mind that the PEPRA rules cap the pensionable limit for PEPRA. (crosstalk) The social security number. Mr. Bartel: Less than 143 I think, for miscellaneous, but maybe 143 for safety, yeah. And then similarly for safety, Tier 1 folks would be paying the 9 plus the 3, 50 percent of the total normal cost would be 15.3. Tier two, the 3 at 55. The classic tier two folks would, again, be paying 12, 50percent of the normal cost would be 13.3. PEPRA folks 10.75. If you compare that to the, that’s roughly 50percent of the total rate, but we’re assuming that the cost sharing would apply to PEPRA employees as well. Okay? So, now the discount rate. So, let’s talk first about CalPERS 7 3/8 discount rate. The discount rate is really made up of two returns; anticipated inflation, in CalPERS that is 2¾, and a real rate of return above inflation. So, at CalPERS that’s 4.625 percent. You add those two together. You get to the 7.375. So, if you go to the Wilshire study, they came up with a projected return over the next decade. What they said was, inflation roughly 2 percent and the real rate of return 4.2 percent. So, their inflation is lower. If you think about inflation, that has an impact on salary increases, so lower expected benefits plus cost of living adjustment. And the real rate of return is really the big driver, so when we think about going from 7 3/8 down to 6.2, the big difference, the thing that will drive the liability is not just the reduction to 6.2, it’s that reduction in the real rate of return from 4.6 down to 4.2. And the other thing that I will say is, CalPERS is dropping that 7 3/8 down to 7. We don’t know for sure they will keep the inflation at 2¾. My expectation is they will. If they do, then the real rate of return will be very close to that 4.2 percent real rate of return. If we go to what people normally think of a long- term assumption of 6, if we were to keep the inflation where it is, then the real rate of return would not be 4.6, it would be 3.25. And so, if you look to me, you would hear me say, I think 6, keeping inflation at 2¾, dropping the real rate of return is more conservative than I would encourage you to be. It would not be what I would recommend. I think there is a pretty strong argument that the real rate of return of 4.2 is a good long-term assumption. FINAL TRANSCRIPT MINUTES Page 33 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 If you wanted to be a little conservative, maybe you would pick something lower, but I actually think using something like that 6.2 is a plenty conservative enough assumption. Chair Filseth: Why do we care what the split is between inflation and the real rate of return? Does it affect COLA adjustments? Mr. Bartel: It’s salary increases. It’s kind of everything. What happens is, when you’re projecting out what the benefits are going to be, it’s not just what the investments will earn, it’s that real rate of return above inflation that has the impact on the liability piece. It doesn’t have an impact on the assets, because if the asset is going to grow at 6, it’s going to grow at 6. The issue is, what will the liability do if the asset grows at 6 and inflation is 10, you get a different environment than if the assets grow at 6 and inflation is zero. And so, zero might mean much, much lower, the lower inflation is, the much lower pay increases will be. Council Member Tanaka: So, you’re basically recommending 6.2, right? Mr. Bartel: Well, you would hear me, I think that’s not exactly what I said. I think what I said was, the 6.2 would be at the upper end of conservative. If you said, we want to use 6.2, I don’t think I would disagree with you. But I might pick something that was closer to the 7 3/8 or dropping down to 7. But I don’t think you would get a very different number if you went directly to 7. I don’t think it would be substantially different if you were at 6¾ or 7 versus the long term 6.2. Michelle Flaherty, Deputy City Manager: John, could you spend just one more moment on inflation and rate of return. I think that really bears a moment of the Committee’s attention. Thank you. Mr. Bartel: I don’t remember the years. I’ll start off with, if you go back many years ago, I’m sure there are people sitting in this room who remember the years of double digit inflation, right? So, if you had a retirement system that was earning 12 or (crosstalk) the odds are I could guess as to who remembers those. If you had a 10 percent inflation rate, and your system was earning 13 percent, you’re earning 3 percent above inflation. If inflation is 2 and you’re earning 13, you’re earning 11 over inflation. So, I sort of think of earning inflation is treading water. Earning above inflation is how much are you getting ahead of the impact of inflation. And so, this example here, on 41, is meant to kind of say all discount rates FINAL TRANSCRIPT MINUTES Page 34 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 are not the same. Salary increases are different if you are in a high inflationary environment than if you’re in a low inflationary environment. There is a strong argument that we have an expectation that the inflation environment is going to be low in the foreseeable future. So, when you look at that middle column, that’s really what the Wilshire associate said. What they said was, we think investments are going to go up with inflation, but we think above inflation it’s going to be a little bit above 4 percentage points. So, if you look at the 7 3/8, that’s really, what CalPERS is saying is that investments are going to go up with inflation, but you’re also going to get a real rate of return of about 4.6. So, Wilshire was saying, we think inflation is going to be lower. We think the real rate of return above inflation is going to be lower. And when actuaries plug those two into their valuations, the real rate of return reduction has a bigger impact than the inflation. So, dropping from 7 3/8 to 6.2 would be different, you would get a different number, a different contribution requirement. If the real rate of return remained at 4.6 and the inflation were lower than 2, then it would be, if the real rate of return dropped below, dropped to 4 and the inflation was at 2. Council Member Tanaka: We get it. Mr. Bartel: Okay. So, what we’ve done here on Slide 42 is to look at your short-term contribution impact of going to 6.2 with that lower inflation. What we’re really saying is, your current rate for miscellaneous and safety for ‘18/’19 fiscal year, I say your next fiscal year, about 32.6percent and 55.6. If you go to 6.2 that would jump up to 35.4 and 60.3. We did not say this on the slide. I’m sorry, we should have said this on the slide. We are keeping all other assumptions the same. So, that projection of where we think investment return is going to be, it’s the same in all these scenarios. We’re keeping the five-year phase in the same under all scenarios. So, you don’t see the contribution spike up right away, because it’s really being phased in over, the unfunded liability piece is being phased in. And if you went immediately to 6, keeping inflation where it was and dropping the real rate of return, the increase is about double. So, you go from 32.6 to 38.4, a little less than the 6percent increase, a little less than a 3percent increase if you go to the 6.2. You might have an expectation that those would be close to each other, but they’re not because of the inflation difference. And then, what we did on slide 43 is to project out where the rates would go. So, what’s going on here, there’s really a couple of things that are inherent in these projections. So, the green line is the same green line, sorry, this is a little bit more pea soup green, rather than the bright green from the other ones, but they’re the same green. The blue line is that 6.2. What’s going on there is, there’s a tendency for the rate to come down, but we have capped FINAL TRANSCRIPT MINUTES Page 35 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 that 6½ percent expected return over the next decade, so we’re determining the liabilities using the 6.2, but we’re using the same scenarios of investment return to get to that blue line, if you will. So, really what you see is a ramp up, a steeper ramp up, and then eventually you see the line coming down a little bit, because we’re expecting you to earn a little bit higher than the 6percent return. And, eventually you get more money in the trust, so the contributions kind of merge to each other in a little more than a decade. Council Member Fine: And so, this is where you were speaking earlier about how we’re not able to look at the pension issue in isolation, because we’re weighing it against other budget priorities. Mr. Bartel: That’s right. And then, 44 is the dollar amounts. So, 43 was the contribution rate for miscellaneous, 44 the dollar amounts. And then 45 and 46, the same information for safety, contribution rates and dollar amounts. Okay to go on? Chair Filseth: Please. Mr. Bartel: Okay. What we also have is some information that the Finance Committee has requested in the past, and that is, how do your numbers compare with other agencies. So, we have, oh, somewhere in the neighborhood of 15 other agencies with a variety of comparative information. So, Slide 47 is, how does your unfunded actuarial accrued liability compare as a percentage of payroll. For your miscellaneous plan, you all are the green lines. Safety, on Slide 48, again unfunded liability as a percentage of payroll. Ratio of the actuarial accrued liability to payroll, so the first one was the unfunded, the next one is the actuarial liability relative to payroll. Again, you all are the green lines, normal cost rate. This is a blended normal cost rate for you and for everybody else here. And for safety, there’s really not much variance in the normal cost rate. Total employer rate, again for miscellaneous and safety. Chair Filseth: So, we’re in the mix is what you’re saying? Mr. Bartel: Yeah, that’s right. You guys are still awake? Chair Filseth: We are, absolutely. FINAL TRANSCRIPT MINUTES Page 36 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Mr. Bartel: Excellent. Chair Filseth: Questions? Council Member Tanaka: Yeah. I just wanted to see if, and I don’t know, Jeremy, if you have any perspective on what has been presented so far or any advice, given what you’ve seen. Dr. Bulow: Well, you know, my approach is different, and I think simpler. I would calculate the value of our liabilities in the way I said, which is, say you know, what if people stop, the same way we do for defined contribution plan. We would say, what if everybody stopped working today, what would, we would look at the spreadsheet, figure out what we owe them. Because, we have the same kind of, we think we’re going to pay those liabilities the same, we think they are equal quality, perhaps even better than what the insurance company would provide to its annuitants. We should discount them at that rate. We have assets in the plan that partially offset the difference between the assets and the liabilities is kind of, is basically, you know, what our debt is. In terms of thinking about future contributions or how we want to manage things going forward, Palo Alto, but really you guys, my inclination would be to say, these ten-year predications of the stock market, I mean, you know, not terribly useful. We do have information from CalPERS that tells us what they’re going to require the City to contribute more or less, the next couple of years, and we can take that information, we can look at the debt that we’re in in terms of our pension plan and the City Council can make a decision, whether it wants to put aside extra money in those Section 115 plan to try to whittle down some of that deficit. And then, rather than anticipating, oh, you know, we think the stock market is going earn 6 percent or 7 percent or 2 percent or 4 percent or whatever, you know, we’ll see the next year what it’s done and just like, you know, all of us do on our own finances, and if it’s a good return, then our debt is going to be down and we’re going to be happy and we may decide we want to continue to whittle away at it by putting more money into the 115, or we might say, this year we need to put in less because we’ve got some pressing other issues. But that’s kind of the way I’d approach it. Figure out how much of a debt we have, and then think about it each year, well, you know, can we put something aside to try to reduce that so that in the long run we’ll be in a position where we can pay everybody off. Chai Filseth: Just from procedural perspective, you know, I think there’s a staff report that’s going, and the staff report actually has some thoughts on FINAL TRANSCRIPT MINUTES Page 37 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 that, right, I think? But, how do you want to do this. Do you want to finish with John and then move on the staff and let John go, or should we move directly to the staff presentation and do it all together? Mr. Perez: Well, I think we should let Kiely do the next slides and the presentation, and then recap what you requested and see where we’re at, see what we still need to provide you. And then, decide the next steps from there. Chair Filseth: Everybody okay with that? Let’s do that. Oh, I should say that you’ve talked strictly about pension, right, not OPEB, right? Do we use John with OPEB? Mr. Perez: Yes. And so, status on that, it’s not on the agenda, but I’ll give you a quick status, if you want us to come back and put it on the agenda, we can. We’re compiling the data. We’re required every two years to run this actuary report, unlike pension. So, once we get that data compiled and cleaned up and massaged, then we send it to John. We’re trying to shoot for March, because we want to use those numbers for the proposed ’19 budget. Chair Filseth: Right, okay. Thank you. Mr. Perez: You have that presentation At Places, by the way. Kiely Nose, Budget Manager: Yes. So, this will be rather brief, but this is just us trying to kind of recap from our last conversation where you left us, so we can pick up the conversation, obviously, this month. So, in September you guys left us with about six “to do” items. The ones in bold are in progress or we’ve actually reported back out to you guys on them. The first one we are still working on internally, because it is quite the undertaking to try to simplify the language associated with this, the City pensions and all the calculations as an actuary. I’ll go through number two shortly. Number three is something that we continue to discuss at this meeting, as well as potentially, if you guys want to give further direction on that, right. We’ve engaged with the SIHER Institute at Stanford, we’ve engaged with Bartel, we’ve had some public comment today as well. So, it depends on if we want to formalize anything in the future. Four and five I’ll get into shortly, again, in the further slides. And six, six is that tabular kind of format that we wanted to talk about by bargaining unit and by kind of compensation levels, but what’s really important in that is for us to nail down, hopefully tonight, a couple scenarios, so that we can actually model those for you. I’m not sure FINAL TRANSCRIPT MINUTES Page 38 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 how, when we went to do a tabular format, we can give you what current costs are, but do you want to assume a 6 percent discount rate, do you want to assume a change in your amortization period? So, what are the assumptions that we want behind that tabular format for you guys, and then we can come forward to show you guys what is it actually, materialize in terms of numbers for you. Council Member Tanaka: Can we also talk about releasing some of the data to some of the Stanford professors to allow them to do some of the analysis? Ms. Nose: That’s definitely something the Committee can take under advisement and make a vote (crosstalk) on what you guys would like. So, the list was just to continue to review and discuss how best to utilize the experts in the area. There wasn’t necessarily specific direction on exactly what we were going to do. It was more of an open-ended question that we have a lot of resources, and how best can we use them to help us address this issue. Mr. Perez: And if you don’t mind, I really think you guys need to give us a Motion and directive on stuff like this, because these are… Chair Filseth: I remember there was some discussion of sort of exactly what data and you know. Mr. Perez: Yeah, so that will be very helpful to us. Ms. Nose: Okay, so one of the items was to kind of look at, what would our total compensation look like if we added on or assumed a 6 percent discount rate. So, these are really some high-level numbers, but the moral of the story here is, if you went from that 7.375 to 6, it’s about an additional 5 or 6 percent of total compensation. So, you can kind of see the matrix of it for both plans. We just aggregated an average salary for miscellaneous and average salary for safety, and basically everything under the green bar is what is in your budget today, in terms of the assumptions we used to develop our (inaudible) just at the very top. Where you start seeing the red text, sorry, greenish/white, and the red text and the red increments, numbers, are what’s not assumed in our budget or our planning today. So, that’s kind of the differentiating factor. Black, you already have in our budget assumptions, red would be on top of what we’re currently carrying, okay. So, to kind of articulate, and this is a very crude example, but what we did is we said, okay, in FY’18 our adopted budget, we had about $210 FINAL TRANSCRIPT MINUTES Page 39 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 million worth of expenses. We drained about $3.4 million from the budget stabilization reserve while maintaining the Council 18.5 percent. So, we just did some ballpark estimates of, what would our annual contribution be if we had a 6 percent discount rate. Now, when we talked to CalPERS, they gave us a five-year phase in, so know that this is the first year of that five-year phase in. Chair Filseth: I wanted to ask, sorry, go ahead. Ms. Nose: Sure. And it’s just how CalPERS calculates the numbers basically. So, I took that number and just plopped the difference on top of the ’18 budget. So, we’re (not understood) a little bit here, because CalPERS is doing a ’19 estimate based on these valuation reports, but, you know, if we wanted a rough gauge of what we would have been trying to balance against in last year’s budget, it would have been an additional $5.4 million in the general fund. Chair Filseth: So, I wanted to understand that. So, is that assuming, the $5.4 million, is that assuming 6percent or is that assuming one-fifth of the way to 6percent? Ms. Nose: One-fifth of the way to 6 percent. Chair Filseth: Got it. So, if it were really 6 percent, it would be north of the $5.4 million? Ms. Nose: Correct. Mr. Perez: So, this is a good point to interject. If we wanted to have Mr. Bartel run us that scenario, then that would be a directive that we could have, too. But, put this in perspective here. Go back to our budget hearings. Now we have five more million dollars to either cut, defer programs, pull from reserves. So that gives you an area of magnitude to your point earlier, you know, it’s without context. Well, here’s a little bit of context now. Chair Filseth: It sort of was going to be one of my questions. Sorry, jumping in here, but it is, if we were to actually use $48.3 million as the expense instead of $39.7, so there’s that $5.4 million, what do we do with that $5.4 million? I mean, does it go on to the UAL, do we accrue it somewhere? What do we do with it? FINAL TRANSCRIPT MINUTES Page 40 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Mr. Perez: We would have some options. We could send it to CalPERS. I didn’t say that’s what I was recommending. I was just answering the question. Second, we could send it to the PARS 115 trust. Those are really, I think, the two main options that I can think of off the top of my head. Because you don’t want to keep it in house, because the rate of return you’re going to ear is going to be miserable. It’s going to be 1.8, assuming PARS or PERS could do better than 1.8. And in terms of where it would be applied, I’m not exactly sure, and I hate to put you on the spot, John, but do you know if we have an option on designating the additional payment, whether to the unfunded? Mr. Bartel: You can take any additional contribution to CalPERS and target amortization basis. So, that’s one option you have. But, if you put it in the 115 Trust, it would not be a direct reduction against the net pension liability you would have on your financial statement. Having said that, though, it would still be an asset. You would still have it as, so the City’s net financial position would be the same, but it would not show as a direct line against that. Mr. Perez: And John brings up a good point. So, how you’re going to see it this year, because we already have some assets in there, is that we’re going to make a note because GASB does not consider the Section 115 PARS trust a pay down of the liability. But, we can note to say, well, the number is this. We actually have this other asset. Make it the number, not this. That’s a notation, but not included in the financial numbers themselves. Chair Filseth: But the Section 115 trust shows up in the statement of position as an asset, does it not? Mr. Perez: That’s correct. And, the thinking on the Section 115 is that we’re trying to work on a target number, because you may ask us, well, what’s the number that we should have there. We’re looking at past recessions that we’ve had, and the impacts and the percentage of revenue lost, and maybe looking at some of those numbers to come up with a target, because one pathway could be a hybrid that you, let’s say that that number is $15 million, just making up a number here on the fly. Once we reach that 15 we say, okay, now let’s start sending it to PERS, because we want our financials to actually show a decrease, and let’s choose some of these base years they have, a longer than 20-year amortization, and let’s pay those down. And so then, that helps us reduce our interest payments for those particular items. And then, you have the $15 million in the bank per se, hit the next recession FINAL TRANSCRIPT MINUTES Page 41 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 where you’d lose $10 million in revenues, and instead of having to make immediate cuts or immediate freezes of positions, you send $10 million from PARS to PERS and you ratchet your budget and you have a year to do it, versus having to do it all at once. So, that could be a potential path. Chair Filseth: Questions. On this slide before we move to the next, because the next one is a pretty big chunk. Council Member Holman: I have a question for Lalo. So, this shows that we would potentially look at pulling down another $5.4 million if we adjusted our expectations to 6 percent, correct? Mr. Perez: Yeah, and it’s one-fifth, right, because it’s phased in. So, the number is higher if we do a true 6 percent. Council Member Holman: So, I guess I’d like to hear from you what you would, at this point in time, recommend, because we’re, what, a quarter of the way into this year’s budget, and if we did draw down that much more, then where are we in terms of our 18.5 percent BSR? Mr. Perez: Because, you know, I took your, the Committee’s comments to heart when you said, let’s work on a number, not on a solution. I don’t necessarily have an answer for you quite yet. Council Member Holman: Not all of us said that. Mr. Perez: And, you know, we definitely have areas that we need to pursue. There are things that you’ve done already that can continue to work. But there’s definitely impacts. I think one of the things I can, I believe safely say, that we’ve lost opportunities, but we did not lose services in years past as a result of the increases of pension. What do I mean by that? I mean that we did not reduce the level of service, for the most part. There were some that were done, but they were calculated reductions, street sweeping is an example, right. What we did is we flipped it. We flipped the delivery of service. We contracted out golf park maintenance, custodial services, street sweeping, some of the swimming programs. So, all of those reductions in expenses that you see were not necessarily correlated to a reduction of service. Going forward, it may not be the same, and so we will need to look at all the options. Because, you know, everything is going to have a consequence, and so I think it needs to be done in a thoughtful, methodical way for us to present you this information, and so I think that would be what FINAL TRANSCRIPT MINUTES Page 42 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 we were envisioning. You start choosing a number and then we start working with those numbers, and figure out what the impact is, and then give you, okay, here’s some options and solutions and here’s the pros and cons for each one of them, and here’s what we would have to do. Negotiate with labor, you know, and so on. Council Member Holman: Thank you for that. And when this does come back for our next step and any kind of recommendation for, well, next step for any kind of recommendation for the Council. One of the things that you and Kiely both absolutely anticipate is, I want to know where we are in budget stabilization reserve impacts that we’ve had, and what’s anticipated, at least for the next quarter, at least. Because there have been some… Mr. Perez: And we’re pretty close to finishing our audit, so we’re going to come to you on December 5th, thank you, to present you the numbers. I can tell you that we’re going to end it with a surplus. We have given you a range between $3 and $5 million, and that’s still in the works. I don’t want to jump the gun, because I want to conclude the audit. So, it’s an unaudited number that I’m giving you. So, we can put that in perspective, right. So, if you have that $5 million, this is why I’m saying I can’t just give you an answer, because we need to put everything in the picture. It’s a pie, so we can’t take one slice only. We have a pretty big bill for infrastructure, as well. And so, we need to, the directive from the Council, and this was a formal directive, let’s take care of the infrastructure plan that we have that is continuing to grow in costs. So, this $5 million potentially here, could go to infrastructure, because we know we have a shortage, or it could go to pension, or it could be split. So, that’s what I mean by, you know, we need to give you the whole picture so you are able to make an informed decision. Council Member Holman: One last piece of this, not to try to take too much time here, but one last piece of this. So, I did bring up previously about, you know, we all want to catch up on our inventory, I mean our infrastructure. We all want to catch up on that. That said, we could not be doing it at a more expensive point in time, and I mean, we don’t know what next year is going to bring, but we could not be doing it at a more expensive point in time. And, you know, since these construction cycles and all economies go in cycles, I do have some kind of like, well maybe we shouldn’t be so aggressive now, because there will be a downturn, and we won’t be in such a highly competitive market for… FINAL TRANSCRIPT MINUTES Page 43 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Mr. Perez: Well, in some regards we may not have an option, and we have to defer projects because our expense is just climbing (inaudible) exactly. And, we may not even be able to… Council Member Holman: I hope we’re making choices, not just forced into corners where we’re… Mr. Perez: And I understand your point and I think it’s something that the Council can definitely, you know, decide upon, and that’s why I believe we need to give you a bigger picture, because then you can strategize based on what you’re seeing. Council Member Holman: I’m sorry. Once last thing here is, before I forget to mention it later, if we want these documents to be understood by the public, including the full Council, we need to not have so many acronyms. We need for these to be able to be plain English for people to understand, because we’ve go John here saying, well, what I mean by this is blah, blah, blah. So, we really, maybe most of the public understands what BSR means, but maybe not. So, if we could have even just a glossary or something that helps with this, but this should, if we’re talking about transparency and people to understand this, we need to be talking in plain English, as much as this stuff could be done in plain English. Mr. Perez: You won’t hurt my feelings if you remind me, if I forget. But, yeah, that is why we left it bold, because it’s a task for us to continue to work on. Chair Filseth: Let me just add something on to the discussion, because you touched it now, then I’ll turn it over to Council Members Tanaka and Fine. I want this to be in context, because we’re looking at this and say, yeah, but we’re going to have to cut spending by $5 million on trimming trees or something like that, right. I picked that one on purpose. But, look, here is sort of, I mean, you may say this is a naïve perspective. John, Jeremy are very sophisticated guys, but let’s say for the sake of argument the real answer is, over the foreseeable future, CalPERS is going to earn exactly what Wilshire Associates had said, 6.2 percent. Let’s say that’s the real number, okay. Then, if we use the schedule, 7.375 percent, 7.2 percent and so forth, and proceed on our way, then we are spending 2049 and 2050 dollars on tree trimming today, right? I mean, because we’re spending money that we don’t have, right? And we’re borrowing it on the credit card. I mean, that is the status today. So, what we have right now are the issues of FINAL TRANSCRIPT MINUTES Page 44 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 warping what we say we’re earning, right, with what we’re really earning and what we’re spending, and we got all that stuff amalgamated on together. A better world in which we did exactly the same thing we’re doing today, trim the trees, fix the potholes, you know, it would still be a better world, okay, if we recognized the we’re borrowing 2049, 2050 dollars to do this, right? And that’s sort of, I think, inherent to the idea of, let’s get the numbers first and then figure out how we’re going to fix the problem. So, I think we have to be able to recognize what the real numbers are, without constraining ourselves in an environment where we say, well, we can’t say that number because then we’ve got to cut the tree trimming, okay? We can’t let ourselves be in the position, although undoubtedly we’ll get there at some point. But, at least we’ve got to be, we’ve got to have the stuff right, because then we go back and figure out, okay, what are we going to do about this. Are we going to cut the trees or are we going to do something else, are we going to close the pool one day a week or whatever, or we’re going to raise the hotel tax rate, and we’re going to charge all those Palantir kids, right, or whatever? So, that’s all I’m going to say. I hope we can deconflagrate those things. Mr. Perez: I think you make an excellent point, and we would, understanding the pain, I’ll call it, then you will be able to give us better policy decisions. Chair Filseth: I mean, I shudder to say it, but you could take the $5 million and stick it, park it in some new account or something like that, and say yeah, this is a liability. Imagine, for the sake of argument, we said, we have this new alligator liability, okay, and it goes on the statement in that position, like the UAL. Because, if we don’t do that it just goes on the UAL anyway, right? Mr. Perez: And there is also, there’s more details to that that we need to discuss. I think Council Member Fine was one that was asking the last time, restrictive versus nonrestrictive reserves. So, we’ll have to make those kinds of policy calls too. Chair Filseth: Council Member Fine. Council Member Fine: I just have a few and I’m sure I’ll have more. So, I do agree with the Chair that I think we need to simplify this problem for the public and the schedule actually doesn’t help with that. It’s just borrowing into the future, and so we should be clear about that. And then also, in FINAL TRANSCRIPT MINUTES Page 45 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 terms of keeping the policy choices out, because that’s when we get into the political side of things, whether it’s pools, you know, tree trimming, whatever you want to talk about. Yeah, any of them. What are the parameters you are looking for tonight in a motion? Can you just like give us a couple (crosstalk) Mr. Perez: I’m looking at the team, don’t be shy team. (crosstalk) I think it would be good to get some directive on costing of any sorts that you want that we did not provide you or. You know, you don’t want to see the one- fifth, you want to see the full number of something. Chair Filseth: I’d much rather get our arms around to calculate, but we really ought to have some sense of OPEB in there too. Mr. Perez: Well, we can give you the last report that John Bartel prepared. Chair Filseth: That may be the best we can do. Mr. Perez: At this point. I see your point, to kind of look at the whole pie, right, but understand that those numbers are going to change. (crosstalk) So, I think the directive on the dollars. We believe that we can take a range of dollars and insert those in scenarios with the long range, ten-year long- range financial plan that we can bring you. So, it may not have those solutions, but it is going to show you what the impact is long term. So, we can commit to something like that. You may want to choose the numbers or let the numbers be calculated and, therefore, dictate the number. Our hope is that once we have a number and you see the impact, then you will decide the timeline. I’ve got to remind you that our clock runs out with this current structure in December, unless the next mayor is not one of you, and you decide to all four convince the next mayor that you’re it. So, keep that in mind as you’re making your decisions for what you need and what you want us to do, because as you saw today, it’s a pretty lengthy discussion, and then there’s the multi-meetings that you’ve had to try to understand this. So, if there is a window of opportunity, I ask you to keep that in mind. Ms. Flaherty: This is a really small nitpick. You’ve so rightly asked us to use laymen’s terms for the public and reminded us not to use acronyms, and, because language matters, and I think we also probably need to be careful about not labeling the right number or the real number, since we’re really talking about estimates or targets, and this is all going to be subject to change and it’s almost inevitably going to change over time. So, just FINAL TRANSCRIPT MINUTES Page 46 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 remembering that as we try to manage the public’s expectations with how we’re managing these estimates. Council Member Fine: If they don’t like the numbers we choose, we’ll hear from them. Council Member Holman: Can I ask a simplistic question, but it’s not a simple topic, is, we’re grappling with this, trying to understand this, it’s not only the public that we need to bring along with what we’re grappling with, but it’s also the staff. And, so, I’m not quite sure what the best means is to do that, but we don’t want to be starting a war that’s unnecessary, because we haven’t communicated well and haven’t brought people along together, because we are in this together, and I think it’s a communication path that we need to have, we need to have a map for. Mr. Perez: Yeah, because as you’ve been hearing, it’s a bigger than Palo Alto issue, so it’s going to be all over the news. You’re starting to hear some cities do their public speaking, the boards or committees stating that they’re already projecting that they’re going to be in trouble. So, our employees are going to ask, are we in trouble? So, you’re absolutely right. We’ve got to work on that educational and information process. Chair Filseth: I also think part of that, I mean, I think we’re doing the right thing. By dealing with this proactively, we are making the future much more secure, right. I, as an employee, would be a lot more worried if we weren’t doing anything, because… Council Member Holman: And I think our labor groups… Chair Filseth: I hope we can communicate that. I hope people will feel that way. Mr. Perez: And we have, and I think people are understanding that you’re trying to address the problem. We’ve spoken about that at our leadership meetings. Council Member Holman: I won’t say what I was going to say. FINAL TRANSCRIPT MINUTES Page 47 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Chair Filseth: Let me see if I can summarize what you said, which is that we’re going to have a motion to sort of direct staff on what number to use for the calculation. Is that what you said? Council Member Fine: Is it just the one number. Is that all you need? Or, because I don’t think so. Ms. Nose: I’m also going to look at Steve a little bit, because he’s probably going to be the one who’s crunching these numbers. Chair Filseth: Lucky Steve. Ms. Nose: But, I think what would be helpful is either, if there are certain ranges. You guys can see obviously what one-fifth of getting to 6percent could be, so that will give you a rough ballpark. So, what we can do is in the long range, at least what we’ve internally kind of planned is, get a baseline, let that baseline be what our CalPERS reports say, what all of our, you know, normal base budget long-range financial forecast entails, and then do maybe two or three alternates where we added a high-level look at either a certain percentage of payroll, or we can start at $3 million and grow it by a certain percentage, or what have you. In my head, ways that we could do this is either, again, you guys do like flat dollar values that you would want to see modeled and what it does to the bottom line in the ten-year forecast. Or, other things that we talked about is looking at the reports and the slides that Bartel had given us, where you saw the ranges of contributions where it was either the 25th or the 75th percentile. That could be a direction, or something a motion that you guys make where, hey, I want you guys to run one at 25th, one at 50 and one at 75, and then you can kind of see that, and we can model those percentages. Something either, but I would say the more specific, the more happy, I think, you guys will be when you see the long- range financial, and the less already, to Lalo’s point, when you guys are going to be potentially separating by the end of December, the less kind of scrambling we will be doing to try to get something done before the holiday period. Council Member Fine: So, just my comment there. I think, personally. the contribution percentage is kind of the most understandable for me. (not understood) Ms. Flaherty: And I would just add, since we’re talking about using this information for your policy-making, decision making, we’re also talking FINAL TRANSCRIPT MINUTES Page 48 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 about the importance of it for communications purposes, to the public, to our workforce, to the rest of the Council, who hasn’t had the benefit of all of these Committee meetings. And so, keeping in mind the competing interests of getting all the data to crunch to make an informed decision, and trying to keep it manageably simple for communications purposes and finding where the sweet spot in that is for you all would be helpful. Ms. Nose: And actually, to Michelle’s point, that’s one of the reasons why we haven’t bolded that first one is, there are so many variables that are out there that we’re all discussing. Trying to develop a cohesive and easily-understood communication plan when we’re talking about tons of actuarial assumptions is hard to get our arms around. So, if we narrow that scope, it will make that story telling that much easier, both for the community as well as Council and our staff. Chair Filseth: I’m going to let Council Member Tanaka here talk in a second, but I think to me, I have grown to believe something that Dr. Bulow said a little while ago, which is, actually it isn’t that complicated, okay. And the actuarial piece, you know, the actuarial piece seems to me maybe one of the simpler pieces. I mean, it’s got a couple inputs and it’s got a couple outputs. Maybe I’m oversimplifying this, but I believe the actuarial piece, and I think we don’t need to understand its inner workings. We just need to understand what the inputs are. Council Member Tanaka. Council Member Tanaka: So, for me, I think the thing I would be really interested in, I guess first I’ll just kind of, what you were just saying, communications versus the analysis. I think we don’t necessarily want to combine the two, because I think communications is a totally different ball of wax than for us as a Committee can analysis this and figure out what we want to do. So, I wouldn’t say that we’ve got to keep the analysis as simple as possible because that’s the way the communication has to happen. I think that would be a mistake. That’s not from what you were saying, I think what she was saying. Council Member Holman: Okay. Council Member Tanaka: Sorry. So, I do think we should do a pretty thorough analysis, because we owe it to our citizens to do that. So, I think the second thing that I really think is important is, we have kind of a somewhat convoluted CalPERS way of kind of viewing the world, and then we have the one that Jeremy talked about, which is kind of like the Stafford FINAL TRANSCRIPT MINUTES Page 49 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 estimate, and I would really want to see both, right. Maybe you think 4 percent is way too low, maybe it is, maybe it isn’t, but I think it’s important for us to actually see a range of where we’re at. You know, we could decide as a Committee what we want to recommend, but I think for us not to know that would not be good. So, I think that’s very, very critical. And, I think, you know, I agree with the idea of kind of removing the policy decisions. I think really what we should do right now is kind of understand where we’re at, how deep a hole are we in, and then once we understand that, we could, I think Council could figure out what is the policy decision that can be had. But, I think one of the key things that we want to get out of this that will help us with our policy decisions going forward is for future expenditures, right. Whether it’s we’re hiring an employee, we’re giving a raise, we need to know what the true, like multiplication factor is. I’ve been told it’s like 2x, like so you pay someone $100K, they’re really getting $200K, right. I think we really need to know that, because we need to know what the true impact is to the City. Maybe 2X isn’t the number. Whatever the number really is, we should really know what it is, so that every time we give a raise we know what it really costs the City, right. Because it’s not just the money we pay out today. It’s the money that we promise in pension obligations in the future and we’ve got to be really clear what that is. Because if we don’t do that, when we make policy decisions, we make the wrong decision, right? We think that maybe keeping it in house is way cheaper than outsourcing, because we don’t factor in pension contributions or pension liabilities that we have. So, I think that’s really important, so that Council has a tool to know, like okay, what is something really costing us, whether it’s a raise, a hiring, whatever, right, we know. I think that’s actually critical. So, but largely I agree with that the Chair just said, so I don’t know what we want to do in terms of a motion right now. Chair Filseth: I want to ask a question based on something you just said. I think that’s an important point, right. Is this the marginal cost of the next person we hire? Mr. Nose: What are you pointing to? Chair Filseth: That. Does that include everything, because it includes a contribution to the UAL amortization, and includes the normal cost at 6 percent? I mean, is that? (inaudible) Right, because you can say, I’m going to hire the next, we owe many hundreds of millions of dollars unfunded amortization, right, liability. But the next person, that won’t change, that won’t go down if we hire another person, but if we hire another person, does that go up if they’re paying their normal cost? If we consider the normal FINAL TRANSCRIPT MINUTES Page 50 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 cost? I guess I’m wondering, is that the answer to Council Member Tanaka’s question? Ms. Nose: Let’s pause on that for one second while I actually go talk to Mr. Bartel, over here, but Steve can help answer the questions about average salaries. Steve Guagliardo, Principal Management Analyst: Thanks for the question, Chair Filseth. Steve Guagliardo, Office of Management and Budget. Nice to see you all again, and for anyone interested, the last I checked, the Warriors are winning. So, what this chart does show is kind of oversimplification. It is by plan, by retirement plan. So, it’s miscellaneous and safety all grouped together. Obviously, there’s all sorts of positions across all sorts of bargaining units within each of those plans. To a point I heard Council Member Fine just make, this is the average compensation for those plan types, so obviously, management is in the miscellaneous group, as is someone who is in SEIU. So, to your point, this is the approximate percentages of that. It does include overtime for those SEIU eligible positions. Obviously, management is not eligible for overtime. But to your point, UAL is a percentage of payroll. Right now, under the current models and parameters it would be 13 percent. The normal cost, the employer normal cost as of now would be about 6 percent. Chair Filseth: But the UAL, the 13 percent here, that’s an allocation for the annual required amortization to the UAL, right? Mr. Guagliardo: Correct, right. Chair Filseth: Aha, so given that the annual required amortization, and I think Mr. Bartel said this too, right, isn’t enough to actually pay down the UAL? Mr. Guagliardo: But I heard him say, and I again, presuming to speak for him a little bit here, is with the current changes that CalPERS is undertaking, we’re moving towards actually paying it down. Under the old model, I think you would agree, I would agree with that assessment, that we were actually just paying down the minimum payment and not actually getting to that interest piece that we’re referring to. I know we’re mixing metaphors all over the place here, which gets back to Michelle’s communication strategy, but sticking with the credit card analogy, we’re actually now paying down the principal a little bit, under the new tenents that CalPERS put out. I’ll also FINAL TRANSCRIPT MINUTES Page 51 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 use this briefly to speak to Kiely’s deferment to me and a point you brought up a little bit earlier, as far as requests of staff for this. I think you’re exactly right. I think the actual model itself not that difficult. I think what we need from you guys is clear direction on what you want the parameters for that model defined as. Chair Filseth: That’s what I ‘m hoping. Mr. Guagliardo: And so then we can actually run it through, see the impacts, and if you guys want to reach a dollar threshold in either the Section 115 or some other mechanism, we can tell you want that mechanism would be. If you want to reach a percentage contribution over and above, we can model that for you as well. Chair Filseth: I don’t feel comfortable tonight, personally, maybe we do – I don’t personally feel confident in my ability to take how much we would put in the Section 115 tonight. Mr. Perez: And I don’t think we’re ready for that tonight. I think you need more data from us. Chair Filseth: I think data, yeah, okay, thanks. We’re on the same page. (inaudible) Let us come back to that Council Member Tanaka. So, I think, what I just heard from Steve was, though, I think we should define, he’d like the parameters, which are the inputs to the model, and then I think we ought to also talk about what outputs we want. For example, I heard one from Council Member Fine, which is, I would like to see the impact on contribution margin over the next ten years, okay? Council Member Tanaka: I’d actually like to hear what Jeremy has to say. Ms. Flaherty: While he’s walking up, I’d just, I don’t think Staff is asking the Committee to have to design the whole model. I think we’re looking for your must haves and can’t stands. Chair Filseth: Yeah. Thank you for that. Keeps us under control. Dr. Bulow: Just a point about how one might think about the marginal costs in this entry age normal model. The way I think of the entry age normal model is, they’ll say, well, let’s figure out the present value of the FINAL TRANSCRIPT MINUTES Page 52 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 employee’s projected future wages. So, let’s say that came out to $100 using whatever discount rate they made up. And then they said, let’s figure out the present value of the employee’s – they’ll say, well, let’s figure out the value of his lifetime wages, let’s say that was $200, the present value of his future wages, and that comes out to $100. And then they say, okay, now let’s figure out the present value of what we’re going to have to pay him in pensions, and let’s say that number came out to be $40. So, they’d say, well, he’s going to earn $40 in his lifetime, he’s going to earn $200 in his lifetime and he’s going to be paid $40 in pensions, so if we set aside 20 percent all the way along, we’d be okay. So, the normal cost is 20percent. However, at this moment, he’s worked half his life in terms of earnings, so he’s earned $100, so we should have $20 set aside, but we only have $10 set aside. So, $10 is the unfunded liability on that method. And then, you know, you sort of have to make that up somehow, maybe by charging 30 percent as he earns the next $100. It’s an actuarial method. If you want to learn the details of it, you could go back to a book written by, oddly enough, Mr. Winklevoss, the father of the infamous Winklevoss twins. But, I’m not sure I’d recommend it unless you wanted to go into a career as an actuary. (crosstalk) Because, again, I think it sort of diverts you from the simple economics. Chair Filseth: Let me see if I can boil down Greg’s question to something constrained. If I understand what you’re asking for, we say, we’re going to hire this person and it’s going to cost the City this much. But, in fact, we worry that, and that’s net of benefits and sick time and all that kind of stuff, and car allowance if we do that and all those kinds of stuff as we report them. But, there’s this other piece that we’re signing up for that, it’s a don’t ask, don’t tell piece, right? We’re signing up for it but we’re not going to report it, which is the unfunded liability. So, we want to know what the full cost, including that, which is – and I think, if I understand what you’re saying, it’s kind of an interesting point, right, because you say, oh, the present value of that, okay, if we don’t actually pay off the present value of that this year, then it’s going to be bigger next year. So, there’s sort of that complexity too, but is there some way of saying, what’s the full cost for that person, and I think there’s two cases, right. One is, a new employee. Kiely hires somebody and they go on the payroll and that’s it. And the other one is, we’re in discussions with one of the bargaining groups, and we say, okay, we’ve such and such an offer, right, proposal. What’s that going to cost the City, because we get reports now, right, what’s it going to cost the City. But, again, it covers that much. It doesn’t tell us the other piece of that, right. So, I think if we had those two cases, I think we’d be a lot further ahead. FINAL TRANSCRIPT MINUTES Page 53 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Council Member Tanaka: (inaudible) Dr. Bulow: There’s part of the cost that you’d have, even if everybody walked away, right. And at some level there’s an issue of whether, in the bargaining that’s even relevant. The only way, you know, if for example you said, the City of Palo Alto has a constitutional obligation to pay those benefits regardless, and because the tax base of the City is large enough, people might not like it, but every homeowner is going to have to essentially cough up an extra five-year’s real estate taxes to pay these bills, but it’s going to happen, and the union has an absolute right to those claims. Then you say, well, the past pension benefits are kind of irrelevant. It’s a debt of the City, just like a bond debt, but now what we have to think about for a new employee, as well as an old employee, is well we say, well what if they stay around one extra year. Now, that’s the way we do it if we have a 401k plan. We say, if the person stays around an extra year, they get a salary of $100,000 and we contribute $15,000 or whatever the number is, to their 401k, our cost is $15,000. Some actuary may say, oh, but you know, maybe they’ll get a raise in the future and who knows how long they’ll work for us and what their salary will be in the future, and we do fancy discounting. You’d say, well, you know what. I think the right way to do the 401k calculation is just, you work the year, we pay them $100,000, we put in $15,000 into the plan. If you want to do the defined benefit plan analogously, what you do is you say, alright, the person has earned his annuity if they quit today of $25,000. If they work an extra year, at the end of that year they’ll have earned an annuity of $27,000. So, what we owe them for this extra year of work is another $2,000 annuity, and let’s figure out the value, the cost of that. And that’s really our pension cost for this year. So, again, it gets back to the principle that both of us agree on, that this is actually not that complicated, though it can be made to be infinitely complicated. But, it really isn’t once we get down to just really thinking about what the real economics are. Chair Filseth: So, in other words, if I understand what you said, it’s assuming, so if you were to assume that what’s accumulated is accumulated, and it’s fixed, right? There’s a contract, we’re in it. Then, the net cost to the City of the next employee is the cost of the incremental $2,000 annuity? Council Member Tanaka: Or just an extra year, right? Chair Filseth: For an extra year. FINAL TRANSCRIPT MINUTES Page 54 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Dr. Bulow: What the person gets by working for a year versus not working. And then the next year they’ll have another (crosstalk). Chair Filseth: The cost to the City, I mean, we measure it right now in terms of per year, right. We don’t say, well, if we hire this person it’s going to cost the City, you know, $500,000 over their career. We say, it’s going to cost this much next year. And so, then the normal cost of the annuity, the normal cost of the pension benefit covers it all. Dr. Bulow: Yeah, you’d say, we’re giving him an annuity of $2,000 a year and the present value of that is such and such. Chair Filseth: Which is the normal cost. Dr. Bulow: It could be that, instead, if it was a 401k we would be giving him money that he maybe would use to buy stock in something. Same thing. Chair Filseth: Okay. That makes sense to me. Council Member Tanaka: This is why I think (not understood). I mean CalPERS discount this and whatever, but I think… Chair Filseth: That’s something different though. That’s the 4percent thing. Council Member Tanaka: That’s another story, but, (crosstalk). Dr. Bulow: It’s a separate issue, but just figuring out – I think if I were you guys, I’d want to figure out what the cash flow obligations I have over the next 100 years are, and then how those are changed by the new year’s labor contract, and then for another day, we can look at the issue of, okay, the annuities that we have promised have gone up by this much, or the cash flows have changed by this much, because of the extra year of service. Let’s try to think about what the present value of that is, so that we can think about what it really costs us. And that’s it. Chair Filseth: So, how do we ask for that? How do we ask Staff for that? Dr. Bulow: (crosstalk) My guess is that Staff provides certain… FINAL TRANSCRIPT MINUTES Page 55 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Chair Filseth: The words of the Motion. Dr. Bulow: Well, I wish Joe were here for this, because he has all the experience with the Pension Tracker website. But, you know, my guess is staff already – for CalPERS to do its calculations, it has to be provided with a set of data, and that data should be adequate. So, it should just be the same thing, but the only caveat is, you’ve already dealt with them a lot, and there are various privacy issues that might have to be also addressed with Stanford. Chair Filseth: We’d have to hire an actuary every time we do… Mr. Bartel: Do you mind if I ask a question? Chair Filseth: Yes, please. Mr. Bartel: So, direct here, if you’re using the same assumptions, would your numbers match CalPERS or not? I’m just asking that question. Dr. Bulow: So, CalPERS, if you looked at CalPERS (crosstalk). If you looked at CalPERS termination calculations, which are an accrued benefit calculation. Mr. Bartel: Now wait, (crosstalk). I’m sorry, if you’re using the same assumption, it doesn’t matter whether we’re talking about the termination number or we’re talking about the entry age number (crosstalk) Dr. Bulow: CalPERS has a bunch of accrued benefit, sorry, a bunch of projected benefit, you bs in their calculations, and then you know, over time they’ve used various smoothing out, as you know, some of which they’ve, fortunately, gotten rid of. But, they have a bunch of stuff that they do to come up with their projected benefit calculations and payments. Ours would not look like that. What ours would look, would be similar to, is what CalPERS does when they calculate the termination liability. If Palo Alto says to CalPERS, okay, we’re in debt. We’d like to just pay off what we owe and move on to a defined (crosstalk) the best contribution plan in the future, how much do we have to pay. The calculation that CalPERS would do would be similar to what we would do, but I can’t say that it would necessarily be identical, because CalPERS, you know, doesn’t, it’s not very sharing of their data. Let’s put it that way. FINAL TRANSCRIPT MINUTES Page 56 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Chair Filseth: I think, from a practical perspective, what we ought to do is as the CFO to go figure out how they’re going to do this, and what combination of Stanford resources and Bartel resources and internal resources and so forth, how they’re going to do this. Comment on that? I’m not sure we’re in a position to decide it tonight. Ms. Flaherty: And I don’t think we were asking the Committee for direction on all the sausage making. We were looking for the boundaries, right, of what you want to make sure is included in what we bring back to you. Council Member Holman. Council Member Holman: I’m channeling Greg Tanaka here. So, I’ve been sitting here wondering for the last little while, it’s like, so everybody is looking at this, maybe not tonight, but everybody is looking at this in a same general time frame, because we’re all in the same pickle, so, what are other cities using? This is my channeling of Greg Tanaka, what are other cities doing in trying to address this? And I don’t want like a big old fedo matrix, but just generalized speaking, what are other cities doing? Chair Filseth: They’re not doing it. We’re blazing new ground. That’s the answer. Ms. Nose: I would also say that some closed systems have had to deal with this problem, or are dealing with it, because they aren’t part of CalPERS, so they have their own fiduciary boards that are looking at things that are independent on both representative employees as well as other financial professionals. So, I wouldn’t say that we’re the only ones looking at it. Chair Filseth: You’re right. People who are not part of CalPERS are doing it. Ms. Nose: But also keep in mind, in certain areas like that have more flexibility over their investment strategies and policies, whereas we don’t necessarily have all of the same levers that all organizations have, being a part of CalPERS, having that contract with them. So, but that’s not to say that we can’t get some data on who else is looking at things, and I’m wondering if John even knows of some of his clients that are asking him to run certain scenarios. Council Member Holman: Surely there’s some other CalPERS cities that are doing something to try to like grapple with this. FINAL TRANSCRIPT MINUTES Page 57 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Mr. Perez: (crosstalk) They’re doing additional contributions to be clear, Mountain View, Sunnyvale. Something as simple as CalPERS estimates that our payroll is going to be X dollars, and they’re tracking and they’re seeing, okay, we’re not making that number. We’re going to go ahead and make that number whole, and send that additional gap number to make, to close the gap. Or, if the number is X, add another X million dollars on top of that, and send it either to CalPERS or PARS. PARS has now something to the magnitude like 70 plus… Mr. Bartel: I think it’s over 100. Mr. Perez: Over 100 now agencies. So, it’s starting to become something that people are doing, but they’re not going back necessarily calculating new numbers. They’re saying, what can we afford to send extra and sending that. That’s the simple answer. Dr. Bulow: It’s not an unreasonable approach. It’s just that, you know, you’re better informed if you have the data to decide how much extra you’re going to, the amount that you’re going to throw in extra this year, you know, may be influenced by figuring out just exactly what the whole is. And then the other thing, of course is, in terms of understanding what’s going on in labor negotiations, understanding what the cost of any given contract is would be valuable. And that’s the particular thing, to answer Mr. Bartel’s comment, that is particularly not available from even the CalPERS termination numbers. I mean, aside from the fact that they come to you so late, 15 months after the close of the year. They don’t really give you the kind of data to figure out, what did it cost us, the fact that we gave so and so, we gave these employees a 2 percent raise. How much did it raise the future cost of our pension? And that should be something that ought to be don your computer dashboard, you know, as you are working through these issues. This should be on the union’s computer dashboard as well, so that everybody can be on the same page and understand what’s happening. Council Member Holman: It’s the difference between having a strategy and just taking a practical action. It’s like having a strategy, being armed with the information versus like, well, it’s practical but we’ll just pay it down more. So, it’s kind of that comparison, I would say. Mr. Perez: Yeah, because we’re going to come back to you with some big numbers, and the reality is that chances are we’re probably going to phase in what we currently have informally, which is 10 percent of our annual FINAL TRANSCRIPT MINUTES Page 58 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 contribution that’s added on top, and we’re sending it to PARS until we figure out how we’re going to get to the number that we want. So, I’m not as concerned as, calculating that number, because I think it’s nice to have and good to know, but the reality is, we need to start funding it now, and what can we afford today and what can we shoot for our target going forward, and what is it going to impact, or what do we want to change. We want to revisit our portfolio of services. You know, there are so many questions and so many things that we need to look at as a result of getting that number. Chair Filseth: Well, we’re not going to revisit our portfolio of services for fiscal 2018. I mean, that’s done, right? Mr. Perez: Correct. Chair Filseth: So, if we can get all this, if we can figure out what our numbers are, you know, in the next few months, then we’ll be in a position to sort of have that discussion for Fiscal 2019. I think that’s sort of what we’re shooting for. Mr. Perez: Yeah, and I think if we put something formal in play to start, I think that’s, it’s not the ultimate goal, but I think it’s a start. I think Council Member Tanaka said, when are we going to start, and I think we could do that. Ms. Nose: So, not to hijack things, we haven’t quite gotten through the whole PowerPoint. So, I’m wondering if you want to just refocus the conversation to finish going through. Chair Filseth: Why don’t we do that, actually. Because you’re going to throw another monkey wrench into the… Ms. Nose: A little bit, and just kind of reground ourselves on next steps after this. So, kind of talking about what Lalo was saying in terms of the future as well as solutions and goals, this is just a visual representation of one of the potentials that we could choose as an organization to either execute or use as a target, a goal, to reach in terms of funding levels. So, what this schedule shows us is, in green what the current amortization schedule is of our unfunded liability for CalPERS. FINAL TRANSCRIPT MINUTES Page 59 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Chair Filseth: Assuming 7.5 percent? Ms. Nose: Yes. And so that’s over that 30-year period, right. So, those would be your annual contributions. Now on top of this, you would have your normal cost, right. And so, what CalPERS did for us in our reports, for both the miscellaneous and safety plans is they said, okay, what if I amortized those things over 15 years. What if I did it over 20. What does it look like? So, ultimately, obviously you do see savings based on each of the plans, but you also see some serious balloon payments compared to what potentially someone had done a 30-year forecast. Chair Filseth: That’s what happens when you take a 15-year mortgage. Ms. Nose: Exactly. And so, these are things that we can look at. So, two things, one, you probably have potentially heard conversation of what is called the “fresh start”, which is essentially pulling the trigger on refinancing your home, right? You actually sign the contract, you sign the paperwork. There’s no going back. You have to pay that annual contribution no matter what, otherwise you’re going to default on your home. The other thing that we could do with these numbers is work towards funding targets. So, instead of actually locking in a contract like that, you could use these numbers to say, okay, had I done a 15-year amortization period, my contribution would be $10 million more. Let’s put that into PARS. Let’s not actually refinance the home from a contract standpoint, but let’s financially start socking that money away in our PARS account and then when the day comes that we need to pay something off, we hit a downturn or whatnot, again, that’s that flexibility. So, this is where we get back to what I would, my office, because we’re the ones going to be doing this, would find really helpful is, I hear you guys on wanting to know what the right number is, and I would ask that potentially we start to take these things in parallel as we approach the budget time frame. We can continue to work on what we think reasonable assumptions are from an actuary standpoint are. So, do you think you should have a normal cost rate based on 6percent, 4percent, 7percent or what have you, but also know that we’ve already started building the FY’19 budget. We will be coming back to you in a report that will come out in basically four weeks for a long-range financial, and so to be able to start modeling things, we may just need to figure out some ranges, so you guys can start seeing what it does, and then continue on a parallel track to have that conversation so you guys can see. And I know it will make divesting ourselves from the politics of it a little bit difficult, but I also don’t want you guys to miss another budget cycle by not, by spinning on, you know, what is the right number, so to speak. FINAL TRANSCRIPT MINUTES Page 60 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Chair Filseth: What if we asked you for two scenarios. One is the straight up CalPERS scenario, and the other is the conservative end of fund conservative, that 6.2 percent scenario? What if we asked you for that? Is that? Ms. Nose: Totally feasible, yup. That’s exactly what would be helpful. And just because you ask us for that number, doesn’t mean that that’s the number that you guys give policy direction on in terms of what would be in the proposed budget. You may see, you know, let’s say that’s a $10 million number, let’s say that’s a $30 million number. I actually have no idea what it is. I’m just throwing these out. But, that might not be palatable to bite off in one year. So, once you see those numbers in the long-range financial and say, okay, Kiely and your team, Steve frankly, what does it look like CalPERS, what does it look like at 6.2 with maybe a five-year or an instant phase-in period. We can show you those numbers. You can see what it is, and then say, great, do your best to get there, at a minimum level of blank. Chair Filseth: CalPERS is the default. I mean, we have to do that under any circumstances. We can’t do less than CalPERS, right? Ms. Nose: It is, and so you guys know our long-range forecast and when we show you guys FY’19’s numbers, they already assumed CalPERS numbers. So, there’s not a lot of difference from what you guys have seen previously in FY’19 to what current CalPERS report says. So, that’s where you guys can start making those, this is the goal and maybe you give us the benchmark of, this is the goal, see how far you can get, but don’t go any lower than what our current contribution rate is, which is, we’ve got that 10 percent of our annual. So, I mean, those could be the ranges that you guys help give us. All the while, you can continue on the, I want a different rate in the system. Chair Filseth: What do you guys think? Council Member Tanaka: I think that it’s not a bad approach. I still would like to see the simpler Stanford, (not understood) because you don’t have to use 2 percent, we could use 4 percent or 6 percent or whatever our favorite number is. Because that’s a heck of a lot easier to explain than all the stuff the CalPERS does. Actually, this is not a bad idea to actually have, because then we kind of know, like what to put in our budget, right? So, that’s actually, it seems to make sense. FINAL TRANSCRIPT MINUTES Page 61 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Ms. Nose: That’s Lalo’s idea. Council Member Tanaka: Good idea. So, but I think, I mean, we could see the difference and we don’t have to wed ourselves to any one of them, but it gives us a kind of range of options. We could see what’s going to happen. We have a way of modeling how it would show up in our budget. And, whatever discount rate we happen to finally choose, we could finally use that as what the true cost is when we give raises, when we hire someone, when we decide to outsource versus in house or whatever, right. Council Member Fine: I think, I’ve been writing down a few of the things I’m hearing, and this might work. I think we’re maybe interested in asking staff for a full CalPERS report and the same report at, call it 6.2, maybe instant, right, not phasing it in. And if we want to be soft, we can go to 6.3 or whatever, right? Additionally, there’s some kind of issue where we would like to release the data to Stanford in a way that’s sensitive to our employees, and then the final thing is Council Member Tanaka’s point about what’s the true cost of employee in those different models. Does that sound? Chair Filseth: Terence first. Terence Howzell, Principal Attorney: So, we’re clear, I understand that we do need to be sensitive to our employees and the other considerations as it relates to sharing data with Stanford. Another issue, and I don’t want to go into any great detail about it, but there is a claim that Stanford has filed against the City. There are ongoing contract negotiations with Stanford concerning fire services, and pension issues are implicated in both. So, there are discussions that will have to be had by City Attorney’s Office and Stanford concerning how best to deal (crosstalk) Council Member Tanaka: I asked Jeremy about this before, and he volunteered either his department or Joe Nation’s department volunteered to sign a nondisclosure agreement, just to keep it within their department. Dr. Bulow: I have no influence… Mr. Howzell: You don’t talk to the firefighter’s union, or anything like that? Okay. Dr. Bulow: I don’t talk to the President of Stanford. FINAL TRANSCRIPT MINUTES Page 62 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Mr. Howzell: But again, the attorneys will need to kind of work through that. That’s another part of this discussion. Ms. Flaherty: And if I could just ask for some clarification, I know when the Committee discussed this last month, the conversation got a little muddled, and I was not, I did not leave with a clear understanding of what it is the Committee is asking staff to share. There’s public information that goes in the packet to you all that is accessible. If you look at the model, for example, of a FOIA request and how Freedom of Information Act requests are handled at multiple levels of government, there are certain standards in the law. If a citizen comes and says, I’d like to see something you already have, we need to make that available. If a citizen comes and says, I’d like you to calculate a bunch of new stuff for me that you don’t already have, we say, well, we’ve got to prioritize our staff resources. So, if this is a request for calculating information or producing new information – okay, that was a point of clarification we were confused about. Dr. Bulow: No, it’s more asking for the kind of raw data that is provided to CalPERS with, as Adrian said, any kind of confidentiality issues taken care of, which I suppose they have to be taken care of in dealing with CalPERS as well. But if there are extra protections in dealing with us, because we’re not a State agency, then, you know, that’s… Council Member Fine: So, we could couch this in terms of… (crosstalk) Ms. Nose: Just to get a clarification, if you guys don’t mind. When you say it’s the data that we provide to CalPERS, so obviously we report to CalPERS kind of our payroll on a biweekly, or whatever it is, basis, but we don’t necessarily report to CalPERS any information about our retirees, and that whole population that we went through, right. So, 70 some odd percentage of safety is our retirees. CalPERS holds that information. So, I’m not quite sure what information we’re requesting. Are we requesting for our active work force and what we’re reporting to CalPERS from that standpoint, or are we talking about the entire retiree population? Council Member Tanaka: Why not get the historical data as well, right? Chair Filseth: Why don’t we ask Stanford. Dr. Bulow: I think Joe will do better than me. I mean, it’s just a note in terms of the piece of this which is meant to help in future wage negotiations. FINAL TRANSCRIPT MINUTES Page 63 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 The retirees are, of course, irrelevant to that part. But in terms of figuring out the liability that the City has, how much pension debt that the City has, it would be good to have data on the retirees, but for them I guess what would be really required is, you know, whatever it takes to figure out what people’s pensions will be going forward. Of course, we don’t need to be able to figure out the names of anybody or anything like that. But, figure out, so we would fill out our spreadsheet about how much is owed to CalPERS going forward. Ms. Nose: So, if I could ask, just given what our legal counsel has advised us on, if the Committee is that adamant that we want to actually share this information publicly, what if you guys made a Motion tonight that said, explore the legal feasibility associated with this, and then we can actually have articulate conversations with our counsel, legal counsel, and if you guys could just be specific in that information. So, for example, do you want retiree data, since CalPERS holds that? Are you only looking for current employee population? Council Member Tanaka: (inaudible, no mic) Ms. Nose: Well, and how many years are we talking about? Mr. Howzell: I’m sorry. Could you just direct us to have the conversation? I think this, what they want is evolving at the table and why don’t we have that as a separate – he can get Joe Nation involved. He can help identify what it is. We can have this discussion and report back. Council Member Holman: I have another aspect of this though. Chair Filseth: (inaudible) I mean, I’m assuming there will be some, you know, some samba between our legal and Stanford’s legal, because they’ll probably want some kind of NDA that says, no, you’re not going to turn it over to the negotiators, right, because there is a negotiation going on, and there’s people arguing with each other about this stuff and threatening all kinds of nasty things. So, it’s probably more complex than we just give them a thumb drive. Sorry. Council Member Holman: Yeah. So, I have another thought about this, which I’ve had before, which is, on the one hand we have, let’s just set the legal parameters of this aside, legal concerns of this aside that you guys are going to work out. There’s another piece of this, though is, it’s not 100 percent FINAL TRANSCRIPT MINUTES Page 64 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 clear to me what would be needed. Like if what Greg is saying is like, it’s payroll. You know, our City’s salaries are published by position. If I was a City employee and it has nothing to do with Stanford or you or anything else, but if I was a City employee, well, I guess I am, a City employee and it’s like, my payroll information is going to be turned over to an outside entity, I’m not so sure I’m real keen on that. Chair Filseth: Isn’t all this public information? (inaudible) Mr. Perez: We have it on our web page. So, let us have the discussion and see where we need to go. Chair Filseth: I’m going to recap the language which is I think here, which is explore the legal feasibility of releasing something or other data to Stanford, current employees and retired employees. Releasing member data. Ms. Flaherty: And existing data as opposed to things that we’re producing. Council Member Fine: I think current and retiree. Chair Filseth: Yeah. We’re not directing them to go do a whole bunch of IT work to do custom data base searches or stuff like that. It’s existing stuff. Okay. Council Member Holman: So, this is something I didn’t know. If you get a (not understood) in California, you can see like every employee and what they make and what their benefits are. You really can. Chair Filseth: We’ve got a member of the public here who’s got even another website. Mr. Howzell: Well, if the City releases it on it’s open data base (inaudible) Chair Filseth: You can read it in the Post, with names. Council Member Holman: Well, by position usually. Chair Filseth: No, they’ve got names. FINAL TRANSCRIPT MINUTES Page 65 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Mr. Howzell: (inaudible) we could provide a link to Stanford and maybe shortcut the process. Dr. Bulow: Is this link going to have, you know, all the data that is relevant to figuring out, you know. For retired employee we would have to be able to figure out what happens, what kind of, we have to be able to figure out what the projected future benefits that they will receive are. So, that will include, you know, their age and I don’t know if the formula is complicated by marital status in any way, what they receive. Chair Filseth: So, that’s part of the exploration? Dr. Bulow: Yes, that’s part of the exploration. So, it might not be quite so simple as a link. (crosstalk) marital status may not be something that folks, they may understand that their payroll information may be useful, but their marital status and number of dependents and all those types of things. Ms. Nose: Correct. Council Member Tanaka: But I think their names would be obfuscated, right? Ms. Nose: So, again, (crosstalk) if the Committee so chooses, make a Motion that says, Staff go explore this, and I think the clarification that Michelle made on whether or not you want us to be creating data or if you want us to already just pull from existing data would be helpful. Chair Filseth: I’ve got existing data here. Ms. Nose: Perfect. And then, and we will come back to you after we have some internal dialog, and work with Stanford, obviously, on the data points they need. Chair Filseth: So, so far then we have that piece. We have the, ask Finance to generate two scenarios, one based on a CalPERS scenario, and an alternative return scenario. We have to decide what that number is, but I’m thinking 6.2 percent. That’s the Wilshire Associates number. Council Member Tanaka: I’d also like to see like the 4 percent at the termination. (not understood) The one that Jeremy proposed where we’re basically taking (not understood) FINAL TRANSCRIPT MINUTES Page 66 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Chair Filseth: Okay, so what specific data are you looking for? Termination cost? Council Member Tanaka: (inaudible) So, there’s what CalPERS says, that’s 6.2, and then there’s the one that Jeremy recommended, which is find the simplest. Council Member Fine: You weren’t recommending CalPERS at 4 percent, right? Dr. Bulow: I don’t think, there’s little about CalPERS that I would recommend. And, you know, I would note that they’ve earned their expected return over the last 20 years and nevertheless, managed to get you into this kind of soup. So, something about what they’re doing is not quite right. But, no, we were just talking about the idea that the ideal calculation would be just to say, you know, to add up for each employee what their annuity would be. Chair Filseth: That’s what he’s doing with the data. Mr. Bulow: Yeah, that’s what we’re trying to do with the data. It should be a similar, it should be a broadly similar kind of calculation to what’s done by CalPERS on the termination data, but the thing with their termination data, you only get it 15 months late, and it’s not easy to figure out from that the kind of thing we were talking about, like, what if we give the employees another 2 percent, what happens to our pension costs? Chair Filseth: It’s kind of like Stanford is going to do the third scenario then. (crosstalk) Stanford is going to do the third one, right? Mr. Perez: Assuming we can get them the data. Chair Filseth: Yes. Assuming we can get them the data, and then Finance is going to go look at the CalPERS scenario and the 6.2 scenario. Is that right? Okay. And, the two scenarios are going to include… Council Member Tanaka: (not understood, mic) Chair Filseth: Assuming we can work out legal direction. FINAL TRANSCRIPT MINUTES Page 67 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Ms. Nose: I was going to say, are you guys trying to determine that maybe a more conservative rate than the 6percent? Is that what you’re trying to… Chair Filseth: You know, Stanford has the wherewithal and they have an approach, right, which uses you know, the more conservative – I mean basically the termination rate, the insurance company rate, right? So, they’ll take a shot at that. Dr. Bulow: Yeah, but once we applied this and kind of got the spreadsheet for you, you can change the discount rate very easily. So, it’s more of a tool in that sense, and the interest to somebody like me is, because, as you said, it’s not just Palo Alto, it’s everybody across the country who’s got this problem. If we can develop an improved way of City Councils throughout the country being able to analyze their own situation so that would be a significant research contribution. Chair Filseth: So, if we direct staff to go do the first two scenarios, staff can go do it internally and they’ll start working with Mr. Bartel. Is that right? Mr. Perez: We would work with Mr. Bartel, yes. Chair Filseth: So, why don’t we do that. Why don’t we have staff work on the first two with Mr. Bartel, and then with Stanford on the, Stanford can do the third one and maybe, assuming we can work out the data. Because there are some uncertainties in here and (not understood) Mr. Perez: Yeah, because it took a long time to meet the form that the CalPERS wanted. It was probably a year’s process. But I think we’ve talked enough about that. One of the things that would help us to, I think Council Member Fine asked a clarifying point, do you want it phased in or all upfront? Chair Filseth: No. Pull off the band aid. Council Member Fine: I agree with that, and I think Greg, to your point about getting a 4 percent model, hopefully from Stanford, if the phase in is getting us a $5 million deficit this year, the non-phase in, you know, whatever, call it 20, 30, we need to know that. FINAL TRANSCRIPT MINUTES Page 68 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Dr. Bulow: Well, the phase in is one of those things it takes something that is simple and straightforward and makes it incredibly complicated. Chair Filseth: Yeah, I think the phase in is addressed, actually a different problem. The phase in sort of, I mean, so much of this is designed that if you have cash flow problems. Okay, now everybody has cash flow problems, but if you have cash flow problems, I mean, I think one of the things that was an education to me at Joe Nation’s conference, is the CalPERS guy, Richard, said, you know, we get push back from the cities on this, right. Because they’ve got cash flow problems, right. So, the phase in is sort of to address your cash flow problems, but the 6.2 scenario is to tell us what the numbers “truly are”, right, and I don’t think we should confuse it. I mean, I think, you said it more eloquently than I did, I don’t think we should confuse it with phase ins, right. Tell us what it is. Council Member Tanaka: I mean, policy wise we could always change it. Chair Filseth: (crosstalk) That’s exactly right. That’s a policy, right. Okay, so, what else can we give you? Council Member Tanaka: I think we also want to know what the, we also want to know like what the incremental costs are, right? Like we hire someone, we give raises, you know. Chair Filseth: Well, that’s going to come out of… Council Member Tanaka: I know. So, once we, yeah, once we have this, right, we do these models, we would then be able to use these models to do some prediction, right, as to, okay, if we gave everyone a 5percent raise, it’s going to cost us this much, right. We will be able to actually know that. Chair Filseth: So, should that be part of this Motion, or should that be sort of part of the next phase. Council Member Tanaka: Because that’s a practical use of it. Mr. Perez: Let me ask John if we were going to ask him to do this, what do you recommend? FINAL TRANSCRIPT MINUTES Page 69 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Mr. Bartel: So, we’ve calculated for clients before the impact of pay increase. What we encourage people, the way we encourage people to think of it is not just a 5 percent pay increase, but an increase above what the CalPERS assumption is, because, let’s be clear. If you give a pay increase below the assumption, your cost goes down. If you give an increase above that, your cost goes up and we can kind of very easily kind of quantify that. Let me give you just a quick comment, though. The bulk of your liability does not rest with active employees, so I think you’re going to find that the difference between a 4 and a 5 percent pay increase is, in terms of order of magnitude of liability and in terms of contribution… Council Member Tanaka: Well, that’s true, but it’s trying not to dig the hole deeper, right. Mr. Bartel: Say it again please. Council Member Tanaka: It’s trying not to dig the hole deeper. So, I think we should consciously know when we spend money on personnel, what’s it truly costing the City. Mr. Bartel: So, I’m hear two different questions, though, because what I heard was the cost of the pay increase versus the cost of a current employee. Because I think those are two different question. Council Member Tanaka: What I’m trying to do is, okay, once we have these models it’s kind of like Lalo was saying, okay, great, so you have these numbers. So, now what, right? How do we make practical use of it? And to make practical use of it, we have to be able to put in the form where, okay, so if we make a decision of, do we outsource tree trimming or not, we know what that true cost is. Or, if we outsource legal more, which is the right decision? Or, we decide to give the unions a 10 percent pay raise, right. We kind of know what it’s costing the City, like fully loaded. Mr. Bartel: So, for me I think that’s a great question to ask. The challenge, just so you know, with answering it, answering that question without providing more detail, is if you go back to the question of, the answer to that question is a function of what will the future investment return be. (crosstalk). And if, so the answer at 6.2 is different than at 7 3/8, but what I’m tell you is, we can answer the question at 6.2. Council Member Tanaka: Yeah, but that’s the idea, right? FINAL TRANSCRIPT MINUTES Page 70 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Mr. Bartel: Yeah. Council Member Tanaka: So, we have these three models, we pick a number and we know what it is. Mr. Bartel: Yeah, we can, that’s and easy, easy thing to do. Chair Filseth: I think that’s where we want to be. As to your comment about, you know, the vast majority is the existing retirees and so forth. That’s undoubtedly right. But, you know, I think people might be surprised, okay. Our general fund is $200 million a year, right? People might be surprised how much we scrimp and save for a couple, scrimp and dig for a couple hundred thousand dollars here and there during the budgeting cycle. I mean, you actually might say, oh, it’s noise compared to the size, but it actually isn’t when we’re in there going, oh, I want $20,000 for this. So, it may seem surprising, but actually differences like that, you know, we care about. Dr. Bulow: I will be a bigger number than you’d think. I mean, just to give you an example, it’s easy for somebody to have, you know, okay. Council Member Fine: Just a comment. I think it seems like these employee true cost numbers will be easily explicit from the three models we’re asking from, once we get the models, and so I don’t think we have to ask for it right now. I think the next step after we get these three models is figure out what are the operational products we want out of them, after we’ve refined them a bit, right. Because it’s not just going to be employee cost, it’s going to be timeline and it’s going to be, you know… Council Member Tanaka: (inaudible) will be, slide five I guess. Council Member Fine: Employee true cost. So, I think those are going to be easily made out of the three models we’re asking for. So, I don’t think we have to ask for it right now. And next round, let’s figure out what are the couple tables, sets, graphs we want to show to our Colleagues. That gets to the kind of communication piece out of these three models. And, I think you’re right, it is these two to start, but there’s probably more in there. So, I think… Chair Filseth: What other guidance? FINAL TRANSCRIPT MINUTES Page 71 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Ms. Nose: I was just going to say, I think you guys are on a good track, and the only thing that I would say is something to start to percolate in your minds is, as we come up with our three models so you guys can then kind of pick some assumptions so we can do things like normal cost, know that things like this amortization schedule is at 7½, so if we want to rerun these schedules at whatever the new rate is, that would be something else that we would probably ask our very patient consultant here, Mr. Bartel, to assist us with. So, just keep those kinds of things in your minds as we’re doing our calculations and when we come back to you, in terms of context pieces. Mr. Perez: And if you don’t mind, John, I also want to be mindful that you’re extremely busy right now, so you’ll have to understand that some of it is going to be dependent on his and his staff’s availability to turn some of the stuff around for us. Mr. Bartel: I actually am not allowed to give you timing on any question anymore. I have to go back and ask. Ms. Nose: So, that’s the other thing I would say is, do keep in mind as my team is doing all of this, we will also be developing your FY’19 budget. Chair Filseth: Well, I know you do one in the daytime and one at night. Ms. Nose: You haven’t gotten my AM evals yet. The rest of the team has. But, do keep that in mind, so that’s also why I think we’re trying to bring some structure to this, so that I can manage a little bit of our team, so that they don’t all quit on me. That happened two years ago. Chair Filseth: So, we’re going to move that the Committee directs Staff to prepare alternate finance, long-range financial models, one based on, two alternate long-range financial models, one based on CalPERS data, one based on a 6.2 scenario with no phase in; and to explore legal feasibility with releasing existing member data to Stanford for the purposes of generating a third scenario based on termination, based on 4 percent? Council Member Tanaka: It doesn’t matter. Once we have this picture we can plug in number, basically. Chair Filseth: Okay, based on other percentages. FINAL TRANSCRIPT MINUTES Page 72 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Council Member Fine: That’s existing members and retirees, right? Chair Filseth: Using existing members and retirees. Mr. Perez: (not understood, crosstalk) Chair Filseth: A parametric model sort of. Council Member Fine: I’ll second that. MOTION: Chair Filseth moved, seconded by Council Member Fine to recommend the City Council A. Direct Staff to prepare two long range financial models: i. the CalPERS scenario and ii. an alternate scenario based on 6.2percent with no phase in B. Explore the legal feasibility of releasing existing current and retiree member participant data to Stanford University and, if feasible, allow Stanford to produce a third scenario based on that data. Chair Filseth: Do you care to speak? Anybody else? Council Member Tanaka: I think once we have this, then we can do, get the tools, this amortization thing sounds like a good idea, the true employee cost, and then communication plan, right? Chair Filseth: Right. Council Member Tanaka: So that will be, hopefully, at the next meeting. Chair Filseth: Sounds good. All in favor? Motion passes unanimously. MOTION PASSED: 4-0 FINAL TRANSCRIPT MINUTES Page 73 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Chair Filseth: Thank you very much. Thank you all for staying here. Thank you, Dr. Bulow. Thank you, John. Thank you, Wayne for staying with us. Mr. Perez: I just want to give John an opportunity. Is there anything else we missed from your standpoint that we should be considering? It’s a big question, I know. I just want to make sure that we’re on the right path. Mr. Bartel: So, I’d love to reserve the right to give staff comments on that. I think the answer is, no. You all are doing, I think, more than anybody else really is doing. Most do it exactly, Lalo, the way that you explained it, and that is, you look at where the numbers are going to go, and you figure out what additional money you have, and that’s what you can do. But, I think no additional comments, but I’d like to reserve the right to make a comment tomorrow, when I’m less tired. Chair Filseth: One quick question, as part of the, particularly the 6.2 scenario, love this chart, love what you guys did here, okay. You’re going to update that for the rip-off-the-band aid scenario and put OPEB in if you can? Ms. Nose: Sure, we can, and thank you Steve for doing that chart. Chair Filseth: Love the chart, love the chart. Thank you. It’s exactly what, I’ve lusted after this for a long time. I’ll tell you, you know, that 5 percent, okay, $5 million, that’s an annuity, okay, $5 million a year. You can fund $150 million of capital equipment over that. That’s like ten animal shelters. It’s not that small. Future Meetings and Agendas Mr. Perez: Ready to review the next meetings, whenever you’re ready. Chair Filseth: Yes. What are we going to do next time? Mr. Perez: So, the next meeting we have scheduled is November 7th, and it’s a one-item meeting. You may recall from the budget discussions, that we had a to-do to come back to you with an HSRAP, so that’s what this is about. We don’t have anything else at this meeting. I don’t believe that we’ll be able to come back to you with data sets, any data set at that time and I’m getting an affirmation there. So, then our next scheduled meeting would be a special meeting with Council the 21st. If you may recall, because of FINAL TRANSCRIPT MINUTES Page 74 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Thanksgiving holiday, so the 28th we have the transportation impact fee and we may have the downtown parking management study plan 1, because I believe, well we need count… Chair Filseth: PTC kicked it back, so that one’s… Mr. Perez: Yeah, so that’s why I’m saying, because Planning staff had originally planned on the 7th, but I don’t think we’re going to be able to do that now. So, we’ll have to check internally, so that’s got a pen on it, just so you know. And then the 5th, as you know, we have the CAFR and the long- range financial forecast, and we’ll look for our window of opportunity to interject. Chair Filseth: So, the 28th and the 5th are only a week apart, right. Do you think there’s any way we could have a preview of some of the modeling stuff by the 28th, or should we wait for the 5th? Ms. Nose: I would prefer to wait for the 5th, if possible. If you guys really wanted maybe a high-level base case, meaning the CalPERS reports, I can see if that’s feasible and we can report back to you at the 7th meeting. Chair Filseth: Why don’t we do the 5th? Council Member Tanaka: I think the problem, though, if we wait for the 5th is that because, I mean, so we, on this pension thing, just wrap it up. We have three big things. We’ve got the communication plan, we’ve got, you know, agree on which model we’re going to pick. We’ve got to also come up, give them time to develop whatever totals we want, right? So like, true employee cost, amortization schedule. I mean, and I think, I forgot who was saying it, but we turn into pumpkins at the end of the year, right? Chair Filseth: Yeah, so let me comment on that for a little bit. I think you’re right, although as I think about this, I think some of this stuff is just inevitable, I mean, the communication plan, for example. We’re going to need some time to chew on this and figure out what it is and so forth, and I don’t think we should sort of rush out and try to do a lot of communication stuff before the end of the year. I mean, we’re still going to be gone, we’re still going to be asking questions at that time. So, the pumpkin factor. I think this is very important stuff. I think it is incumbent on Council, this side of the table, so it’s not your issue, right, I think it is incumbent on Council to ensure that next year’s Finance Committee isn’t doing a cold restart. I think FINAL TRANSCRIPT MINUTES Page 75 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 it would ill serve the residents of Palo Alto to do that, and so whatever happens, whether it is, you know, if everybody is new, then we do a massive training schedule and so forth. If Policy and Services and Finance, you know, turn the hour glass upside down, then we do a ton of training, or if there is some continuity and two people from this and two people from that, and so forth. But, I think it’s our responsibility to make sure that we don’t, that Council doesn’t become an obstacle to this problem. And I think we should just take that as Council’s responsibility and commit to doing it, and we’ll talk to the Mayor about it, and whoever is Mayor next year and so forth. Council Member Holman: Maybe we suggest to the next Mayor a little bit of a hybrid, so if the next Mayor decides that this body should be reconstituted, that these four Council Members form a special committee that continue with this work. (crosstalk) So, then there’s a continuity. Chair Filseth: I don’t know, right. Mr. Perez: You did something similar for the infrastructure plan. Chair Filseth: Did we? Okay. Council Member Tanaka: You don’t think we could get there with, I mean, I feel like we’re close. You don’t think we could get there? Chair Filseth: We need Lalo and Kiely to still be alive next year. Council Member Holman: You didn’t ask permission. Council Member Tanaka: Well, that’s the other factor to do it faster? Chair Filseth: How long do we have you for actually? Ms. Nose: Years. Council Member Holman: Till the Giants win the World Series again. Chair Filseth: Until the U.S. makes the World Cup again. Mr. Perez: I’m part of the building now. FINAL TRANSCRIPT MINUTES Page 76 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 Council Member Holman: Wait, wait, the women are in the World Cup. Chair Filseth: That’s true, they are. Mr. Perez: You know, I understand the timing and going back to the comment I made earlier, I think what we will find is that we will be able to make some additional contribution, and I think that we’ll be able to make it within our means. I’m a little worried I’m getting ahead of myself, because the infrastructure picture is looking ugly, so… Chair Filseth: It is what it is. Mr. Perez: Yeah. And so that makes me feel better to the point that if we continue making those contributions and we continue to have this process moving, while it may not move at the speed we would desire, I think we’re heading in the right direction and that we’re going to get to a point where you will have formal policies that could really set us in a path that is towards the discussions and goals you have been having. Chair Filseth: Well, I think if we could get to transparency on these scenarios, right, so we can say, yes, those are the numbers. No phase in, right. This is what it is. I think if we could get there by the end of the year, I think we’d have made really good progress. I think we’ll be where we need to be. Ms. Nose: And just to alleviate some of you guy’s concerns, we always carry forward language from the long range into our proposed documents, so what we do in long range does set the stage for how we develop the next year’s budget. So, that can easily be something that if you guys are worried about memoralizing things, that we, at minimum, just reference in our proposed documents that these are the assumptions that this budget was built on. And so that would be very consistent with how the current documents are set up, and very simple in terms of, you know, making sure there’s an extra chart, maybe, that shows these different scenarios that the Finance Committee considered in December of 2017 that helped inform. So, we all do know those budget documents live on forever. So, that will at least help with some of the that policy side of things. Chair Filseth: So, with that we move to adjourn. Thank you very much. Thank you, John. FINAL TRANSCRIPT MINUTES Page 77 of 77 Regular Finance Committee Meeting Final Transcript Minutes 10/17/2017 ADJOURNMENT: Meeting adjourned at 11:05 P.M.