HomeMy WebLinkAbout2017-12-05 Finance Committee Summary Minutes FINANCE COMMITTEE
FINAL TRANSCRIPT
Page 1 of 87
Regular Meeting
December 5, 2017
Chairperson Filseth called the meeting to order at 7:03 P.M. in the
Community Meeting Room, 250 Hamilton Avenue, Palo Alto, California.
Present: Filseth (Chair), Holman, Tanaka
Absent: Fine
Oral Communications
Chair Filseth: With that we will call the meeting to order and we have, first
we have Oral Communications. We have one speaker, which is Wayne Martin. Welcome and you’ll have three minutes.
Wayne Martin: Sadly, my short-term memory is not as good as it used to
be, so I’m going to have to use notes these days. I’m going to attend a few
of these meetings, because I’m just now getting a chance to spend some
time getting my head around the financial data that the City has been
putting out. I would like to say that over the years, and I’ve been watching
this for 20, 25 years, the financial documents do seem to be getting better,
and I’d like to compliment the financial people in that area. That said, all
that graphic art in the OP Budget is not all that helpful. Personally, if you’re
trying to read this stuff on the internet, trying to wade through those rather
useless graphics isn’t helping. I would like very much to encourage the
financial people to start putting the data that they release out in some form or another, either CSV files or XL files, somewhere on the website. It’s
painful trying to extract that stuff out and put it in spreadsheets to make
something useful for submission back to the City. One of the things that’s
bothered me a little bit is that we’re looking at some huge infrastructure
costs. During the Benest years, as memory serves, the City kind of elevated
as much as $550 million. It jumped up from the White years of $98 million
back in ’98. I haven’t actually seen a number in the last couple of years. I
don’t know if you’ve been publishing it or not, but if we start looking at
these pension obligations that you’re talking about, then I think that putting
together a complete and honest accounting for the infrastructure to include
San Francisco Creek, the airport and any Caltrain trenching, which may or
may not actually come out of the City Budget, but nonetheless, are numbers that have to be looked at in the future, it would be nice to have some place
where all this stuff is at least on the table. I had never heard, or the last the
time you guys were talking about 115 Trusts. At the time I had never heard
FINAL TRANSCRIPT MINUTES
Page 2 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
of them. I spent a couple of days after the meeting digging through the
City’s website and the websites of several other cities and it turns out that I
was surprised to find that Palo Alto has a 115 Trust for its post-retirement
healthcare and that you seeded it with $30 million, and that from
discussions I’ve had with folks in your Finance Department, it’s worth quite a
bit more than that now. I think that’s great. I found that you created a 115
Trust for the pension benefits and seeded it with $3 million, and I think
that’s woefully under seeded, and just as an ordinary citizen, it wouldn’t
bother me if you found $50 million, got it into, so it’s working. Because, frankly, everyone knows that interest is free money, and downstream we’re
going to have to pay off this unaccrued liability for the pensions one way or
another. Right now, I don’t see money on the table to pay off these huge
numbers, which brings me to the two e-mails that I sent in. Hopefully, I’m
not violating your rules. The first one…
Chair Filseth: If you could wrap up, you’re at the three minutes.
Mr. Martin: I’m sorry?
Chair Filseth: You’re at your three minutes, so if you could wrap up pretty
quickly, it would be great.
Mr. Martin: Alright. Well, there’s two e-mails I sent in. One turns out to be
what I believe the unaccrued pension liability will be using the 5 percent
multiplier that California Public Employee Retirement System (CalPERS) has been documenting and as far as I can see, you’re looking at almost a billion
dollars as you get out in the 2030’s years, unless something changes. The
other one is a little more complicated. I guess I’m not going to have enough
time to go through it, but what I tried to do is to demonstrate that if you
keep paying people three to five percent a year, and you don’t change any
of your labor negotiation policies, you’re looking at some cost, as you get
into the year 2030’s and 40’s, the cost to hire some of your people are going
to be $4, $5 and $600,000 dollars per employee, and I just think that’s hard
to believe.
Chair Filseth: Thank you.
Agenda Items
FINAL TRANSCRIPT MINUTES
Page 3 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
1. Macias Gini & O'Connell's Audit of the City of Palo Alto's Financial
Statements as of June 30, 2017 and Management Letter.
Chair Filseth: With that, we’ll move to the first Action Item, which is the
audit of the financial statements.
Lalo Perez, Chief Financial Officer and Director of Administrative Services:
Chair Filseth, I think there’s going to be a video shown from Harriet first.
She is unable to attend the meeting and after we see the video I would like
to make a suggestion on the Agenda, due to a technicality.
Chair Filseth: Okay, super.
Harriet Richardson, City Auditor: Good evening Mr. Chair, members of the
Committee, Harriet Richardson, City Auditor presenting the results of the
annual financial audits. The City Charter of the Municipal Code required the
Office of the City Auditor to coordinate the City’s annual financial audit.
Macias Gini & O'Connell (MGO), also known as MGO, has conducted the audit
for the seventh year, and is here tonight to discuss the results of the audits,
which include the independent auditor’s reports on the City’s financial
statements, on the internal control over financial reporting, and on
compliance with other matters based on an audit of financial statements
performed in accordance with government auditing standards, also known as
the Single Audit Report, and compliance for each major program and on
internal control over compliance required by the Federal Office of Management and Budget (OMB), Circular A-133, also known as the Single
Audit Report. In addition, they have audited what are referred to as the
small reports, the report to the City Council is also known as the
Management Letter. They have a report on the cable TV franchise revenues
and expenditures, the Palo Alto Public Improvement Corporation, the
regional water quality control plan, Transportation Development Act Funds
and the independent auditor’s report on the appropriations limit. There were
no outstanding recommendations from prior Fiscal Years; however, the
auditors had three findings of recommendations this year related to the
Federal Single Audit. Two of the findings were related to the Highway
Planning and Construction Grant, including not verifying that a vendor was
not on the Federal Suspension and Debarment List prior to entering into a
contract with the contractor, and not obtaining the certified payrolls to
ensure compliance with the Federal wage requirements. The third finding is
regarding the Clean Water Grant and not obtaining documentation to verify
that the construction management company that oversaw the project had
FINAL TRANSCRIPT MINUTES
Page 4 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
obtained the required certified payrolls. The auditor’s classified the findings
related to the Suspension and Debarment List for the Highway Planning and
Construction Grant and the certified payrolls for the Clean Water Grant as
significant deficiencies in internal control over compliance, and the finding
related to certified payrolls for the Highway Planning and Construction Grant
as a material weakness in internal control over compliance. The difference
between these classifications is that auditing standards define the significant
deficiency as a deficiency or combination of deficiencies in internal control
over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of
the entity’s financial reporting; and the material weakness as a deficiency or
combination of deficiencies in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of the
company’s annual or interim financial statements will not be prevented or
detected on a timely basis. The City has concurred with the findings, and
identified corrective action plans that they expect to complete no later than
December 2017. In addition, I recently provided the City’s Executive
Leadership Team with guidance regarding internal control over Federal
grants, and will be doing training for some of the project managers on this
topic in the Spring of 2018. I would like to thank David Bullock and Irene
Chan and their team from MGO for their diligence and hard work in completing this audit. I would also like to thank Lalo Perez and his Staff in
Administrative Services Department (ASD) for the assistance they provide to
MGO to complete the audit on time, but more importantly, for the work they
do throughout the year to ensure that we receive unmodified opinions on our
financial statements. David Bullock from MGO and ASD Staff will answer any
questions you have regarding the audits and the comprehensive annual
financial report. Thank you.
Mr. Perez: Thank you. Lalo Perez, Chief Financial Officer. David Bullock,
Partner with MGO is here, as well as Tony Sandhu, who is interim accounting
manager, I have to get the titles right. Tony is a retiree that we were able to
bring back. We have not been able to successfully fill the accounting
manager position nor the assistant director position that previously was held
by Joe Saccio. We have been having a challenging time, but Tony was here
to help us through it. My suggestion is to combine one and two on the
Agenda for the following reason. I failed to catch that the Comprehensive
Annual Financial Report (CAFR) was not listed under the auditor’s item
Number 1, and that’s the purpose of Mr. Bullock being here. So, that’s why
I’m recommending that we combine 1 and 2. That way he can just go ahead
and discuss the CAFR as well as the Management Letter.
FINAL TRANSCRIPT MINUTES
Page 5 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Chair Filseth: That seems reasonable.
Mr. Perez: Thank you.
Chair Filseth: Please proceed.
2. Recommendation to Approve the FY 2017 Comprehensive Annual
Financial Report (CAFR) and Approve Budget Amendments in Various
Funds
David Bullock, Partner, Macias Gini & O’Connell (MGO): Good evening. So,
Harriet kind of laid the foundation of the reports that we’re going to present
today. The first report that I was planning to present is the Comprehensive Annual Financial Report (CAFR). I’m not sure how familiar you are with the
CAFR, but it typically has three sections, three primary sections. Your CAFR
has four. In addition to the introductory section, the financial section and
statistical section, you’ve also included the single audit in this report so, it
houses your Federal Works, the programs for your Federal Works. So, the
first section is the introductory section, and that kind of lays out the
transmittal letter and introduces the document. It talks a little bit about the
service efforts and accomplishments. We don’t audit that section. It’s for
management and it transmits the document. The third section is the
statistical section, and that is a nice section for some historical information.
It presents the ten-year trend for the most part, so it gives you a little bit of
history in comparison to where you’re at this year and the last ten years. So, the primary section is the financial section, and if you want to follow along,
it’s the second tab in your CAFR. If not, I’ll just kind of walk you through it.
But the first section in the financial section is our audit opinion, and that’s
where we talk about the scope of work, the standards that we follow. We
follow two sets of standards. We follow the Generally Accepted Auditing
Standards, which is what Certified Public Accountants (CPA) follow when
they follow the professional standards. But in addition, we follow the
Government Auditing Standards, and you’re mandated to have your audits
conducted in accordance with Government Auditing Standards when you
receive Federal awards. So, the Government Auditing Standards really
include the Generally Accepted Auditing Standards and add a little more
emphasis in the areas of independence, auditor independence in areas of
reporting internal control and compliance-related matters. That’s really
where the emphasis is in those sections. So, we’ll talk a little bit more about
that when we get to the single audit, because that’s where that report is
presented. But in terms of the opinions on Page 2, and basically the opinion
is an unmodified opinion. Which is the highest level of assurance that we can
FINAL TRANSCRIPT MINUTES
Page 6 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
provide as your auditors, that we believe these financial statements are
fairly stated. Management is responsible for preparing the statements. In
terms of the following sections, the NDNA is a nice section because it
provides a little context to the numbers. Management puts that together and
Tony is going to go through some of that financial analysis with you after my
presentation. The following section is the financial section, which includes
the financial statements and the footnote disclosures. That’s considered the
basic financial statements. I always like to pick maybe two or three topics to
talk about, just to provide some context and discussion, but pension is an ongoing issue with most governments right now. You guys have your
pension plans with California Public Employees Retirement System
(CalPERS), both the safety and miscellaneous. There is a lot of information
out there, a lot of change as a result of new standards that have been
implemented. This is the third year reporting under a Government
Accounting Standards Board (GASB) 6DA and some of the unusual things
about the way you present pension (not understood) present pension, is
when the information is not available at the time you close your books, you
have up to a year in arrears to report, which you guys do. So, you’re always
reporting one year in arrears. So, you’re actually presenting the 2016
information in your report because that’s the best information that’s
available at the time this report is prepared. So, as you look at your balance sheet, you can see that the net pension liability is the largest liability on the
financial statement, on Page 29. And that’s going to change from year to
year, just based on actuarial estimates and how the Trust performs in terms
of collecting contributions and investment returns. So, I just wanted to bring
that to your attention, in case there were any questions on it. I would be
more than happy to discuss some of the particulars. There’s a disclosure that
talks in depth about the pension plans that you have, and some of the
actuarial methods and assumptions that go into that. You’ll note that the
information in here is different than what’s being done on a funding basis.
One of the things that GASB tried to achieve with the pension reform was to
separate the funding from the reporting. So, the financial reporting has
nothing to do with whether or not you’re going to fund on some method of
reduced discount rate over a three-year period. It’s based on what the
economical substance is behind the numbers. And so, a good example of
that is this year CalPERS just finished their 2017 audit and they actually
lowered the discount rate to 7.15 percent. On the accounting basis in
accordance with GAP, you don’t reduce the discount for administrative
expenses. So, for funding purposes you use 7 percent, but for financial
reporting purposes you’re using 7.15 percent. And that’s going to be
reflected in next year’s report when you report the 2017 results. So, the
discount rate is going down pretty quickly. More quickly than the funding,
FINAL TRANSCRIPT MINUTES
Page 7 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
right, so there’s going to be a little bit of a gap in terms of when the funding
valuations catch up to the reporting valuations. On the good side, or the
good news, I guess, is that CalPERS did perform well in their investment
portfolios this year. They achieved above their assumptions. They were at an
11.2 percent return, so at least they’ve recovered some of the lost returns
that they’ve had in the last few years.
Chair Filseth: Other Post Employee Benefit (OPEB) liability doesn’t appear on
this, but my understanding is that it will next year? Is that, am I accurate?
Mr. Bullock: That’s correct. So, the OPEB is the other shoe to drop. So, GASB tackled pension first with the intention that they would evaluate how
governments report OPEB and that’s going to be implemented next year.
The information, CalPERS, the City invests its funds in CalPERS in the
surrogate plan in terms of the Trust. And CalPERS is making that information
available this spring. So, you will be able to implement next year. It will also
be one year in arrears, just like the pension plan. And that will be significant.
If you look on Page, if you’re curious, if you look on Page 94, you’ll see a
schedule of funding progress. There’s a table there. And this information is
dated. It’s based on the last valuation which was done for 2015, June 30,
2015. I understand that June 30, 2017 is in progress now. But this is the
latest information that’s available, and you can see that the actuarial
estimated liability is $234 million, as compared to $78 million set aside. And one thing to keep in mind is the value of assets on the actuarial basis is
different than the fair market value of investments at a specific date. And
also, that was the date back in 2015. So, a couple of things to keep in mind,
but as you can see, the unfunded liability two years ago was about $156
million. So, under the current standards, you’d be reporting whatever that
difference is between what the actuary says the liability is and the resources
you have in your Trust. That difference is going to be reported as a liability
on your financial statements. At the government-wide level, not in the fund
statement. So, I just wanted to make that clear. It’s not going to affect your
fund balance, but it is definitely a liability to consider as you’re planning for
the future. Any other questions on the OPEB? The other things I want to
point out, there wasn’t a lot of change in the current year. There wasn’t a lot
of change in standards, so it didn’t impact the financial statements as it has
in past years, but there’s the new State revolving loan for the, what is it, the
regional water quality control plan. So, that’s a significant change. That’s
new debt. There were no bonds issued, debt, other than that loan. So, that’s
a big project and that’s going to be happening over the next several years.
And then the other thing I wanted to point out is the Pension Stabilization
Fund, so, the City established a new Pension Stabilization Fund in the
FINAL TRANSCRIPT MINUTES
Page 8 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Internal Service Funds, and has set aside during the current year, $2 million
into this trust that can be used to help offset some of the increased
contributions in the future. And I know the City plans to contribute more to
that trust in subsequent years. So, that’s something new this year, so you’ll
see a restricted cash balance of just over $2 million sitting in your Internal
Service Funds in the current year, and that was a change from past years.
In terms of the single audit, that’s at the very last tab of the CAFR, there’s
two reports that we issue. One is under the Government Auditing Standards,
and that’s basically Government Auditing Standards as it impacts your financial statement audit. We didn’t report any internal control deficiencies
or any compliance findings. So, that’s a clean report. On Page 165, though,
on the Federal Funds, we did see a couple of compliance issues as we were
looking at your Federal programs that were selected for testing. And the way
the single audit works is, you select a certain number of programs based on
how much funding you get and the size of the programs every year, because
they want you to go through the different programs. So, instead of auditing
every program every year on a risk-based approach, they have you select a
certain number of programs. So, this year two programs were selected, the
Highway Planning and Construction Grant and the Capitalization Grants for
Clean Water. So, those were the two grants selected and as we were going
through there, as Harriet mentioned, we had findings in relation to the suspension and debarment clause. So, obviously, it’s important to check
whether or not vendors are suspended or debarred before entering into a
contract with them. So, there was one instance where we found the
verification was done after the fact. So, there weren’t any problems. You
weren’t contracted with anybody suspended or debarred, but the potential is
there is you’re not checking beforehand. So, we noted that. The other two
had to do with prevailing wages. You know, just the wage requirements.
Along with Federal Funds there’s strings and they require certain types of
construction employees be paid a prevailing wage. So, there were a couple
of instances with one program where, as we were doing the testing we didn’t
see the evidence that that was documented. One of them, the information
wasn’t available and so we couldn’t even go back and check whether or not
those contractors were paid. So, that was the one that we called a material
weakness because we just couldn’t verify. The second was a program where
they were being housed by one of your contractors and we were able to
obtain those and verify that the employees were being paid prevailing
wages. So, that ended up not being a compliance finding, but just an
internal control matter to make sure that gets checked and documented. So,
you’ll see that management has provided a letter of corrective action on
Pages 179 and 180 to make changes in policy and procedures to address
those two areas. Also included in the Packet is the report to City Council and
FINAL TRANSCRIPT MINUTES
Page 9 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
this area mentioned, she called it also like a management letter, and it’s
similar to a management letter, but it’s really more than a management
letter typically that reports internal control issues or other
recommendations. It’s a letter that reports the results of the audit. So, what
we’ve highlighted in that letter, which is required in accordance with our
standards are changes in the financial statements. We let you know when
there’s changes in consistency, and that’s in your Packet Page 9, is the start
of the section where we talk about required communications. So, I’ll give
everybody a chance to get there. Packet Page 5 is the cover of the report, but Page 9 is where the communications start. So, the first part of that
section just talks about changes in consistency. So, any time you implement
new standards, or you implement any change in accounting practices, we
highlight that here so that you’re aware of it. Otherwise, you would just
assume that things would be consistent with prior years. We also highlight
significant estimates, just so that you’re aware of them. You know, financial
statements contain estimates and they have to in order to report on a timely
basis, but things could change in the future that are different from those
estimates. So, we just want you to be aware of where the estimates are, or
what’s being estimated in the financial statements. And then we also
highlight a couple of other sections of, or areas where if there were any
issues during the audit, and we’re happy to report there were none. The audit went as planned. There were no material adjustments. There were a
couple of small items, uncorrected items, that, you know, when they are
small, immaterial items oftentimes they get passed on and they just get
reflected in the following period. So, that will just be reflected next year. I
don’t think those are significant. There’s no disagreements with
management. And then we also highlight, as we talked about earlier during
the CAFR, what areas we don’t audit. For instance, we don’t audit the
statistical section or the introductory section. The remaining reports, the
cable TV franchise, the regional water quality control plan, the Public
Improvement Corporation, which is the 2002 bonds, all of those were
unmodified opinions of complete of those audits, and there were no findings
in there. And then the last one was the Transportation Development Act.
That’s the MTC money, the bike path money and we had no findings there.
So, with that, I’ll turn it over to questions or back to you.
Chair Filseth: Council Member Tanaka.
Council Member Tanaka: So, for the single audits, who selects which
programs get audited?
FINAL TRANSCRIPT MINUTES
Page 10 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Mr. Bullock: We do. So, there’s specific criteria. There’s what we call a Type
A Program and a Type B Program based on the dollar amount of the grant
and for the Type A’s, they have to be audited. If they were audited in the
last two years with no findings, and they are a considered a low-risk A
program, then we look to the smaller programs and audit those higher risk
Type B Programs. So, before the single audit app was changed, you would
just audit the same Type A programs every year, because they were the
larger programs, and the Federal Government felt like there wasn’t enough
coverage. You were testing the same programs, but then you’re missing some high-risk smaller programs, and so we alternate through those
programs. So, that’s, there’s a specific risk assessment process that goes
through major program determination.
Council Member Tanaka: Okay. Do you guys also look at the procurement
process the City uses?
Mr. Bullock: We do, yeah.
Council Member Tanaka: Okay, and you guys audit that as well?
Mr. Bullock: We audit, are you talking about Federal programs or are you
talking about the City just in general?
Council Member Tanaka: The City’s procurement process in general.
Mr. Bullock: Yeah. So, what we do is we typically select samples and we’ll go
through and as we look at disbursements we go through and we look at the contracts associated with them or the agreements. And so, we look at it in
that regard, and we look at the policies and procedures in general just to
see, what are the procurement practices. You know, what are the thresholds
for quotes versus competitive bidding, and we go through a process and just
to ensure that we believe there’s proper internal controls in that area.
Council Member Tanaka: Okay. So, going back to Page 33, the balance
sheet. Let me ask you, I assume you guys audit other cities as well, right?
Mr. Bullock: We do.
Council Member Tanaka: What are some of the local cities you guys audit?
FINAL TRANSCRIPT MINUTES
Page 11 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Mr. Bullock: Sunnyvale, Mountain View, we audit San Francisco, we audit
Oakland.
Council Member Tanaka: Okay, great. That sounds good. So, if you, let’s say
look at our balance sheet relative to other cities, what would you say is
notable?
Mr. Bullock: You know, each city is so unique. I mean, Palo Alto is very
unique, where it has Enterprise Funds that you don’t see in typical cities.
You know, you typically don’t see power and water. You see water, sewer,
refuse, but you typically don’t see, you know, electric or gas utilities. And a lot of times, different governments utilize Internal Service Funds for different
ways to allocate costs among departments, and so some governments just
have those activities housed in their General Fund, and some of them have it
housed in Internal Service Funds. So, it’s really hard to try to compare.
Some of the things I think that are maybe more, if you look at the Page 29,
because Page 33 is just your governmental funds and it’s going to be unique
to your organization. The government-wide Statement of Position has all of
your funds excluding your Fiduciary Funds, your agency funds. And it’s going
to be maybe a better way to compare yourself to other governments. But
without knowing the population and the types of services, some cities
contract Sheriff Department from the local county or they contract certain
things, and some have their own departments. So, it’s just, everybody is a little unique. But, some of the things that quickly come to mind is just
looking that there’s very little debt in comparison to most governments that
have infrastructure or large capital assets. So, you have $500 plus million in
capital assets, but you only have about $60 million in debt related to those
capital assets, which is a good sign. And so, you kind of look down at net
position, you can see the net position related to capital assets, and then
those that are restricted. And the restricted nature of net position depends
on, you know, whether or not you get a lot of funds with strings attached to
them, like Housing Funds typically we’ll see in there, or other projects. And
so, there’s not a lot of restricted resources, other than transportation and
capital projects. And then your unrestricted net position, you know, a lot of
governments right now are reporting negative net position in the
unrestricted category, just because they had such a large pension liability
when they brought in the net pension liability without any corresponding
asset. You actually may go negative once you implement the OPEB
Standards. So, that’s something you’ll have to talk to your bond rating
agencies about. It’s a long-term liability. That’s not due tomorrow, it’s going
to be paid over a long period of time. But it’s just something to be aware of.
I don’t know if that helps. If you’re interested, it would be good to take this
FINAL TRANSCRIPT MINUTES
Page 12 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
schedule, this statement, and pick some cities of equal size to Palo Alto and
just line them up. Some of them, some cities that are newer are going to
have probably more significant dollars in the capital assets because the
current spending is going to be higher than maybe what they’ve spent in the
past, depending on how old the city is. So, there’s just going to be a lot of
variations that will arise as you do that comparison, but a lot of them could
be explained.
Council Member Tanaka: Yeah, I actually have the Mountain View one up
right now, so I’m just looking at it compared to Palo Alto. Do you personally work on the Mountain View one?
Mr. Bullock: Mm-hmm.
Council Member Tanaka: So, if you contrast us to Mountain View, what are
your thoughts?
Mr. Bullock: Well, I don’t really get into a lot of financial analysis. My job is
not really to analyze a government, you know, like a credit-rating agency
would, but from an audit perspective, we’re more validating the information.
Council Member Tanaka: Okay, I understand.
Mr. Bullock: So, I kind of hate to do a comparison without really spending
time looking at those.
James Keene, City Manager: Can I, just for a second. So, when you say one
of the primary functions of the Comprehensive Annual Financial Report is to show, to report publicly, both to meet requirements of that, but also to let
the world, including investors in the marketplace understand the City’s
financial position. And this would be a document, for example, that would be
a factor in rating agencies looking at a city’s financial standing. And, seeing
as how our City has a Triple A bond rating, to what extent would you say
that that is a common occurrence across California, versus putting us in a,
you know, really kind of the top level of agencies as were seen by the credit
agencies.
Mr. Bullock: Yeah. The credit rating is a good sign of the strength of the
organization and its ability to make payments. So, there are not too many
cities who have that high of a credit rating, so yeah, that’s a good testament
FINAL TRANSCRIPT MINUTES
Page 13 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
to the financial strength of Palo Alto. And, if you look in the statistical
section, there’s a lot of information in there that talks about assessed value,
and that’s a good way to establish, you know, obligations compared to the
assessed value and the potential for future revenue and the strength of the,
the base of revenue that comes into the City.
Council Member Tanaka: Okay. So, I’m not sure if you guys are the right
guys to be asking about his, but I’m looking at Page 2 of Exhibit B, I’m
sorry, Attachment A, I’m sorry, Attachment B, Exhibit 1.
Mr. Bullock: Is that in this reporting Packet here?
Council Member Tanaka: No, yeah, it’s in this big one right here.
Mr. Bullock: I’m sorry. What page is it on?
Council Member Tanaka: I’m trying to figure it out, because…
Mr. Bullock: On the bottom, is there a Packet Page?
Council Member Tanaka: I know, but not on line though.
Chair Filseth: It’s in the Staff Report. (Crosstalk) Packet Page Number 74.
Council Member Tanaka: I guess it’s number 74. Yeah, it’s doesn’t show on
line. It only shows on the printed, but, okay. So, I was wondering if you
could speak to the Fire salaries and benefits.
Chair Filseth: Before we do that, can I ask a procedural question here? I
think it makes sense that we go look at individual, you know, expenses and
what changed and so forth this year, right. I know there’s a Staff presentation on the CAFR itself, right. This is sort of the auditing phase of
this, right? So, how do you want to do, do this all at once?
Lalo Perez, Chief Financial Officer and Director of Administrative Services: If
we can save those, that way we can focus on Mr. Bullock and his review and
audit. That would probably be easier.
FINAL TRANSCRIPT MINUTES
Page 14 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Chair Filseth: Okay (crosstalk). So, let’s focus on the auditing piece and
basically does this represent an accurate assessment, an accurate tally of
our financial status, and then talk about sort of, you know, the analysis of it
afterwards.
Council Member Tanaka: Well, in terms of the audit, that’s mainly what I
had for that, except I was just curious, are these kinds of changes typical?
Like, what we owe, or do you even know?
Chair Filseth: You’re asking him to be an analyst.
Mr. Perez: He wouldn’t have reviewed that particular section that Staff prepared. He could have reviewed a component of it, but not necessarily
that report. So, it would be a Staff question.
Council Member Tanaka: Okay.
Chair Filseth: Is this accurate?
Mr. Bullock: Yes.
Chair Filseth: Thank you. Okay, I’m good. Thank you very much.
Mr. Perez: So, in that case, we’ll turn over, I’ll ask Dave to stay for a little
bit, just in case we, you know, you see something on the CAFR and you say,
and I want to ask that question. So, he’ll stay for a little bit longer. So, let
me turn it over to Tony. He’s going to hook up his laptop. In the meantime,
while he does that, let me give you a high-level or (inaudible). So, we closed
the year with a $5.8 million surplus. So, it’s another year where we stayed within our means. Revenues slightly higher, expenditures a little bit lower.
Tony is going to go into the details. Bottom line, at the end what we want to
do is recommend that the net surplus that we identified, about $3.5 million,
be considered for infrastructure at this point. Because as you well know, you
have a, we have a gap, and the gap is growing as we speak as a result of
construction costs going up. We’re hearing all sorts of warnings about
interest rates going up as a result of potential Federal Tax law changes, and
so that could increase our debt obligation payments. So, what we’ll do is,
we’ll have Tony walk you through some of the details. You’re welcome to ask
your questions, Mr. Tanaka, that you were thinking of asking, and we also
have some questions that were sent earlier by Mr. Tanaka and then, Chair
FINAL TRANSCRIPT MINUTES
Page 15 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Filseth, we can address that as we go forward through the presentation. And
then, obviously, any other questions you have. Thank you, Tony.
Tony Sandhu, Interim Accounting Manager: Good evening again. My name is
Tony Sandhu. I’m Interim Accounting Manager, and I’m glad to be here. I’m
going to go over a few slides and the first slide basically gives a very high-
level analysis of the General Fund, the total revenues, expenses and
transfers compared to the final budget of $5.9 million favorable. I’m also
referring to Attachment A, Exhibit A, Page 72 of the Packet, just in case you
want to look at some details. For the total revenues, they exceeded the final budget by $2.8 million and a big component of that is $1.9 million is the
Utilities Users Tax (UUT) (inaudible) tax. This is something kind of hard to
forecast in a sense. We don’t know, because a lot of that money comes from
the telephone companies and there are a lot less details available. So,
basically we take what comes, and we had a good year. This is a revenue
source which has been going I’ll show in the coming slides and for the Fiscal
Year is $1.9 million. The next big component of the favorable is general tax
revenues, $2.4 million. This revenue source includes our big tax revenues,
Property Tax, Sales Tax, Transient Occupancy Tax (TOT) and Document
Transfer Tax, extra, extra. So, the combined impact is $2.4 million. And
lastly, we have some categories where we were less than the final budget
and the combined impact of that is $1.5 million. Mostly this is what you would call the charges for services and development activity is a little less
than what we forecasted in the Development Services, and that’s the biggest
chunk of unfavorable variances we have, including Planning and Permits.
They are also slightly lower than what we forecasted.
Council Member Holman: What was the last one?
Mr. Sandhu: Planning permits and plan licenses category. These are new
building permits and the one-day cross the street. Okay. On the expense
side, again compared to the final budget, we are $2.1 million lower, and
savings were mostly across various categories. There’s not any big chunk.
The only category we can point out is less use of contingency accounts. We
had contingency accounts of City Manager, Council, Sustainability and a few
more. So, we didn’t use all the contingencies, so that ended up in a savings.
Chair Filseth: The material amount of that due to sort of unfilled positions?
Mr. Sandhu: Yeah, there was some savings in the vacancies, also. But on
the other hand, there was some higher uses of overtime in Public Safety.
FINAL TRANSCRIPT MINUTES
Page 16 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Chair Filseth: Fire, year.
Mr. Sandhu: Fire and Police. So, that basically used most of the vacancy
savings.
Chair Filseth: Okay.
Mr. Sandhu: On Page 72, the schedule, we’re showing the expenses also
include $6.7 million of carryover encumbrances into fiscal ’18, and also $1.1
million of appropriations, re-appropriations of Fiscal ’17 Budget to the next
year.
Chair Filseth: What do you mean by encumbrances?
Mr. Sandhu: These are the Purchase Orders (PO), purchase orders, the
contracts which are outstanding. Mostly they are related to capital projects.
Those capital projects that will finish at the end of the Fiscal Year. So, by our
charter, those are carried forward to the next year until the project is
complete.
Chair Filseth: Would it be an accurate description to say, that’s an expense
that was budgeted for this year, but we didn’t spend it this year. We’re going
to spend it next year?
Mr. Sandhu: That’s true.
Chair Filseth: So, it’s a savings this year, but.
Mr. Sandhu: But for comparison purposes, because that money was already
carried forward or was part of the budget, so it’s just comparing apples and apples.
Council Member Tanaka: So, how is that different from reappropriations?
Mr. Sandhu: Reappropriations are, and Kiely can talk more about it, these
are the kind of programs which they were part of the budget, carryover from
the prior years, but somehow the program was not finished, or the Staff is
going to work on the following year. Those are the kinds of things, just sort
of reappropriations.
FINAL TRANSCRIPT MINUTES
Page 17 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Mr. Keene: Encumbrance is usually involved, where we’ve got a contract
that’s already in existence for an expenditure, and so we, in one sense it is
like a reappropriation, but we call it an encumbrance because it’s locked to a
contract. Reappropriation is more like a budget amount that isn’t necessarily
contracted to anything, but it is unspent. So, we take the authority to spend
that, put it in the reappropriation and carry it forward to the next year.
That’s the difference.
Mr. Sandhu: Okay. This slide is basically historical, this is what we call the
top five tax revenues for the General Fund. This is sort of historical picture for the, actual for the last three Fiscal Years (FY), ’15, ’16, ’17, and Adopted
Budget for Fiscal Year ’18. Just as a context, for Fiscal ’17, if you add up all
these various revenue sources, they comprise approximately 70 percent of
total General Fund revenue. So, these revenue sources so critical. The first
one, Sales Tax, you can see it is pretty much flat for the past three Fiscal
Years, going slightly up in the Fiscal ’18 Adopted Budget. I know there is
going to be more discussion in the next Agenda Item.
Chair Filseth: That was actually down this year. (Crosstalk).
Mr. Sandhu: Yeah, it’s slightly down, 0.3 percent or something like that. We
call it pretty much flat. It’s like 300 grand.
Chair Filseth: So, that’s budgeted. Okay.
Council Member Tanaka: Just a question. Why didn’t you, because it looks like Sales Tax has been kind of flat, why did you show an increase for 2018?
Mr. Sandhu: This is an Adopted Budget. I think Tarun is going to talk more
about it right now.
Tarun Narayan, Manager of Treasury, Debt and Investments: My name is
Tarun Narayan. I’m Manager of Treasury, Debt and Investments. The
Adopted Budget that you see, we full costed that about half a year ago.
Recently, I did an update which is not reflected here, which basically shows
that our Sales Tax is going to be about $1.6 million lower than what we
show in the Adopted Budget. So, in essence, the actual that we are going to
be adjusting at the midyear is going to be basically flat, yeah.
FINAL TRANSCRIPT MINUTES
Page 18 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Mr. Sandhu: The next category, Property Tax, as you’ve been hearing
around the estate industry, assessed valuation is growing every year for the
past few years, and this year is no exception. In Fiscal ’17 we grew 7.5
percent over prior Fiscal Year, and like you can see also, the budget is
reflecting like 6.5 percent over Fiscal ’17 actual. TOT, that’s another
category which has been doing great lately. We also have some increase in
our TOT rate plus new hotels. The combined impact is in Fiscal ’17, we grew
like 5 percent, which is still pretty good compared. There is still room for
growth. Documented Transfer Tax, this is one source which we’ve been doing well because of the number of planned real estate transactions being
closed. And again, if you look at Fiscal ’15, there was one large, I think, one-
time transaction closed in that year. But since then, again, 6.2, 7.4 percent,
which is again, good growth, but (inaudible) again, this is very hard to
project in the sense that we can’t project either, which transactions are
going to end up next Fiscal Year. But still, compared to other agencies,
we’ve been doing pretty good. Last, not the least, UUT. I touched it a little
bit in my prior slides. This is, most of the growth, we are at $14.2 million,
which is almost 14 percent increase over prior actually, Fiscal Year. Most of
this growth is actually coming from telephone companies. There are a lot of
new products they are selling, you know, and UUT’s charge all of those.
Also, our rates on electric utilities have gone up, so that’s the thing and more UUT in our City, utility evidence as well. So, any questions? Yes.
Council Member Holman: Yeah, I have a question, and it’s more for Staff
than for you, I think, about the TOT. We have how many hotels that are in
process too, right?
Mr. Perez: There’s two that are going to, one somewhat new, I guess, and
one’s expanding and two major additions.
Council Member Holman: And so, when are they expected to come on line?
Mr. Perez: That’s the question we’ve been asking. They have not pulled a
permit for the Marriott Hotels yet. Staff at the Development Center and the
discussions they’ve had with the developers believe that early next calendar
year they expect the permits to be pulled.
Mr. Keene: On the larger one of those two hotels next year. A sense of no
signal as to when the second smaller hotel will pull.
FINAL TRANSCRIPT MINUTES
Page 19 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Council Member Holman: And so, these numbers, the 2018 Budget, those
numbers don’t, do or don’t anticipate the new hotels being on line in 2018?
Mr. Perez: They do not.
Council Member Holman: They do not. Okay.
Mr. Perez: So, I would imagine it will take 18 to 24 months to construct, as
a rough guesstimate on, you know, from what we’re hearing.
Council Member Holman: Even for the expansion?
Mr. Perez: Oh, I’m sorry. No, I was referring to the Marriott. Our experience
has been that it takes a little while to get going too. Because people don’t necessarily know that it’s there, then they start getting the business and
they ramp up.
Council Member Holman: And then, is it something that you all can help
with, or is it totally different entity, which I would appreciate, about when
we reach saturation with hotels? That’s not something you can help with, I
don’t presume, but I’m just asking to be sure.
Mr. Perez: Well, you know, we’re starting to see a little bit of a downtick on
the occupancy rate ratio, so it’s a little bit concerning. We do believe that we
are a destination location. In other words, people come here for a purpose,
so that (crosstalk), so it gives us an advantage because people want to be
near the destination of where they’re going, be it Stanford or other
businesses, doing business-to-business. I believe that Marriott has done their homework, otherwise they would not have entered into adding rooms
in Palo Alto. I have not seen a report for the region this year, but most of
the agencies in the Peninsula and down to the south bay were looking at
adding hotels wherever possible, because of the demand. So, the demand
had been there. Two years ago, we had the highest growth in the State,
Santa Clara County did, and the highest occupancy. So, that’s what I’m
referring to. I need to look that data up and see where we’re at. Typically,
Mr. Levy keeps saying it’s going to keep going, and he doesn’t, he came to
talk to us a week or so ago and he doesn’t see a slowdown in the near future
for that, you know, short of other impacts that are beyond our control. So,
you know, we’ll do a little more homework on that to see what’s going on on
those data points, and when we come back to Council we’ll see if we can add
some of that.
FINAL TRANSCRIPT MINUTES
Page 20 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Council Member Holman: That would be really helpful. Thank you.
Mr. Sandhu: Okay. This is another view of General Fund expenses. On the
previous slides we are $2.1 million lower than the budget. These are the
three departments which are basically contributed the most. Admin.
Department, which combines City Manager and Human Resources (HR)
miscellaneous services, City Clerk, they combined $1.6 million. And non-
departmental, these are basically again, the contingencies which we
establish as part of the budget. They were not fully used. And Development
Services, basically they have some vacancies which did have some savings, plus some of the lease expenses were lower than what we did anticipate. So,
that’s the big one. Like I said, most of the details are in Attachment A, Page
72. This slide shows the Budget Stabilization Reserve. As of June 30, 2017,
as part of this CAFR, we are at $48.1 million. There are some uses which
have already been approved for Fiscal ’18 Adopted Budget and Kiely can talk
more about it. Fiscal City Manager has four budget amendments so far, as of
October 30, (inaudible) $23,000. And we did mention reappropriation of
$1.41 million. These are in addition to $1.1 million, which are being
proposed for approval. Recommended budget, as Lalo mentioned, as a part
of a funding policy to infrastructure we will transfer $3.5 million next year, in
Fiscal ’18. And last, we also have set aside $795,000 related to Edgewood
Plaza development fee and this is in a separate bucket right now.
Chair Filseth: So, the $795,000 is the, sorry, $795,000, that was the penalty
that Sand Hill was paying us? So, we’re budgeted to get it, but we’re
assuming that’s not certain we’ll get it? Is that what I read here?
Mr. Perez: We have it in our possession. (Crosstalk). Well, our recollection
was that the Council wanted us to set it aside for future determination of
use. And so, what we’re trying to say, we’re identifying it and calling it out.
It’s not a restricted dollar amount, but it’s there. I don’t know if there’s
anything else.
Mr. Keene: No, I just think that there’s some pending litigation, you know, in
that matter too. So, you know, we certainly don’t want to keep it in the
Budget Stabilization Reserve (BSR) for all of the (crosstalk), the BSR.
Chair Filseth: I didn’t realize we actually had it. Okay.
Council Member Tanaka: So, I don’t quite see a graphic, maybe it’s in here
somewhere, but in terms of the Budget Stabilization Reserve, how typical is
FINAL TRANSCRIPT MINUTES
Page 21 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
it that it drops by $10 million in a year, 25 percent? Is this the first time
ever, or does that happen every year?
Mr. Perez: Yeah. It varies. It just depends on what’s going on. There’s things
that we’re required to record and adjust. One of the things that can swing
for us is the recognition of the gains and losses on investments. Even though
it’s not an actual loss, it’s a paper loss sometimes. That could swing it, if
there’s a drastic movement in rates in the market. If we do some major
capital work.
Council Member Tanaka: I’m not asking why. I’m just asking, has there been another time where it’s gone down about $9, $10 million?
Mr. Perez: In my years here, yes.
Council Member Tanaka: So, it’s pretty typical every year?
Mr. Keene: I would think there’s two things to say here. Number 1, we made
a conscious decision, whether we entirely liked it, to use $3.3 million of that
to balance the FY 2018 Budget. And that was based on sort of offsetting
some one-time expenses. And, the other big piece there is the $3.5 million,
which is just taking it out of this reserve and putting it into a, in one sense,
another reserve. That has been a very typical transfer that we have been
making every year for past years, and we’ve had years where we’ve
transferred much more than $3.5 million. So, that’s it. But we have not
often really used, I mean regularly, a draw on the BSR for balancing the budget.
Mr. Perez: The City Manager is right. It just dawned on me to explain it in a
different manner that might be helpful, because what we have here is, we
have a broad definition of the Budget Stabilization Reserve. There’s multiple
components to it.
Council Member Tanaka: You don’t have to justify. My main point was, my
main question was, I still don’t know, when was the last time we drew down
about $10 million on the BSR.
Mr. Perez: Right. So, I’m trying to get to the answer to your question,
because I think where I would be concerned if I were you is, are we staying
within the parameters of the reserve. So, what I was trying to illustrate is
FINAL TRANSCRIPT MINUTES
Page 22 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
that we have all these other components that make it appear that we’re
drawing on the, what I would call the true Budget Stabilization Reserve,
which is the 15 percent minimum, 20 percent maximum, 18.5 percent
target. So, what we’re trying to work with, and we started this year with
Tony’s help, was to try to isolate that so you don’t see that wild swing in the
actual Budget Stabilization Reserve. So, that way, it doesn’t shock you when
you see a $10 million number. But the last one we had was probably three
years ago, we had a surplus pretty significant we transferred, it’s in the
report. Page 4.
Mr. Sandhu: Page 4, Packet Page Number 65.
Mr. Keene: So, kind of let’s be clear for a second. I mean, some of this is
fast real-time accounting that’s going on, right. You know, there was a $3.5
million transfer to the general Capital Improvement Fund. When did that
originate?
Mr. Sandhu: As part of the medial light planning.
Mr. Keene: I mean, this is recent under expenditures and over revenue
collections that are in real time. So, it goes into the BSR for a moment, and
then we make a policy decision publicly to say we’re going to transfer it to
that reserve. So, in one sense, that one is almost not really a draw on the
BSR, you know.
Council Member Tanaka: I’m saying it’s good or bad. I’m just trying to understand when the last time was. So, the last time we withdrew $10
million on the BSR was when?
Mr. Perez: If you look at Packet Page 65 or Page 4 of the Staff Report you’ll
see a summary of the draws that we had on the Budget Stabilization
Reserve.
Council Member Tanaka: Okay, so we’ve never had a $10 million draw then,
right?
Mr. Keene: I don’t think the point is worthwhile without the context.
Council Member Tanaka: $8.9 million in 2013.
FINAL TRANSCRIPT MINUTES
Page 23 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Mr. Perez: This is the net transfer out. There were other transactions that
make it to the 10.
Council Member Tanaka: Sure. I’m not saying it’s good or bad. I’m just
asking. Yeah, thank you.
Council Member Holman: I have a question, and I’m not sure if this is the
right time for it, so you’re welcome to say hold that one for later. So, we
have, last year I guess it was, we did a placeholder amount of money
because of the Stanford Fire, and we have an ongoing item now, and
obviously, we’re not going to talk about litigation, but I’m just putting out there, it’s like, is it smarter to do the infrastructure transfer this year, or is it
smarter to hold out some money as a placeholder for an undetermined
outcome to Stanford Fire negotiations?
Mr. Perez: And that’s a very good question. So, we left them, typically what
we’ve done in the past, the City Manager instructs us to, because the policy
says, anything above the 18.5 percent target, the City Manager has the
discretion to transfer to the infrastructure reserve directly. So, this year
what the City Manager did is, we left it in the Budget Stabilization Reserve
and not transfer it out to the infrastructure reserve, because we want you to
have all the information, and then make that call. So, at this point our
suggestion is, the infrastructure, but as things move and we provide you
with more additional information, you’ll have the ability, you as the Council, in this Fiscal Year ’18, to move it wherever you want from a policy
perspective.
Mr. Keene: We advise we cross that bridge when we get to it.
Chair Filseth: Artfully worded recommendation earlier this evening on that.
Council Member Holman: So, I guess, to follow up on that, crossing the
bridge when we get to it. So, yeah, what you were saying is like we can
decide something now, but we can change our minds later. So, it’s our
money so we can.
Mr. Perez: Yeah. The thing is to be prudent and not use it for something
other than the potential items that you talked about.
FINAL TRANSCRIPT MINUTES
Page 24 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Mr. Sandhu: Okay. The last comment I have on this slide is the bottom line,
the $39,286. This is a sort of projected over Fiscal ’18 BSR and per the
Council policy, approximately 18.5 percent of our target. On the enterprise,
this slide shows, the first column shows the deficit and surplus for each of
the Enterprise Funds, and the next column shows the RSR and the reserves.
You can see, this bottom line is much better than, especially for water and
electric, compared to the prior years because of the end of the drought, you
know the hydro conditions are improving. Not only we’re getting on the sales
side, water sales side, we’re also saving on the wholesale, especially on the electric side, because there’s more hydro power available. On the reserve
side, there are a couple of funds which are still showing negative RSR,
negative reserves. One is them is (inaudible). This is just a timing
difference. This includes auto carryover encumbrances and reappropriation
we just talked about. And as we get into the Fiscal Year we spend that
money we’re going to collect from the partners, are we going to get it as,
from the loan proceeds, new loan which was recently wired to the City from
the Water Resource Board. Lastly, you can see the Airport Fund is still
negative because it’s still not collecting enough and most of this money is
being advanced by the General Fund. So, other than that, in the next slide
again, like I said, the drought is really helping electric and water. Our
revenues are up because of the rate hikes we implemented in Fiscal ’17. The combined surplus compared to Fiscal ’16 improved like 7.2 percent, and
mainly it is the water, electric and Airport Funds. Again, we’re going to be in
positive once we collect the funds from the partners. And basically, we
talked about Airport Fund. Again, if there is any additional information,
(inaudible) is available, and I’ll be happy to answer any other questions you
may have.
Chair Filseth: I have a question on the Airport Fund. So, it’s negative reserve
of $2.4 million due to continuing operational results. So, for that, I mean,
without having gone back and looked at it in the Adopted Budget, where are
we in the final relative to what we budgeted for the airport operations?
Mr. Sandhu: Just looking at high level, our revenues are increasing because
we’re signing new leases.
Chair Filseth: I understand, but we budgeted an operating loss for the
airport this year, right. How close was the actual to the budget? I should
have looked it up before I came here, but maybe you guys know it off hand.
FINAL TRANSCRIPT MINUTES
Page 25 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Kiely Nose, Director of Office of Management and Budget: Good evening.
Kiely. So, in terms of the Airport Budget and how we’re doing, I would say
that there are some variances, but those variances are easily kind of
articulated. So, there’s two main things going on. They’re ramping up on the
Coordinated Area Plan (CAP) side as their getting a lot more funding from
the Federal Aviation Administration (FAA). And so, as that’s happening,
we’re making sure we’re leveraging it, since it’s a 90/10 percent split
between the, not General Fund, I’m sorry, but City funds versus the FAA
grant money. So, you’re going to see variances on the capital side. The good news is, though, on the revenue side the team actually, at the airport, has
been working extraordinarily hard over the last I’d say quarter to really do a
thorough accounting of all their grants that they have outstanding with the
FAA, and hold them accountable and bring in the revenue that’s necessary.
So, they are still running in a, the fund is still running obviously needing
support from the General Fund; however, they are on the path to hopefully
repaying the General Fund in the near future, barring any kind of unforeseen
things like that.
Chair Filseth: And what was the variance?
Ms. Nose: Bottom line or?
Chair Filseth: Yes, please.
Ms. Nose: Oh, I will have to look that up and get back to you.
Chair Filseth: I should have looked it up before I came here, right?
Ms. Nose: Sure.
Chair Filseth: I thought maybe you guys knew. Okay.
Mr. Perez: I can get into the questions that were asked ahead of the
meeting, if you like, if that’s appropriate, or do you want to ask them
through your own set of questions?
Chair Filseth: Please.
Mr. Perez: Okay. One of the questions that we were asked, “Why is the
General Fund revenue decreasing?” So, we assume that you’re looking at
FINAL TRANSCRIPT MINUTES
Page 26 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
the comparison of actual ’17 and actual ’16, where the decrease was $1.4
million in comparison. So, one of the large drivers was the golf course, right,
so completely shut down, about $1.2 million. We had some, the fees
specifically on the Stanford side for development that we don’t have in ’17.
And we have a net loss on investments, and then lower permits and license
fees, as you heard earlier, about $.5 million dollars. We also had the sale of
the jointly owned former City Manager house in ’16 that, obviously, we don’t
have in ’17. So, all of those plus other increases in taxes and so on netted to
the $1.4 million.
Chair Filseth: This is going to be a dumb question, but, how can we have an
investment loss when the market is up 30 percent?
Mr. Perez: It’s a paper loss. Again, it depends on, as interest rates move up,
any security that we own that is lower than that rate, then on paper it shows
a loss. But we are a buy and hold agency, meaning that we hold it to
maturity, so we never realize the loss. That was one of the questions from
Council Member Tanaka. The other one, “Why is the General Fund
expenditure increasing so much when the revenue is decreasing?” So, what
we had here, again, it’s the comparison of actuals. When you look at the
budget to actual, we actually had more revenues and less expenditures in
’17. So, different things could drive that, and I just gave you the list of the
revenues, right, why the revenues are lower. So, probably the best way to look at it is to look at your Packet Page 72. And on this, what you want to do
is you want to look at the, I’m starting from left to right, the Adopted
Budget, then compare it to the adjusted budget, and then to the actual. So,
this is, I think, from my, from our perspective, a better way to look at it to
see how we did the budget to actual. Because looking at actual to actual,
there could be a lot of variables going from year to year that skew it, but the
way you want to look at it, and analysts look at it, is from this view to
ensure that we stayed within budget. The other question that was asked,
and I think I need Kiely for this one, “What is the reason that the City should
increase salaries by 5.8 percent?” And I believe this was as a result of a
comment we made on Packet Page 64. We assumed, Council Member
Tanaka, that it’s off your, please correct me, in the first block there is a
paragraph that says, “The Fiscal Year 2018 Adopted Budget reflects a 5.8
percent increase in salaries from 2016/17 FY levels of $70.7 million. So, we
assume that this is where you were asking your question, from this
sentence.
Ms. Nose: Is that accurate. That’s where your question was coming from?
Sure. And so, what that is, is we’re looking at a budgeted figure, and so in
FINAL TRANSCRIPT MINUTES
Page 27 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
2018 that budgeted figure assumes all of the changes in the Memorandum
of Agreement’s (MOA) that were approved between 2016 and 2018 years,
and those had phased-in changes, so when we’re looking at actuals to
budget, when we’re also looking at what’s within the budget, you are looking
at a number of variables. The other things that can impact other, I’m sorry,
are vacancies, right, and if you add positions or you take away positions
from different funds. So, the 5.8 percent is something that was approved as
part of the Adopted Budget when you guys did that back in June.
Council Member Tanaka: And what is, can you remind us, what is the expense growth projected?
Ms. Nose: The expense growth projected?
Council Member Tanaka: Sorry, not expense, the revenue growth. Sorry, the
expense to revenue growth for the same time period, what do you
anticipate?
Ms. Nose: For what time period, I’m sorry.
Council Member Tanaka: So, this 5.8 percent. So, what I’m trying to see is,
for this – okay, in general salaries cannot be in line with the revenue growth,
right? So, for the revenue growth, how does that 5.8 percent compare?
Ms. Nose: Let me look it up. If I remember correctly, it’s probably in the
ballpark, but I assume you’re looking at the FY ’18 adopted revenue growth
in the General Fund?
Council Member Tanaka: What I’m trying to do is, I’m just trying to do
apples-to-apples comparison. So, if the salaries increased 5.8 percent, you
would hope the revenue growth of at least 5.8 percent. I’m just trying to
figure out how they match up to each other.
Ms. Nose: Understood. Give me one second while the file downloads, and I
will be happy to provide that.
Council Member Tanaka: Okay.
Mr. Keene: Just a second here. I don’t want to steer us off here, but the
purpose of this particular item is to look at the comprehensive financial
FINAL TRANSCRIPT MINUTES
Page 28 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
report for Fiscal Year ’17 and in a sense backwards, not forwards. And I
think that some of these questions might be better answered, even when
we’re looking at the long-range financial. I mean, certainly they are issues
for the budget itself, as we look forward, right, as to how ’18 is performing.
It’s more of an issue when we’re looking at the long-range forecasts to look
at the subsequent years after the current year, which is FY ’18 to try to look
at, what are the drivers on the estimates on, say for example, salaries and
other costs and expenditure side and how they compare to revenues. And it
will be easier for you to answer those questions, I think, when we’re at that item. Am I clear, that the comprehensive financial report is a backward-
looking report, and these are questions where we’re trying to look for the
current year as it unfolds.
Chair Filseth: You’re saying that the question is really about the FY 2018
Budget, not the CAFR.
Mr. Keene: That’s correct in this case. I mean, she answered the question,
the earlier question.
Ms. Nose: It’s 6 percent. The ’18 Adopted Budget assumed about a 6
percent increase on the revenue side.
Council Member Tanaka: But is this including the $1.5 million that was over
estimated for the Sales Tax?
Ms. Nose: So, this is where you’re actually getting right back into what Jim is kind of referring to, which is, the look is prospective at, you know, from
’17 to ’18 to ’19 years and thereafter, versus this report is looking at ’17
year actuals.
Council Member Tanaka: I get that, but I think we have, I forgot the
person’s name, that just showed us some charts, right. It showed that well,
actually, you were $1.5 million more than we thought. (Crosstalk).
Mr. Keene: For 2017.
Council Member Tanaka: Yeah, so I’m just curious if, I mean, what I want to
make sure is that we don’t have salaries going ahead of what our revenue
growth is doing. Otherwise, we run into trouble. So, that’s what I’m trying to
figure out.
FINAL TRANSCRIPT MINUTES
Page 29 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Chair Filseth: Well, for this 5.8 percent. So, on the Sales Tax, right, I think
you said, was it you? I forgot who. I’m reading the line here. The FY 2018
Adopted Budget recollects a 5.8 percent increase in salaries from 2016 to
2017 levels of $70.7 million. So, I think I’m going to go with the City
Manager on this one. I think you’re asking about the FY 2018 expenses.
Council Member Tanaka: Well, I just saw a chart up there.
Chair Filseth: That chart covers 2018 year projections, right?
Ms. Nose: Understood, and you guys are actually, as a whole, the questions
that the Committee is asking are poignant ones, frankly, and ones that both the accounting team and budget team look at, and what you’re hitting is a
timing difference. You’re truly hitting a timing difference of, we have to have
a budget adopted the day before we close the books of the prior year. And
so, when you’re developing that Adopted Budget, you only have so much
information at that moment in time. So, I absolutely hear what you’re
saying, Council Member Tanaka, that our Sales Tax receipts didn’t come in
as high as our Adopted Budget was built on, and so that’s going to require
us to look internally during FY ’18, this current Fiscal Year, and potentially
rejigger things, as Tarun alluded to. However, what he also didn’t touch on
is that Utility Users Tax tract much higher, and so our Adopted Budget was
built on a lower base for Utility User Tax. And so, really, this reconciliation
that we’re talking about is something that we will do as part of the midyear financial review, when we look at how is the City actually tracking. Not only
how did we track in ’17 year with our actual collections, but also let’s look at
the first six months of the Fiscal Year and update everything for all the best
information at that time. Whereas, the Adopted Budget, and I hear you on
expense versus revenue growth, was really, as Tarun alluded to, built almost
a year ago at this time.
Council Member Tanaka: I hear you. I just, I think you guys are all aware of
what happened in the school district, right, where raises were given,
Property Tax didn’t come in as expected. You know, we just, we see where
the Sales Taxes are right now. We’re about $1.5 million short. I realize the
timing issue, right, so you can’t predict the future, but it is what it is. And
so, I just want to make sure that our salary increases aren’t going past, or
aren’t going ahead of our revenue growth. But, if this projection is correct,
or the new projection that we just heard, the revised projection, then there
will be.
FINAL TRANSCRIPT MINUTES
Page 30 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Mr. Perez: You only have one number, right. So, we need to give you the
whole picture. And if we had such a problem, we would be telling you.
Mr. Keene: There is nothing going on this year that would even remotely
approximate what happened in the school district. So, let me go back and
answer your first question. We do not, the $1.5 million year-end excess,
that’s in a sense what’s left over, is not included, as Kiely said, in the FY
2018 Budget. We don’t have that number. We don’t know the number. We
actually are happy to know that our revenues may come in more and our
expenses less to allow for those things to happen. But, it would be terrible practice for us to start budgeting, you know, it’s almost like double counting
when we do the budgeting. When we say, oh, here’s what we think we’re
going to spend, here’s what we think we’re going to bring in, and then
somehow add some additional amount. So, what this is, is we’re closing the
books on the last year, and we’re giving you a report of the State of the City
right now. In one sense, this had nothing to do with the FY ’18 Budget. The
’18 year Budget is a spending plan. We adopt a spending plan at the
beginning of the year. We make adjustments all during the year. For
example, when we close the books and we find out we’ve got an extra $1.5
million, we’re ultimately going to come back and formally amend the budget
and put that back in the FY ’18 Budget in the middle of the year. We monitor
expenditures enough that if suddenly we are seeing some trend that is really problematic, we’re either going to make decisions to sort of really freeze
positions, or whatever, not hire, watch money. So, we don’t get into a
situation where we’re surprised by the fact that we’re way out of whack on,
if suddenly we’re seeing a real downturn in our revenue stream that could
impact our expenditure levels. We monitor that closely enough to be able to
come to Council. Actually, I have authority to make some adjustments
myself, but we would come to Council and remedy that. Now, obviously, if
something happens like the 2008 financial crash, which took place in the fall,
in the second quarter of a budget year, that began to suddenly hit a bunch
of stuff that was completely anticipated, we again, even in that situation
were able to jump on that and begin to manage through that. But it required
some pretty comparatively draconian decisions that we had to make on the
expenditure side.
Council Member Holman: This is going to sound extreme, if not odd, but –
so, I get pretty conservative when it comes to spending money and
budgeting. At the same time, your comments made me think about, you
know, it was before your time, but we paid however many millions and
millions of dollars to Enron, and even with that, we managed to come back
and have, you know, a health set of reserves, Budget Stabilization Reserves
FINAL TRANSCRIPT MINUTES
Page 31 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
and such. I think it shows as an organization that structurally it’s pretty
sound. I mean, you were here then, Lalo. I don’t remember how many
millions it was, but it was large.
Mr. Perez: It was over $20.
Council Member Holman: Yeah.
Mr. Keene: Could I just add to that, because I think that’s a perfect example
during FY 2009, 2010, 2011 for example. Unlike many other cities, we did
not go into reserves and draw down reserves to balance this structural, what
we saw as a structural deficit due to the falloff in revenues. I mean, we made, we slashed existing spending in order to do that, knowing that, that’s
just a temporary fix, to draw down reserves that you have. We had to make
systematic changes. And we’re still at the point where we do not have the
same number of positions now in Fiscal Year 2018 that we had back in Fiscal
Year 2007. We have fewer.
Council Member Holman: So, I do have two questions, actually. One is, and
one you touched on, Lalo, which I was going to ask about, which is, I
thought we had agreed that the money from the sale of the former City
Manager’s property was not going to go in the General Fund. It was going to
go into a special pocket, if you will, so that if there was other property that
we wanted to purchase, it would be… It’s a little bit off target, but it’s also
related to what we’re talking about.
Mr. Perez: I do recall the discussion, but there wasn’t a specific Motion to
direct us on that. So, right now it’s part of the Budget Stabilization Reserve.
Council Member Holman: I thought it was Finance.
Mr. Perez: It’s, yeah, it’s there.
Council Member Holman: Okay. And that was, how much was that? Do you
recall? You already know that, Michelle. How long have you been here? I
don’t need to have the number right now, but $1.7 million sounds about
right. So, we might want to revisit that. But, the other thing is, and this
happens to be early in the discussion here, on Packet Page 63, talks about,
under Economic Environment, and midway through that last paragraph on
the Page it says, “The robust local economy and job growth were also
FINAL TRANSCRIPT MINUTES
Page 32 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
driving increases in other revenue such as permit and license fees. While
these results are welcome, continuing rising, continued rising benefit and
other operating costs diminish this more positive outlook over the next ten
years or so.” So, I don’t remember seeing in this effort what the positive or
negative was in Development Center and/or Planning Department, because,
and it’s something that’s always troubled me. It’s like, how do you balance,
like how much to Staff up for good times, but then, you know, it can
fluctuate with the economy and rising costs and benefits, you know, like it
says here. So, looking back, where are we? How did that end up? I don’t remember seeing that in a table.
Mr. Perez: Right, so we are starting to see some discussions with Peter
(inaudible) see some slow down, and that’s why when he came to you with
this last fee, phase two fee adjustments, Staff made the recommendation to
have a reserve for downturns in that activity. The thinking was that the
remaining of the General Fund, or the remaining of the population shouldn’t
bear the challenge or the pain caused by development. And the development
would have an incremental increase in the fees to generate these reserves
over time, to increase them. And that way, when and if we have a downturn,
they have.
Council Member Holman: You mean when.
Mr. Perez: They have some level of cushion to protect the General Fund, at least on the onset.
Council Member Holman: Okay. So, is there something that shows where we
ended up in 2017 with this?
Mr. Perez: Yes. Let us look at the Page and then we’ll…
Council Member Holman: Yeah, I didn’t find it and I could have overlooked
it, but I didn’t find it.
Mr. Perez: Let us take a look.
Council Member Holman: Okay. Thank you.
Mr. Keene: And this is asking for that direction on these budget
adjustments, is that right?
FINAL TRANSCRIPT MINUTES
Page 33 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Mr. Perez: Performance of the Development Service Center. I apologize. The
other question that I realized that you asked, Chair Filseth, is for long range,
not this item. We can continue answering any other questions you have. I
think this is, will answer your questions Council Member Holman. Look at
Packet Page 138. Under Expenditures, towards the bottom, Development
Service Center is listed in there. So, they came in under budget.
Council Member Holman: I think the conversation or discussion on Packet
Page 2 of this report though, I think talks about, does it not, but both are
positive though. Planning and Development Services is what’s discussed on Packet Page 63, is it not? Either way, they both end up positive so, Planning
a little bit, a little bit.
Mr. Perez: And it’s an area that we will need to keep a close eye on.
Council Member Holman: Yeah. Thank you.
Chair Filseth: Greg.
Council Member Tanaka: Yeah. Just too kind of, not belabor it, but just to
close out, so my thing was this. So, 5.8 percent salary increases. At the time
we thought that revenue would go up by 6 percent, but actually we look at
the actuals it looks like we’re going to have to lose or downward forecast
$4.5 million on the Sales Tax, so that’s where I’m coming from, just to try to
be clear for everyone in terms of what my thought process was. But, my
next question actually has to do with Packet Page 74. On the Fire salaries and benefits. And, I don’t know if Staff could talk a little bit more about the
$2.2 million in overtime for Fire?
Ms. Nose: Sure. Thank you for the question. So, what we’re seeing in Fire,
let me step back. So, all the adjustments that you’re seeing in Attachment B
are adjustments to realign revenues and expenses with how we performed
the year end. Every time we build a budget, as Jim alluded to, we are, it’s a
planning document. It’s where we think our Staff are going to be. It’s where
we think our expenses are going to be. But what actually happens is not
always what we forecast. And one of the things that we assume when we
build a budget is a vacancy factor in every department. And that’s based on
historical vacancies in a department. So, for the Fire Department, because
we’ve been keeping a large number of positions vacant as a result of the
ongoing conversations with Stanford and whatnot, we have been carrying a
very large vacancy factor in the departmental budget from a budgetary
FINAL TRANSCRIPT MINUTES
Page 34 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
standpoint. Probably almost to the tune of $800,000. And what’s happening,
though, is because it is a service that you have to have a certain number of
staffing on the apparatus, they backfill regardless of them having vacancies
with overtime. We also have a number of teams that have gone out on strike
teams, so that’s additional overtime that’s happening that’s not necessarily
accounted for.
Council Member Tanaka: What are strike teams?
Ms. Nose: Sure, a strike team like the Napa fires that just happened.
Council Member Tanaka: Oh, I thought we don’t have to pay for that overtime.
Mr. Keene: We get reimbursed. But on the cash flow side.
Ms. Nose: Right. And so, what you’re seeing on the budget side is the
expenses that we are incurring, but you’re absolutely right. On the revenue
side we will see the reimbursement for it, but what this is doing is it is truing
up for all those activities that are occurring through the year that are not
anticipated as part of the development.
Mr. Keene: So, can I just, one other thing on this. I don’t think you should
be completely satisfied with the answer we’re giving you here as it relates to
Fire, right. Because it’s a significant amount of funds. In general, I’d say
there were two things. Almost always historically we actually do budget less
overtime than experience would demonstrate in Fire. It’s an attempt by us to control overtime by not advertising what the level of actually approved
funding is. That’s sort of typical. Then, in these recent years, over the past
two, three years is, we’ve been going through these, this Fire contract
negotiation with Stanford. As Kiely said, we’ve had like 12 positions vacant,
knowing that as we have had to now look at restructuring how we do
services, and actually eliminate those positions on a permanent basis, we
wanted to have them empty enough filled by people. And so, we would use
overtime to fill that. Now, you could sort of do the simple calculation, say
okay, if most of the time overtime is time and a half in comparison to the
100 percent for regular workers if they were filled, but 150 percent if it’s
overtime. What this is demonstrating to us is that, one, we either still have
combination of under estimating what the actual overtime cost is, or we may
have some other practices in the department that we’ve really got to take a
closer organizational look at managing and containing to keep that
FINAL TRANSCRIPT MINUTES
Page 35 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
component down. We can’t tell you how much out of this $2 million is
attributed at this point, but I do think when we get into next year’s budget,
when we come to the Council we’ll be in a better position to talk strategically
about what adjustments we can, we think we can make on a going-forward
basis to deal with this. Because, the truth is, you know, to me it just doesn’t
make sense if we held a bunch of positions vacant, we wanted to backfill
them, and we still over spent overtime by $2.2 million.
Council Member Tanaka: Yeah, that’s my thoughts as well. It’s kind of
shocking.
Ms. Nose: I can add a little bit more. There’s probably two other major
factors that are going on, and I strayed from kind of alluding to the, because
they do get a little technical. One is, from an accounting standpoint,
depending on where pay periods end the year, from a Fiscal Year standpoint
it changes the accruals. And normally it’s a very nominal amount, so you
wouldn’t notice it in a smaller department. But when you look at larger
departments like Police and Fire, where their payroll is a million plus dollars
a pay period. A couple of days can make a very significant difference in their
actual year-end expenses. And last year was actually one of those years like
that. So, typically, again this is getting very technical, but typically everyone
works 2,080 hours, or we budget for 2,080 hours a year. However,
depending on where those pay periods fall, you may have 26 or 27 or a portion of a 27th pay period in any given year, just because of, again, you
may have a pay period that splits one way or the other. And so, what you’re
seeing this year for across the whole is that discrepancy, because we had a
heavy year last year in terms of having more than the typical just 2,080
hours financially booked in 2017. Does that, that’s super technical, I know.
Council Member Tanaka: I understand what you’re saying. So, did we spend
more this year in overtime than ever before? Is this like the biggest year in
overtime?
Ms. Nose: I can actually find that for you. Let me look at it. I would expect it
to grow, because I was going to say the other thing that we’re calibrating, as
Jim alluded to, is with the new IAFF contract that was approved back in
2016, we do definitely dampen the overtime budget to ensure and to
promote a fiscally responsible use of overtime, but when we had these
changes in salaries, naturally your overtime will grow, since it’s a time and a
half compensation. So, we have been really monitoring it to recalibrate it,
based on the next baseline associated with salaries. So, I would say those
FINAL TRANSCRIPT MINUTES
Page 36 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
are two very technical but important factors that can be large magnitudes,
let’s put it that way. But, let me look at the overtime and see if ’17 year was
higher than ’16 year.
Council Member Tanaka: I guess what would be interesting though, is like
per firefighter, how much was overtime this year versus other years, and
were we extremely high this year compared to others. I think that would be
interesting. Because I also notice on Packet Page 72 that Fire from the
Adopted Budget went from $28.9 million to $32.2 million. So, the adjusted
budget also went up. So, I’m not sure if that was already accounted for.
Ms. Nose: The adjusted budget accounts for all of those adjustment that
you’re looking at, correct.
Council Member Tanaka: Okay.
Mr. Perez: May I interrupt for a quick question? It doesn’t appear that we
have anymore CAFR questions, so I was thinking we could let Mr. Bullock go.
Is that fair?
Chair Filseth: I think so. No objection here.
Mr. Perez: Thank you David. He’s got a long commute, so I didn’t want to
keep him any longer.
Chair Filseth: Can I ask a follow-up question to the line that Greg is asking?
If you look at the Page 72, the difference between the adopted, on Fire
again, the difference between the Adopted Budget and the actual expense is actually $3.2 million, not $2.2 million. And so, we’re focused on the $2.2
million overtime, but where is the other million?
Mr. Keene: Just so, the $2.2 million is actually the totality of changes in
salaries and benefits, which includes overtime, but it includes benefit cost
increases and that sort of thing. So, that’s, where’s the other million is still
an appropriate question.
Ms. Nose: Okay, let me work on that one. But, in answer to your other
question about overtime, so in 2016 it was about $5.5 million, in 2017 it’s
about $6 million, which is about a 10 to 11 percent increase year-over-year,
FINAL TRANSCRIPT MINUTES
Page 37 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
but that is in line with the changes in the Memorandum of Understanding
(MOU) associated with the higher contract.
Council Member Tanaka: How much of an increase per firefighter is that?
Ms. Nose: I would not know, because it would depend on how many actual
firefighters you have on Staff in any given year. So, I would have to go back
and look at our actual staffing levels.
Council Member Tanaka: I’m worried on this, and maybe Staff can tell me
whether I should really be worried here, because what I understand about
the pensions is that it’s paid on the last year, right?
Ms. Nose: It does not include overtime.
Council Member Tanaka: Does not include overtime, okay, good.
Mr. Perez: Nor sick leave.
Council Member Tanaka: Good, good. Should we keep going or should we
wait? Okay.
Chair Filseth: I just want to make sure we have time to get to the long-
range financial forecast.
Mr. Keene: Actually, just for fun things to know and tell at cocktail parties,
right, in Palo Alto, it’s an interesting point, your point about the pension
piece, right. So, if we do have a situation where we’re keeping positions
vacant, it would be otherwise a full-time position that would have associated
pension costs with that position, and instead, backfill with overtime. We’re basically paying time and a half in salary for overtime. At the same time, as
you know, we’re basically saying, with the pension costs for the City in
Public Safety approaching 55 percent. So, we’re basically paying that same
cost for a straight-time person when you throw in the pension costs. So,
once in a weird way, without the (not understood) of the actuarial liability.
I’m not saying that I want to argue overtime as the approach that we would
systemically use to provide Public Safety services, but just when we think,
oh, gosh, there’s a lot of overtime, if it’s a situation where we’re supplanting
that rather than having the full-time benefited position, that’s a different
comparison than just, is everybody getting a lot more overtime.
FINAL TRANSCRIPT MINUTES
Page 38 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Council Member Tanaka: How many firefighters do we have active right
now?
Mr. Keene: About 100 and what?
Council Member Tanaka: We have $6 million in overtime. So, that’s what,
$60,000 per person in overtime. Is that right?
Mr. Keene: I don’t know. I mean, why don’t you ask us what you would like,
and we’ll bring you the actual figures.
Council Member Tanaka: I’m just, I would be curious to know what that is.
What is it per firefighter?
Mr. Perez: We do have the annual salary by individual on our website. I
know you have Staff for (crosstalk).
Council Member Tanaka: Oh, that’s in overtime as well?
Mr. Perez: Yes. So, they could download those years, if they wanted to do
some comparison, that could be a source.
Council Member Tanaka: Okay, great. Thank you. The second question I had
is on Page 3, I guess it’s Packet Page 75. And this is on the Police side. I
don’t know if you guys can speak about that in terms of, it’s not quite as bad
a figure. It’s less actually, but what’s the story behind that one?
Ms. Nose: So, I can help out with that. One is, obviously, the change in the
heavier accounting periods. So, they’re seeing or feeling the same impacts
as Fire. However, the really big anomaly on the Police Department side is, we had two significant retirements last year. So, back in December of 2016,
thank you, back in December of 2016 with both the chief and assistant chief
retirement, there were payouts, right, of their leave balances. And even an
even further circumstance, some of those employees were eligible for a
benefit that went into effect in what, 1980?
Mr. Perez: It ended in 1983.
Ms. Nose: Ended in 1983, where their sick leave would also be paid out upon
their retirement.
FINAL TRANSCRIPT MINUTES
Page 39 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Mr. Perez: Not pensionable, just…
Ms. Nose: Not pensionable, agreed, but these would be lump sum payments,
and so with those two very tenured, very senior employee’s retirements,
their expenses were much higher than, obviously, we had anticipated when
we built the budget.
Council Member Tanaka: So, it’s like $150,000 per person?
Ms. Nose: I would not know the exact calculations, and we would report…
Mr. Keene: They are significant numbers.
Ms. Nose: They are in the six figures, yes.
Council Member Tanaka: Wow. Okay. That’s a lot of money.
Mr. Keene: That’s one of the reasons we eliminated that provision a long
time ago.
Ms. Nose: That would be why the benefit (crosstalk).
Council Member Holman: I was going to say, those were under old
agreements, not current.
Ms. Nose: Correct.
Council Member Tanaka: The other question I had is on Page 5, which is
Packet Page 77, and the gas utility purchase of $1.2 million. So, what
caused this, just accounting issues or? It seems like a lot of money. Packet
Page 77.
Mr. Perez: Let me give it a try, because it’s usually the same thing every year. They make their projections on what they think the load usage is going
to be for the City, and we’re not always going to hit it on the spot. And so, if
ended up needing additional commodity to procure, then we adjust the
budget and we need to, pull it out of reserve, you got it right. And so, that’s
usually what happens with commodity purchases.
FINAL TRANSCRIPT MINUTES
Page 40 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Chair Filseth: And is that what happened here, the $1.2 million?
Ms. Nose: Correct.
Mr. Perez: So, it’s not uncommon. We may see it more would be gas
because if people feel that, you know, hey, we’ve had some rain and maybe
I don’t have to be as frugal with the water, it impacts the fund, because
some people heat it up with gas, some heat it up with electric, and so, all
the funds could be impacted.
Council Member Tanaka: That’s all I had. Oh, actually, sorry, one more.
Page 12. The new Downtown parking garage. So, there was a $445,000 increase?
Ms. Nose: Correct. And so, what we are seeing here is an anomaly, not an
anomaly. It’s how we treat salaries and benefits that I will admit we need to
be more refined in our approach on the capital improvement side. When we
budget for capital projects, the teams do their best to anticipate what the
staffing costs associated with those projects are going to be and allocate
them to the projects accordingly. However, it truly is a guess. Capital
projects can be sometimes very labor intensive or very simple. And so, what
the, what we do from a budgetary standpoint is, we have a separate project
for salaries and benefits. It’s project A as $10,000. And so, what we do at
year end is, we will move the money from project A as $10,000 into the
projects that needed it for the salaries and benefit costs associated with that project. So, it is a little retrospective, I will admit. However, it does ensure
that every year when we’re planning the Capital Improvement Budget we
are truly accounting for all of our Staff that are budgeted in the general CAP,
but we haven’t necessarily 100 percent identified exactly what projects
they’ll work on.
Council Member Tanaka: Now, the Downtown garage, isn’t that, aren’t we
contracted under the Zion Contract (not understood)? So, what Staff time is
there involved in that?
Ms. Nose: I would need to talk to our Public Works folks on what specifically
they’re working on, but I know it’s heavy on the design review, community
outreach associated with the projects.
Mr. Perez: And management of the contracts and review of the designs and
working with the consultants
FINAL TRANSCRIPT MINUTES
Page 41 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Council Member Tanaka: Okay. That’s it.
Chair Filseth: I think this is short and I suspect I know the answer, but just
to make sure, you know, if you look at Packet Page 73, for example, there’s
some language that appears repeatedly as an explanation and it goes along
the lines of, with slight variations, this action reallocates departmental
management, development savings to nondepartmental to reappropriate
funds for City-wide training in FY 2018. And they’re all sort of like that. Does
that basically mean we spent less than we thought we were going to over
here, but we spent more than we thought we were going to over there, and so that’s where we’re rejiggering things? What does that mean?
Ms. Nose: That’s a very, very good question. So, as part of our management
compensation plans, we budget, I want to say it’s $1,000 per management
employee, for training for professional development, and so we budget that
directly in the departments for them to spend. And what we do at the end of
the year is, go back in, there’s a specific accounting code for it. What we do
every year is we go back and look at that code, see how much was spent or
not spent, and then we pull it out of those departments’ budgets to put it in
nonsalary, and then reappropriate that money. And what that money is used
for are our initiatives associated with our work force. So, when we talk about
City-wide trainings, when we are talking about kind of growing and
developing our workforce, what we use it for is, it is a pot for HR to really help and pilot some of those projects, because it is truly a one-time pot. It’s
not an ongoing thing. And it’s just, I think, a testament to this
organization’s, the priority that they put on kind of professional development
and training, and wanting to continue that at a City-wide level, even if,
perhaps, we didn’t spend all the money at a departmental level in that given
year.
Chair Filseth: Okay. I understand. There are a bunch of very similar things,
but maybe they’re all different actually. Another one says, “This action
allocates departmental vacancy savings and non-salary savings within the
General Fund in order to offset departments with higher than expected
anticipated expenses in 2017.”
Ms. Nose: Yes. Now those lines are us (crosstalk).
Chair Filseth: Shuffling from different pots. Is that what that says?
FINAL TRANSCRIPT MINUTES
Page 42 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Ms. Nose: Exactly. And so, as you heard Tony say, we were $2.1 million
below budget as a whole in the General Fund. We just didn’t have it right by
bucket, and so we’re moving the money around by the buckets based on our
appropriation requirements.
Mr. Perez: By Muni Code, the City Manager doesn’t have authority to do this.
It requires your authority.
Chair Filseth: I see. Okay. Other comments and questions on the CAFR?
Council Member Tanaka: One kind of small one. There’s a name you
mentioned in this called Eirle Family. What is that?
Mr. Perez: Did you say Eirle?
Council Member Tanaka: Something like that, yeah. I don’t know how to
pronounce it.
Mr. Perez: There’s an Eirle Fund, a former mayor.
Chair Filseth: Bret Eirle.
Mr. Perez: Yes. He had a business, I believe, on Waverly. So, they gifted the
City and two other nonprofits some lump sum of money and so those funds
are used to recognize, per their wishes, the utility employees and those two
nonprofits. And so, at times we make some draws from that for the
distribution, annual distribution of the interest. The principal stays in the
Trust.
Council Member Tanaka: I see. And one last question, which is, I know that you guys are working with, I forgot the guys name, the guy on trying to
calculate the pension liabilities.
Mr. Perez: Bartel?
Council Member Tanaka: Bartel, that’s right. So, when you guys actually
figure out the right amount, where would that be in this?
FINAL TRANSCRIPT MINUTES
Page 43 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Mr. Perez: So, it’s a discussion we probably should, you know, have. One
logical place would be in the notes section. So, if you look at your bound
document, you’ll see a tab labeled Notes and there’s a section in here for
pension, you’ve got to find it.
Chair Filseth: On Page 95.
Mr. Perez: Thank you. You had it memorized now. I should have it
memorized. So, we could put a note here that I think would have to be
stated in a manner that is clear to the rating agencies, what our point is,
because we would be making a statement that, while CalPERS is providing us this particular set of numbers based on their assumptions, the City is
running a calculation based on a different set of assumptions that increases
our unfunded liability. The concern would be, is that going to impact their
decision on the rating that we’ve heard earlier today is Triple A. And if it
does lower our credit rating as a result of them seeing a number that is
different, then it will cost us in the issuance that we have upcoming in the
next six to either months north of $40 million for the golf course and the
California Avenue garage. So, I think…
Mr. Keene: I won’t cost us $40 million. We just have that amount of debt
and stuff, right?
Mr. Perez: Right. That would be the debt issuance. And that’s a number
that’s still moving. So, that would be the concern that we would have to make an informed decision on how we proceed, how we state it, what our
plan is. I think you heard me say last year, when we were talking about this,
that it would be probably good from a Staff perspective that we also have
some funding plan that shows that not only are we recognizing that we
believe the number is different, but that we also have commenced funding
for addressing that issue. So, it’s hard to say. You know, it’s something that
we can definitely do some more homework and test the waters carefully to
see what would be the impact. So, we can definitely first start with our
financial advisor as we’re getting closer with the number that we know that
we’ll probably need to issue in debt, and then advise you accordingly. But, to
answer your question literally, it would probably be in the notes.
Council Member Tanaka: So, like on Page 105 or something like that?
Mr. Keene: Yeah. I think it’s a more general statement. If I could say this. I
think this is a discussion that the Council and the Finance Committee will
FINAL TRANSCRIPT MINUTES
Page 44 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
have in depth, I would imagine next year, when we identify what this
number is. We have the opportunity to talk about the, all of the implications
of how it is that we report this, and then we’ll make a decision. I know the
current Committee has certainly expressed the importance from your
perspective of reporting this figure in some way, so that it can, let’s say
more regularly, more easily inform policy decisions that we have to make.
But, I think it’s fair to say that the requirements of public reporting in public
finance are really directed, in essence mandated, by the standards adopted
by the Government Accounting Standards Board. This is why we call it GASB and when you hear a number that’s one of the newer or the latest policy
reporting requirements that they adopt. And over the past ten to fifteen
years there’s been a real evolution in the requirements that they are
requiring local governments to make as it reports, particularly a lot of these
future expenditures, or commitments. And what you’re talking about us
doing also is something that is, in a sense, ahead of or in advance of where
GASB is, right, if I understand this, Lalo, right now?
Mr. Perez: Yes. And let me illustrate it. I found it, Page 89 of the actual
CAFR. If you look at Note 11 on the top of the Page you see how it’s labeled
Sensitivity of the Net Pension Liability. Then it has 1 percent less and 1
percent more. If we were to illustrate it, let’s say that another one they had
1 minus 0.25 percent, that’s a sensitivity analysis. It probably would not send any alarms, bells, because you’re just demonstrating a sensitivity
analysis. So, it’s the wording, the framing that I think is important. So,
that’s what I’m discussing with you, that we need to do some more
homework on that.
Chair Filseth: Well, GASB sets minimum reporting requirements.
Mr. Perez: Yes.
Mr. Keene: I’m not saying that we should stay there. I’m just trying to
explain basically the evolution of reporting and in one sense, the way the
world also sort of looks at that stuff, and so the world, even the most
sophisticated things, in a way, there are a lot of followers. People following
them around and how they interpret things. I think our only point is that this
is an involved enough discussion that the Committee and the Council ought
to understand the benefits and the consequences, if there are any, of
however it is we choose to report or account for or allocate funding in this
arena, that’s all. Just to be, I mean, it’s the whole concept of reporting and
discussing is to be transparent and understand that. We just want to be sure
FINAL TRANSCRIPT MINUTES
Page 45 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
that the Council makes a conscious decision about what the pros and cons
are of however we choose to report it. I’m not advocating what we should
do, just that we should be aware of that.
Council Member Tanaka: So, I guess my thing is, when would we do this?
When, so, will it be in this CAFR, the next one, or like when would we
actually try to acknowledge the pension liabilities?
Mr. Perez: You, the Council, can make this call for the next CAFR. This one,
it’s already completed as is.
Chair Filseth: Let me see if I can color that one a little bit. I think what you folks have artfully said is that there are different ways to report this, and
there are real-world implications of choosing those different ways, and
therefore, the decision on how to report this has an element of policy in it,
as opposed to simply accounting protocol. And, therefore, it’s an issue that
the Council should take up before there’s any significant changes made,
which presumably we could do in 2018.
Mr. Perez: Correct. And that could also apply to the budget document,
because I think there was a desire by this Committee to look into that as
well.
Mr. Keene: Mr. Chair, just know that we’ve spent two hours on this. Would a
Motion be in order?
Chair Filseth: If there are no other questions from the Committee, I’m going to move the Staff Motion, the Staff recommendation, which is to forward to
the City Council for its approval that we amend the Fiscal Year 2017 Budget
appropriation for various funds identified in Attachment B, Exhibit 1, various
capital projects identified in Attachment B, Exhibit 2, and two, that we
forward to the City Council for its approval the CAFR.
Council Member Holman: Second.
MOTION: Chair Filseth moved, seconded by Council Member Holman to
recommend the Council:
A. Amend the Fiscal Year 2017 Budget Appropriation for various funds
and various capital projects;
FINAL TRANSCRIPT MINUTES
Page 46 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
B. Approve the City’s Fiscal Year 2017 Comprehensive Annual Financial
Report (CAFR).
Chair Filseth: I don’t need to speak to my Motion. Any discussion? All in
favor? All opposed?
Council Member Tanaka: Opposed.
Chair Filseth: Do you oppose forwarding this to the Council?
Council Member Tanaka: I do.
MOTION PASSED: 2-1 Tanaka no, Fine absent
Mr. Perez: So, right now I believe we had a tentative placeholder for January 22 as an Action Item as a result we weren’t sure where it was going to go.
Chair Filseth: It’s not unanimous (inaudible).
Mr. Keene: Which, well, okay, that will complicate that meeting, but that’s
okay, as far as time management.
Ms. Nose: I owe you guys, actually an answer for the CAFR Item, just what
was a million dollar increase on the Fire Department. About $500,000 of
that, do you remember the conversation we had about encumbrances, PO’s?
So, about $500,000 of that is associated with that, so those were carryovers
from FY 2016 to 2017, so it’s about $500,000 of the million. So, those are
contracts that they already had in place when we closed the year. And then,
during the Midyear Budget review last year, we increased their budget by
about $300,000, and I wish I could tell you it was one single item, and I looked up all the actions and there’s about four that comprise that. And so,
that’s where the additional change is beyond that $2.2 million.
Chair Filseth: Thank you very much.
Michelle Flaherty, Deputy City Manager: While we’re answering questions in
a follow-up manner, I’d like to just follow up on Council Member Tanaka’s
earlier question about the gas Item, because we had explained that we were
budgeting in anticipation of usage, but it’s hard to estimate usage and
FINAL TRANSCRIPT MINUTES
Page 47 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
customer usage may go up or down. There’s also commodity price issues,
which could introduce fluctuations as well, and I just wanted to bring to your
attention on Packet Page 70 and 71, also known as Item 2, Pages 9 and 10,
bottom of Page 9, top of Page 10, we did clarify that the Gas Fund showed a
million-dollar negative change due to higher commodity prices, so that was a
major driver there as well. I wanted to make sure we brought that to your
attention.
Mr. Keene: I just want to put an observation here. We spent a long time on
this, and you know, obviously we hope and often typically plan that this allows us to go on consent. This is one of these items that, under the
Council’s policy, the Committee process is designed to let Committees not
only sometimes preview issues, but actually maybe, I don’t want to say
supplant the Council, but stand in for the Council on a decision. And I would
just say, we answered a lot of questions here tonight. Some of them not
actually that relevant to the CAFR, and we’re going to now be back at the
Council Meeting, and we’re going to be on an Action Item where the
intention would be that there are the opportunities to answer questions all
over again. And, I would just think that when we’re thinking about
resources, time is a resource too, and I would hope we don’t have to answer
all these same questions all over again to the Committee. I’m just putting it
out there. Or, if we’re going to end up in this place, let’s save that for the benefit for the whole Council, rather than us doing it twice. (Inaudible).
Chair Filseth: Is it possible that this Committee could make a Motion to the
extent that the CAFR goes as an Action Item, but the audit itself does not?
Does that mean we don’t have to bring David back?
Mr. Keene: My own opinion would be that the Committee would be in its own
rights to make that distinction for the purpose of the Council policy. In one
sense, it’s almost like a divided boat on those two things. If that’s where you
were, if the sense was, I’m just saying, if unanimously you think it’s not
necessary to have these folks back because the purpose is to have more
debate and questions or whatever for the Council making its decision on the
CAFR itself, more than the…
Chair Filseth: Let me ask two questions. It’s procedural stuff. One is, you
know, one of us isn’t here, right, so if it goes 3-0, does it go on the Consent
Calendar, or does it have to go? Okay, so that counts, okay. So, I’m going to
ask Council Member Tanaka, do you want the audit to be an Action Item?
So, then, if I made a Motion that, however the right way to do this, I’m
FINAL TRANSCRIPT MINUTES
Page 48 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
going to propose a second Motion that says, we, that the acceptance of the
audit go on Consent. Can I do that? So, I’m going to move that the audit
that the Finance Committee, how do I say this? I want to put the audit on
Consent. Can I just say that, I move that the audit should go on Consent.
Council Member Holman: I second that.
MOTION: Chair Filseth moved, seconded by Council Member Holman that
the Audit of the City if Palo Alto’s Financial Statements be forwarded to the
City Council on the Consent Agenda.
Chair Filseth: All in favor? Thank you.
MOTION PASSED: 3-0 Fine absent
Chair Filseth: With that, let us move to the next item, which is the Long-
Range Financial Forecast and pension liabilities. We’re going to have to stop
briefly, since we don’t have a quorum.
Mr. Keene: Is there any sense, Mr. Chairman, that you would entertain
thinking of an end time tonight, to try to move to? Alright.
The Committee took a break from 9:12 PM until 9:18 PM
3. FY2019 - FY2028 Long Range Financial Forecast & City Pension
Liabilities
Chair Filseth: Our quorum has reformed. It’s only 20 minutes after 9 PM,
early by Council standards. So, welcome Budget Director Nose. I guess
you’re going to lead the discussion here.
Kiely Nose, Director of Office of Management and Budget: I am. Thank you
Chair. Let me see if I can’t get this Power Point up. Good evening. As the
Chair alluded to, we are here to go over the Fiscal Year (FY) ’19 through FY
’28 long-range financial forecast, specifically for the General Fund and also
to continue our conversation on the City pension liabilities that we started
back in the fall. Also, just a quick, before I forget, at the very end, a huge
thank you to the Office of Management & Budget (OMB) team who helped up
all this together and to Bartel, who provided a lot of the information for our
alternative forecast, as well as Tarun, who really looked at all of our
FINAL TRANSCRIPT MINUTES
Page 49 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
revenues, and kind of analyzed the history of them and helped us pull this
together.
Chair Filseth: By the way, is there an announcement about Mr. Bartel, or is
that?
Lalo Perez, Chief Financial Officer and Director of Administrative Services:
Mr. Bartel did inform us that he is retiring, but his firm will continue under
the leadership of his senior staff that he has. He did commit that he will
finish our transactions, so we propose to carry it out for about another year.
Chair Filseth: So, basically, we drove him out?
Ms. Nose: So, my plan is just to keep asking him questions on the same
project, and then it is still active. That’s, I think, all of our plan, prolong it.
So, just a quick overview of what we’re here to do overnight, and kind of
what a Long-Range Financial Report is, and a bit of housekeeping. You guys
should have, as we discussed at the last Finance Committee meeting in
November, two reports, actually. You should have one that actually went out
in your Packet that had what we’ll refer to tonight as our base case forecast
model, and you should also have a second at-places memo that looks at the
alternative forecast scenarios. So, I’ll do my best to weave the two of them
together as we go through this, but if you guys have questions, please let
me know. So, just as a reminder, a forecast is really a projection. It’s
something to help us inform our policy decisions as an organization, and to look at our financial health, both in the short term and the long term. It’s
not necessarily intended to be a policy itself. It’s the kickoff, right, of our FY
’19 Budget process and where it will be, but ultimately every year, based on
our Charter rules, we adopt a balanced General Fund Budget. So, although
the projections that we look in here may show surpluses or gaps between
revenues and expenses in any given year, our practice as an organization is
always to address those as part of the annual budget process. So, to ground
us, the base case is really looking at what it costs to provide the current City
Council approved service levels. So, every given Monday we make actions as
part of our annual budget process. We approve different service levels and
actions. And what this base case model does is looks at that, adjusts for
things like inflation, adjusts for our current population, obviously adjusts for
our costs of doing business, like pension, and projects out where would we
be over the next ten years. And that’s the intent of the base case. It doesn’t
forecast any increases in service levels. It doesn’t forecast any changes in
staffing levels. So, it truly says, in ten years what would this organization
FINAL TRANSCRIPT MINUTES
Page 50 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
today look like. Okay. Also, the other thing on the docket tonight is to,
again, continue our conversation from our last Adopted Budget process
where the full Council had referred to the Finance Committee a review of our
structural revenue and expense roof, as well as our pensions. So, you will
see that woven throughout these reports. So, what is our ideal picture,
right? The ideal goal of a forecast is to show moderate surpluses, so that
every year the City would be able to afford our current service deliveries,
and obviously, in an ideal world there would be a slight surplus. As you guys
can see on the graph before you, what this organization is facing is a short-term gap between revenues and expenses. So, you can see in FY ’19 we’re
about $2.5, 2.6 million below that zero line. And then we would go positive
in 2024. It’s about six years through the forecast. However, as I mentioned
before, this is assuming we do nothing as an organization. That we leave
things status quo, we don’t make any changes. But every year we balance
our budget. And so, if we did that this year, if we were to change and
structurally balance our budget, you can see this red line, we all of a sudden
go positive, and every year thereafter in this forecast, so the remaining nine
years you would see a marginal surplus between revenues and expenses.
So, again, the blue line is your net one-time surplus or gap between your
revenues and expenses, assuming you’ve done nothing. However, as an
organization, every year as part of the budget process, we work to solve and balance our budget. So, if we swallow the pill now, and work to solve that FY
’19 projected gap between revenues and expenses from a structural
standpoint, whether that’s increases in revenues, decreases in expenses,
changes in service delivery models, what have you, we would be breaking
even basically over the next ten years. And, something really important, I
think here, is to show the testament to this organization of how financially
responsible we are, both as Staff and as Council. We aren’t putting ourselves
where this graph is constantly below the line, and with our policies and
practices of keeping things at the forefront of our mind, this document really
does show us, we are on the right track. We are forecasting and looking at
things, but it does show a cautionary tale, right. Not every single year is
above or breaking, I’m sorry, with a surplus. So, we are in an area where we
should be evaluating our financial choices and weighing things and
prioritizing our expenses to ensure that we can maintain this stability on an
ongoing basis. Do you want me to go back? Okay. So, the next chart is what
we were just looking at in graphical form in chart form and to answer one of
the questions that had come up. In two of the charts there were different
portrayals of total sources or total revenues in FY ’18, because you saw that
$3.4 million gap. As an organization we chose to solve that with a one-time
use of the Budget Stabilization Reserve as an anomaly, with the anticipated
FINAL TRANSCRIPT MINUTES
Page 51 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
goal of working through the revenue and expense growth as part of ’18, as
we’ve been doing with the Committee since September. Questions?
Chair Filseth: So, on this chart, I do have a question on this chart. So, on
this chart, the annual expense growth, I’m sorry, the annual revenue growth
of the City ranges from basically 3 to 4 percent per each year over the next
decade, and the annual expense growth runs between 3 and 3.7 percent, or
something like that out through the first half of next ten years, but then falls
to 1.5 to 2 percent growth each year in the out years. Okay. So, if you go
back to the previous slide, if we look at the blue line where the shortfall in the out years turns to surpluses, having that happen is predicated on that
change in expense growth from the 3 to 4 percent range to the 2 percent
range. Is that an accurate statement?
Ms. Nose: It is one of the things that it is predicated on, yes. And I would
say it is a significant driver of that, yes.
Chair Filseth: So, if expense growth doesn’t fall to 2 percent, unless there is
some other change in revenues or something like that, then the blue line
doesn’t happen.
Ms. Nose: It would diminish.
Chair Filseth: It would diminish, okay.
Ms. Nose: Correct. So, it would depend on the magnitude. The good news is,
if you look at it, you are still above that $2 million threshold from a marginal impact. And what I would argue, perhaps, and I’m maybe stretching a bit,
is, what it means is in those years, and as we make long-term financial
decisions, we need to just bear in mind kind of what are the ongoing
implications of them. The main driver of this, really, is pension though. And
so, if you guys look on, if you look on the actual City Manager Report (CMR)
Report, the one with ID number on it, on Page 11, there’s a chart that
outlines the retirement rates over the course of this forecast, and it actually
articulates just that drop off that you are referring to. So, if you look under
the miscellaneous plan, you can see significant growth year over year, all
the way up through probably about 2024, and then it starts to taper, and
then beyond that, in 2027 and ’28 it even falls. So, what you’re seeing here
is.
Chair Filseth: Although safety does not.
FINAL TRANSCRIPT MINUTES
Page 52 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Ms. Nose: Safety does not, but you can see the growth rate stalls.
Chair Filseth: Yes, that’s true.
Ms. Nose: So, you’re looking at, if you look from FY ’19 to FY ’20, your rate
is going from 55.6 to 61.5 percent. That’s nearly 5 percentage points, right?
Whereas, you’re looking at years ’27 to ’28, it’s 0.2 percent. So, it’s not
acceleration. There’s a few reasons for that acceleration that we can get
into; however, that acceleration dampens on those out years of the forecast.
Chair Filseth: Question?
Council Member Tanaka: So, at the last item, I just asked what our revenue increase was, right? And I think you said it was 5.8 percent.
Ms. Nose: I said in the Adopted Budget it was 5.8 percent.
Council Member Tanaka: Oh, I see.
James Keene, City Manager: Six percent on the revenue side.
Ms. Nose: I’m sorry, 6 percent. Yes, that’s what it was. Thank you, Jim.
Council Member Tanaka: But on Slide 5 it says it’s like between 3 to 3.9
percent.
Ms. Nose: On Slide 5. So, that 6 percent was between the FY ’18 adopted
and the FY ’18 adopted. This chart is looking at the growth between FY ’18
adopted and the projected FY ’19.
Council Member Tanaka: Okay. So, if we grew salaries again by another 5.8
percent, we would be exceeding the revenue growth?
Mr. Keene: Well, yeah.
Ms. Nose: Based on these numbers, and if all else stays equal, then yes.
Council Member Tanaka: Okay. Thank you.
FINAL TRANSCRIPT MINUTES
Page 53 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Mr. Keene: Can I make a suggestion, going back to the Chairman’s comment
about the challenges that we have in these out years, in particular, on these
estimates. Can you go back to that chart there, and fix it for 2019? We’re
going to balance it. That’s now the red line, right, okay. So, I’m going to
make this crazy assumption, right. If we’re really at $2.5 million gap for this
upcoming budget, we’re going to find a structural fix of $2.5 million for this
budget, assuming that’s the only issue we really had. So, this puts us in a
situation where we’re closer to zero for the whole period of time. It doesn’t
change the numbers that are at play in the outer years, but it does, I don’t’ want to say gives us a chance to smooth out some of this potentially over
this period, but it does. As opposed to letting it balloon as it was in the
second half, okay.
Chair Filseth: So, if I understand what you just said, and then Council
Member Holman has a question. If I understand what you just said, it’s
getting the $2.5 million structural fix for next year is a very high priority?
Mr. Keene: Absolutely. Because if you look at that 2024 point where it was
crossing before, we’re almost at $2 million more there, so I’m not saying
that should all go to the expense or something, you know, or treated as
higher revenues or whatever it is, but it feels more manageable. Well, like
anything, as long as we, the sooner we make structural fixes the better the
future is.
Chair Filseth: Council Member Holman.
Council Member Holman: So, setting the stage for just a basic understanding
of this, so, the drivers and how the percentages are calculated, and then
why did they level off further out, in the further out years, and what’s
anticipated as being greater? Let’s say, for instance, on this chart, what’s
anticipated as being greater in operating margin numbers? So, in other
words, the red line continues to go up where we’re having this dip, so what
are the drivers for (crosstalk). Yeah, it’s pension, but why is there the big hit
next year and why is it?
Ms. Nose: That’s a good question. There are a few main drivers of that. The
first I would say is the phase in of the change in the discount rate with
California Public Employees Retirement System (CalPERS). So, they were at
7.5 percent as an organization, they’re moving towards 7 percent, so
they’re phasing that in over, I believe a three-year term, thank you, over a
three-year term. So, you’re going to see larger year-over-year increases in
FINAL TRANSCRIPT MINUTES
Page 54 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
the City’s contribution over the next three years, as we move towards a 7
percent discount rate. The second primary driver of, I would say the sunset,
as well as the ramp up, is the amortization period. So, every year we look at
our assets and our liabilities, or CalPERS I should say, looks at our assets
and liabilities associated with the plan, and they amortize, basically, their
losses over a thirty-year, or gains, I shouldn’t say they’re always losses, or
gains over a thirty-year period, and you see some significant amortization
periods ending in that 2024 to 2027 timeframe. So, what that means is,
your thirty-year mortgage from a year thirty years ago is ending at that time, and so we’ve paid off that mortgage, which would, this kind of tends to
go back to us divesting what our annual pension contribution is between
normal cost and our new Unfunded Auctorial Liability (UAL) payment. And
so, I think Chairman Filseth has said, our normal cost, we want to get a
handle on and our UAL is what it is. It is a lump-sum payment that we make
every year associated with our past liabilities. And so, what we’re seeing is
us actually addressing that UAL over the course of this.
Council Member Holman: The question is, the 3 percent, the 3.9 percent, oh,
that’s revenues, sorry. Those weren’t percentages assigned to these, but
understanding that, yeah, there are adjustments based on actual returns
that we’re going to be experiencing, but, okay. Yeah, I guess this is sort of
like the mortgage that we’ve talked about before.
Ms. Nose: And this assumes everything stays equal, right. This assumes that
we’re not adding to the UAL or paying down in advance the UAL in any given
year. This assumes, you know, they send you your mortgage bill every
month and you pay your mortgage every month. You’re not advancing any
payments. You’re not withholding any payments. And so, you’re not growing
your debt and you’re not shrinking your debt. You’re making your annual
contributions.
Mr. Perez: Another key piece, per prior Council direction, it only includes a 2
percent salary projection, so, you know, Council Member Tanaka alluded to,
later, if it’s a higher number then it changes the numbers.
Chair Filseth: So, this assumes a 2 percent per year salary increase.
Mr. Perez: Correct.
Ms. Nose: Correct. Keep going? Nope, stay back?
FINAL TRANSCRIPT MINUTES
Page 55 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Chair Filseth: It’s pretty fundamental right here.
Council Member Tanaka: So, I think what the Chair was asking about Slide
5, was just, you know, under expenditures, the way we kind of make that
line look nice, is we have a relatively low expenditure increase, but how
realistic is that really, given the unions, given, you know, this year we’ve
given 5.8 percent pay increases? How, I mean, this is like less than half in
many years than what it was this year, and so, I think that’s what the
Chair’s point was, and so I do think he has a really good point about, is this
realistic, right, on the out years.
Ms. Nose: It is a very good point. And we can get into the projections or the
assumptions that have gone into these projections on the next two slides.
So, I’m wondering if we want to get into that first, and maybe we will
address some of these questions, or delve in further.
Mr. Keene: I think we should do that, because we also do have some large
expenditure drivers that are built in here too that one could make the case
that, while difficult, those large expenditure drivers are going to have to put
downward pressure on some other expenditures, or we’re going to have to
readjust the assumptions in those. And I’m particularly talking about the
scope of the pension cost increases that are built in, in the arc that we’re
going to get from CalPERS in these coming years. As you saw just on that
other chart, they’re quite significant, and I think when Kiely shares the assumptions, we didn’t make assumptions. This is much more of a kind of
steady state view without making real policy change decisions, and so there
are lots of policy decisions that could have a big influence on how these
numbers would change.
Chair Filseth: One last question on the 2 percent salary increase assumption.
Is that, so that calculation and how that impacts the rest of this stuff, is that
something we do internally or is that something Bartel’s actuarial analysis
uses?
Ms. Nose: The change in salary level is something that we could calculate in
terms of the numbers and assumptions that are within here. Now, if your
question is taking it a step further, and saying, if we change our salary
assumptions beyond that of what’s in the CalPERS valuation Reports, and
how does it impact that, that would definitely require additional help.
Chair Filseth: So, that would be a second order kind of thing, right?
FINAL TRANSCRIPT MINUTES
Page 56 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Ms. Nose: Correct. You want an isolated view.
Chair Filseth: The expense numbers in here come from us, primarily, not
from the actuarial analysis.
Ms. Nose: Correct. So, if you want an annual change, that’s one thing. You
want the thirty-year change, that’s…
Mr. Perez: One thing we could do is give you what a 1 percent change would
be, and then you set us the two. Just to remind you, the CalPERS
assumption is 3 percent on salary for their calculations.
Chair Filseth: For theirs. Ours here was 2 percent.
Mr. Perez: Correct. So, it’s 2 on top of their 3 percent. Does that make
sense. They’re calculating the liability at 3 percent. It’s the, it’s within the
merit.
Ms. Nose: So, let’s get into the salary assumptions.
Chair Filseth: The rare case of CalPERS more conservative than?
Ms. Nose: Let’s get into this. So, to Council Member Holman’s question,
before we go into the major assumptions used to build this forecast, as with
any forecast, it is also equally important to know what’s not included, and so
there are a significant number of unknowns as we are changing as an
organization, and so I think one of the things we want to encourage the
Committee to do is to look at things and understand we should look at
things in an holistic view. There are a number of variables coming up. Lalo alluded to the capital infrastructure plan and the increased costs, so there’s
a January update coming for the full Council on both the status of those
projects, as well as the financing of it. We continue to have new Coordinated
Area Plan’s (CAP) that are not in our five-year CAP program arise, Junior
Museum & Zoo (JMZ) phase two, the animal shelter, Foothills Park, there’s
7.7 acres there, if we want to acquire any new land for any other CAP
improvements, as Council Member Tanaka alluded to, future labor
agreements. So, all of our agreements end at some point in time during
calendar year ’18. So, we will very quickly be ramping up on that. On the
positive, there are a lot of, there are new revenues that are not included in
here, right. Measure B was passed. It’s tied up in litigation right now, but
FINAL TRANSCRIPT MINUTES
Page 57 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
that’s potentially a new stream of revenue that could help us. Transient
Occupancy Tax (TOT) and whether or not the new hotels come on line.
Those are all things that are not factored into this. So, things to keep on the
horizon, things to keep an eye out for, and really contemplate holistically
how do we want to spend our dollars and what are the priorities as an
organization and in totality. So, the major assumptions behind the long-
range financial forecast: On the revenue side you will see steady revenues
are expected to continue in ’18 and ’19, so over the forecast period taxes
are growing, as we discussed a bit, between probably 3 and 4 percent. One thing I will note, I messed up on the language in the Report itself, so some
of the numbers might be slightly off from the assumptions and the chart.
We’ll fix that for the full Council. We were tweaking the assumptions to
ensure that they weren’t too conservative. In the out-year projections, so
that’s basically 2023 – 2028, we historically have used the Compound
Annual Growth Rate (CAGR) methodology, so looking at our compound
annual growth for each revenue stream. For non-taxes, a lot of our non-tax
revenues are driven by services, so for those that are driven by the cost of
services, we grew those revenues by the same percentage change of
salaries and benefits in that same year. So, for example, when you saw in
those out years that your salaries and benefits are slowing in their growth,
we slowed the revenue associated with the cost of services as well, in the same fashion.
Council Member Holman: Assuming a downturn?
Ms. Nose: No, just your costs, you can’t be over cost recovery, so if our
expense is only rising say 1 percent a year, our revenues for cost of services
shouldn’t rise more than 1 percent a year.
Chair Filseth: The cost of Development Services, if the growth rate of
Development Services’ cost is slowing, then the growth rate of Development
Services’ revenues must also slow.
Council Member Holman: Yeah. So, it’s the moderation in inverse.
Ms. Nose: So, we ensure that our revenues that are associated with services
are modeling the same as we’re modeling on the expense side.
Chair Filseth: So, if we spend a lot more in Development Services, we win?
Ms. Nose: I’m sorry.
FINAL TRANSCRIPT MINUTES
Page 58 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Chair Filseth: If we spend a lot of money in Development Services, we win.
Ms. Nose: No, I think Terence will tell me no. It stays in Development
Services with the fee payers. Okay, on the expense side: salaries and
benefits, and for those Council Members that have been here for a number
of years, this is just a little bit of a reminder of a change in practice. We now
budget and project based on actual employee data. So, when we’re looking
at these forecasts, we resynced our system with our actual employee
population as of this fall, so that means everything from the employee’s
salary, vacant positions, health, all of that. And we will be doing these syncs periodically between now and when we bring you forward a Proposed
Budget. So, do know some of these numbers are going to change as we
refine them. Open enrollment happened, so we’ll capture that new data in
January. Obviously, people retire or are hired in the City, so all of that will
be factored in before we, as close as we can, to the Proposed Budget.
Chair Filseth: And so just to be clear, 2 percent general wage increase is
modeled for years which don’t have an adopted Memorandum of Agreement
(MOA).
Ms. Nose: Correct.
Chair Filseth: If I understand what you just said is, we don’t have any
adopted MOA’s after 2018?
Ms. Nose: That is correct.
Mr. Keene: Mr. Chair, while I turn my light on, just let me say thank you to
our great Staff for making those ongoing changes in real time accounting
and full cost accounting for individuals in the budget. They get good
addition.
Ms. Nose: Yes, not a problem. The, I’m trying to think if I’m forgetting – so,
that’s one of the things that’s going to change, we will update for the new
population, open enrollment. I’m trying to think if there’s another major
change that’s happening. Oh, merit increases that are occurring, so we’ll
capture all that. The other assumption, obviously to talk about are the
pension contributions. So, right now in your base case, so just a reminder,
we’re still in the base case, we are reflecting the contributions based on the
CalPERS actuarial reports, so you do see that ramp up. When we go to the
alternatives we can see what the impacts are if we don’t have a smoothing
FINAL TRANSCRIPT MINUTES
Page 59 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
period. And then, on the wages, yes, we have a 2 percent general wage
increase model per our past practice. On top of that, we also model what is
consistent with the MOA’s, and by that I mean for those positions that are
stepped, which a number of our positions are, this forecast does model
those step increases. So, the step increases range between, I want to say 5
percent, they’re in the 5 percent ballpark range, plus or minus. And so, what
this forecast does is, it looks at that population, it looks at that employee
when we downloaded that data, and forecasts based on their anniversary as
an employee, the step increases, and the system is smart enough to know that if there’s five steps, it doesn’t keep going ten steps over the ten-year
forecast. It only goes to five, it tops out, and then it only has that 2 percent
increase after.
Chair Filseth: But, if I understand what you just said, it says so that
somebody is in year two of their five years, it’s going to project a step
increase in each of the next three years?
Ms. Nose: Correct.
Chair Filseth: But, it’s not going to project that, four years from now they
get a reclassification, and they get another five years of step?
Ms. Nose: Correct. Absolutely correct. So, on the health side, the only other
thing I can think of is we carried a 4 percent on the health increase year
over year. On the non-salaries.
Council Member Holman: Could you repeat that?
Ms. Nose: The 4 percent year-over-year increases on health across the
forecast period.
Ms. Nose: Non-salary expenses, what we do is we annualize for anything
that is one-time, so probably the best example for FY ’18 is the Track Watch
contract, right. We sunsetted that contract during FY ‘18s Adopted Budget
with the anticipation of bringing cameras online. And then there’s an ongoing
cost associated with managing and monitoring the new cameras. So, what
we do is, we look at and pull out the entire contract, because that’s what the
Council approved in the last Adopted Budget, and then we’ll put in the new
ongoing monitoring costs. This one has a savings to us, and so that’s what
we do. The other one is that remodeling Consumer Price Index (CPI)
increases, and again, this is just a model. So, this doesn’t mean that this is
FINAL TRANSCRIPT MINUTES
Page 60 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
necessarily perfect, and so we as an organization will go through to do base
requests with departments between now and the Proposed Budget process,
but we do model a CPI anywhere between 2 and 3 percent, and that’s based
on either contracts or our own contracts, such as rent agreements and our
current indices for CPI increases. So, we’ll update those, because we
typically use December-to-December, but obviously we don’t have that data
right now. Okay, let me pause for a second. That’s the base case, and that
was everything that was contained in that original CMR for the Committee’s
review. Okay? So, moving on to the at-places memo that you have before you, and this slide, we ran three additional scenarios. These scenarios are
truly changes in individual variables associated with that base case. So, we
aren’t redoing the whole thing, but we are redoing all of the General Fund
status with that one variable change. Does that make sense? Okay. So, first,
and I don’t articulate throughout the slides the definition of each scenario,
so take note right now. The first one is 7 percent. So, remember 7 percent
discount rate is consistent with what CalPERS has adopted; however, the
difference between scenario one and the base case is, there is no phase in,
there’s no smoothing, so it means we immediately hit 7 percent in FY ’19.
Scenario two is a 2.6 percent discount rate, also beginning in FY ’19 for our
pension.
Chair Filseth: 6.2 percent.
Ms. Nose: I’m sorry?
Chair Filseth: 6.2 percent.
Ms. Nose: Yes, in FY ’19 with no smoothing. Okay, for the discount rate. And
then the third scenario is, just for context, looking at our major tax revenue
sensitivity analysis, meaning, and this is Terence bailiwick of us just looking
at what we’ve endured as an organization through recessions in the past,
and so what would that look like in terms of our revenue projections. Swag,
we just put it in FY 2021. There’s nothing associated with that. I just wanted
it in the middle of the forecast.
Mr. Keene: You mean, we don’t know the amount of the economic downfall
by 2021?
Ms. Nose: I don’t know that I would be working here if I could project that.
Okay. And so, this is the only slide that kind of summarizes all the
alternatives, so just pause here for a moment. You can kind of see, as
FINAL TRANSCRIPT MINUTES
Page 61 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
expected, right, your gaps in FY ’19 grow between one and two as we lower
that discount rate. Your Scenario 3, you can see the major change in 2021,
obviously, where we go from the minor $2 million gap to a $12 million gap,
and I would say the last thing that I would want to point out to you is,
actually, between your base case and alternative scenario one. Remember,
the only difference between these is the smoothing, so that first three years.
But, if you look at your cumulative surplus or gap for these, between the
base case you’re at $11 million, whereas alternative scenario one, you’re at
$12.6 million. So, it’s about a $1 million, a $1.5 million increase. So, you actually are contributing about a $1 million less in pension, because you’re
not smoothing it. Does that? So, you’ll kind of see an inflection point there.
Chair Filseth: Say that again.
Ms. Nose: Yup. So, there’s no change in your discount rate between your
base case and your alternative. The only difference is the smoothing. Right,
so you’re paying more sooner, but there’s no change to the underlying
liability calculation, and so you’re not accruing more of a UAL, you’re almost
prepaying. And so, over the ten years, because you’re prepaying, you don’t
have to necessarily contribute as much. It’s almost like us prepaying our
Public Employees Retirement System (PERS) amount, what we paid in July,
instead of every pay period.
Chair Filseth: And you see that difference within ten years?
Ms. Nose: It’s a $1 million dollars, but yeah. Okay, so just looking at these…
Chair Filseth: I’m going to make my hockey stick observation here, again,
which is, in a slightly different way is, if you look at alternative scenario two,
6.2 percent scenario, so, over ten years the cumulative gap is $22 million,
but that’s predicated on the transition of expense growth from 4 percent to 2
percent, okay. Which happens in the middle of that time period. If you just
look at the gap in the middle of the time period instead of the end of the
time period, so say 2022 or 2023, then the cumulative gap is 14, 23, 31 38,
43, it’s $43 or $44 million by 2023, and then it turns around. It’s how you
get to 22.
Ms. Nose: Correct.
Chair Filseth: So, you’re counting on that reduction in expense growth,
because if you don’t get the reduction in expense growth for whatever
FINAL TRANSCRIPT MINUTES
Page 62 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
reason, salaries go up faster than 2 percent, okay, then that gap is
substantially north of $22 million.
Ms. Nose: Sure, and that’s assuming, though, that we don’t do any
structural changes.
Chair Filseth: Correct.
Ms. Nose: So, if we don’t choose to address the problem, so if we as an
organization…
Chair Filseth: If it’s business as usual.
Ms. Nose: Yup, if it’s business as usual, we say we’re okay with these numbers…
Chair Filseth: And we don’t have a windfall in revenue.
Ms. Nose: And we don’t have a windfall in revenue and we say, we’re okay
with this. We want to just let it roll, then yes, you’re correct.
Chair Filseth: Also, on Scenario 2, really the entire difference between that
and the baseline scenario is the difference in normal cost between 7 percent
and 6.2 percent, essentially.
Ms. Nose: I think it’s a combo of the two.
Chair Filseth: A combo because, oh, and because of the phase in contributes
something as well.
Ms. Nose: Well, this one doesn’t have a phase in, but I would have to check
with Bartel on this, but I’m assuming that when he did the calculation rate he looked at recalculating what our liability was assuming a 6.2 percent, for
both the UAL…
Chair Filseth: That was going to be one of my questions too, because I didn’t
see it in here, but okay, yeah.
FINAL TRANSCRIPT MINUTES
Page 63 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Mr. Perez: Because the assumption is that you’re paying down the
mortgage, so it should include the UAL.
Chair Filseth: Although the mortgage valued at 6.2 percent is going to be
significantly larger than how we value it now in baseline case.
Mr. Perez: Yeah. PERS gave us the number at 6 percent, so it’s 609 versus
like 404.
Chair Filseth: Not including Other Post Employee Benefits (OPEB).
Mr. Perez: Not including OPEB.
Mr. Keene: So, I mean, the other factor here, which has its own complications, right, is if we were to be able to pay at a 6.2 percent discount
rate, put money aside, right, and we were proven wrong. That actually
things performed better than 6.2 percent, then that dramatically changes
the payoff period on the UAL. And the last thing I would just say is that
these are just planning numbers. Even if we were to launch into a 6.2
percent and we were making a series of contributions and suddenly the out
years problem was unmanageable for us, I mean, for better or worse, we
can always change our mind about that. That’s a voluntary choice at this
point to fund at 6.2 percent a year. So, I mean, there’s that flexibility too.
Ms. Nose: So, I will move through the next slides pretty quickly. The
information is all in the at-places memo. But, just quickly, on alternative
one, you can see again (inaudible) these graphs. The blue line always assumes that we decided to say, thank for these numbers, and just continue
business as usual. The red line assumes that we are going to fix it. So,
again, as you can see, if we fix it structurally in FY ’19, there’s now a $7
million gap. So, it’s what alternative one has in FY ’19, then we (inaudible)
as an organization. But, obviously, fixing a $7 million structural gap is tall
work. There are definitely service implications associated with that. But, just
quick numbers to note, this is your jump in your, the word escapes me,
miscellaneous, I’m sorry, your miscellaneous pension rate. So, the memo
has the actual table with the rates compared, literally on top of each other.
It’s on Page 6, but just for quick reference, in this scenario alternative one,
your rates between your base case and your alternative one in FY ’19 on the
miscellaneous side are going 15 percent. So, not 15 percentage points, but
the change is 15 percent, so 32.6 to 37.6 percent. And on the safety side,
they’re growing 16.7 percent, so 55.6 to 65.9 percent. So, that’s why you go
FINAL TRANSCRIPT MINUTES
Page 64 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
from the 2.5 percent to the $7 million gap. Okay. Alternative number two
goes down to that 6.2 percent again, and you’re going to see about an $8.6
million increase in your pension costs in FY ’19 alone. It’s about an $11
million gap between revenues and expenses, and this, from your base case,
shows about 30 percent increases in retirement rates. So, again, if we were
to structurally fix it, as you can see in the red line, that you could, we would
be financially sound. No, again, we thought $2 million, was hard, $7 million
was hard, $11 million is even harder to solve in one year on an ongoing
structural basis. Okay. So, kind of looking at those pension costs and what does it look like over the different scenarios, base case is the red, so it’s
about $357 million over the course of the ten years that we would be
contributing. Alternative one is about $356 million, so that’s that $1 million
reduction because you can see that green space above the red mass, and
that’s that no smoothing. And then alternative two falls all the way above,
with $391 million across the ten-year forecast. So, it’s about $33, $34
million more in Alternative 2. For context, to try to kind of keep the
messaging and the visuals the same as before, what we did is we looked at
what the base case average cost for miscellaneous or safety employee was,
and then tried to model what the marginal pension cost would be on that.
So, when I, how these rates would be applied would be, if you want to do a
marginal pension cost at no phase in 7 percent, you would do an additional 2.6 percent on that $190,000 total cost of an employee. Now, keep in mind,
this is not employee compensation. This is the total cost to the City for the
employee. On the safety side, you can see the percentages are a little bit
bigger in dollar values. On the miscellaneous side, if you were to do all the
way up to the 6.2 percent, it’s about 5.8 percent in total, or $11,000 per
employee, and on the safety side it’s about 8.5 percent combined, or
$25,000 per employee. So, again, these are averages. This is very much for
display purposes only, to just kind of look at that marginal impact. And to
the Chair’s point, this is pension only. This does not address OPEB. This is
the major tax revenue sensitivity analysis. It’s just a fun little graph of the,
what happens…
Chair Filseth: I notice as we go through the scale, it keeps increasing on the
Y axis.
Ms. Nose: A little bit. You know, just as, the whole point of this is really just
a data point, right. Taxes as Tony and Tarun alluded to earlier, about 60
percent of General Fund revenues, and so you can kind of see in year one of
a downturn, we could see impacts of upwards of $10 million on the revenue
side. And in the last, what two years Tarun?
FINAL TRANSCRIPT MINUTES
Page 65 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Tarun Narayan, Manager of Treasury, Debt and Investments: Yeah, I mean
roughly with the exception of 2008, typically we have 18 months, kind of
two year, which has a cycle on average.
Ms. Nose: So, just something to bear in mind. Okay. So, just overall, just a
reminder this is really a projection of our financial status based on our
current service levels, and it really is a document that’s intended to help
inform daily policy decisions, as well as our long-term goals and challenges
as an organization, and just as we do every year, the City always faces
competing priorities. In this time frame we have a number of strategic decisions that we’re going to have to make. Everything from our workforce
to our capital improvements for the infrastructure plan to grade separate, all
while keep all these variables, both known and unknown, on the forefront of
our minds. Obviously, to make these structural adjustments to our
financials, whether it be on the revenue side or the expense side, they’re
going to call into question those competing priorities, and really have to kind
of look at what are the implications of them, and where do we want the
organization to go and look like in the future. And so, we’ll continue,
obviously to proactively monitor things. That’s why we do this report,
frankly, on an annual basis, is to kind of had this step-back look at where
we’re at as a data point to help, both the Staff and the Council in the future.
Mr. Keene: And if I might add something to that excellent presentation, the recommendations, you know, in the Staff Report would be for the
Committee to review, comment and then forward the long-range financial
forecast, the idea of the base case, to the City Council for approval. We
would want that tonight, and then obviously review, comment and further
directions on the pension obligation issues. You already started forwarding
into that a little bit on the earlier item, but not in the depth that we would
have. And then, I would just suggest this one last thought, that the forecast
is a tool. I mean, in one sense, nothing more than that. In one sense it
doesn’t even need to be perfected at any exact point in time. In any case, it
lets us play with “what if” comparisons against what we have built in the
plans, and the truth is, the way we actually do use it, we do have to modify
it, because it would be very simple. You would just suddenly way, well, geez,
all of a sudden, these revenues this year are even looking whatever way
different. If you adjust that, what does that say long term, X, Y, Z. So, I
would just encourage the Committee to fee, even from your own point of
view, you don’t necessarily tonight have to get it perfected. I mean, we’re
going to go to the Council too and talk about it. And the truth is, this
document is best if it’s really a living document, even during the course of
the year, you know, that we could go back and say, well, in the forecast we
FINAL TRANSCRIPT MINUTES
Page 66 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
thought this, but remember what we were saying, or we adopt our labor
agreements sometime next year and we say, well, wow, we sort of blew the
assumptions that we had built into the long-range forecast so let’s
recalibrate.
Chair Filseth: So, just to be clear. On the Staff recommendation, Item 2,
review, comment, provide further direction and so forth, does that mean all
this goes to the City as well, the alternate scenarios?
Ms. Nose: Yes.
Chair Filseth: Okay. I think it’s important that at the very least, alternative scenario two go as part of this package. I think one and three shed
interesting light on this as well.
Mr. Keene: And I mean, Mr. Chairman, I think it’s appropriate if at the end
of tonight you want to include more specific direction, either about
assumptions you favor, you know what I mean, or whatever that is, because
we sort of left it value free in the way we’ve presented it.
Chair Filseth: Right, and appropriately so, I think. You know, if you go back
to, I’ll make a comment, if you go back to slide 9, I mean, the way we have
looked at this, and it’s a valid way to look at this, is, if we said, okay, we’re
going to fund at the level of alternative scenario two, then these would be
the implications and the cash flows. And I think that’s a valid way to look at
it, but it’s not the only one. The way that I, my inclination to look at this has been, is slightly different, which is to say, let’s say for the sake of argument
that alternative scenario two, back up, let’s say for the sake of argument
that 6.2 percent, which is the vector in scenario two, is in fact, the reality of
what we can expect CalPERS to achieve over the next several decades, right.
Because we’re dealing with actuarial stuff and so forth. What that means is
that if we proceed and do the $2.5 million structural fix that we said is, it
sure looks like it’s a pretty important thing to do, then the City will still have
a gap of $8.5 million in 2019, and that gap will be added onto the UAL. At
least that’s what I think it says.
Ms. Nose: In simple math.
Mr. Perez: Yes. It’s kind of an actuarial.
FINAL TRANSCRIPT MINUTES
Page 67 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Chair Filseth: We add stuff to the UAL every year.
Mr. Perez: We don’t disagree, but it adds. I’m just not sure if it’s one for
one.
Mr. Keene: But, I mean, for discussion purposes.
Ms. Nose: For tonight, I think it’s a simple way to kind of look at it, and I
think what you’re hearing from the team is, when we get more refined in our
ability to model different things, then we may be able to give you a better
answer.
Chair Filseth: Okay. I had a question, which is, and I think I didn’t see it in the Staff Report anywhere, what’s the UAL at 6.2 percent?
Mr. Perez: We asked ourselves that. It’s like, whoops, we forget to ask John
for that.
Chair Filseth: John didn’t do it?
Mr. Perez: Well, he probably has it, except that we thought it about 3:00 PM
in the afternoon. So, I gave you what the PERS number is at 6 percent, so I
don’t think it’s too far off. It’s at 6 and then 9 percent.
Chair Filseth: Okay, so when we talk to John, I assume he must have it too,
so let’s ask him.
Mr. Perez: Yeah. We’ll have it for the Council Report.
Chair Filseth: Okay. Questions. Council Member Tanaka.
Council Member Tanaka: So, I’m also leaning with the Chair that, I think, the more prudent thing would be to actually use alternative scenario number
two. I’m also kind of concerned about, given our previous kind of expense
growth, whether going to, it’s up 2 percent expense if really realistic for us
as a City, because it seems like we’re always – I bring up one Consent Item,
it was like we’re below the median average pay and we have to increase it.
We’re always increasing it more than 2 percent, so I just don’t know how
realistic this really is. But, yeah, so I was looking at Page number, I guess
Attachment A, which is, I don’t know what Packet Page number it is. So, is
FINAL TRANSCRIPT MINUTES
Page 68 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
the Utility User Tax (UUT) really going up 15 percent? I mean, is that what
the projection is? It seems like, it strikes me as an awful lot.
Ms. Nose: So, I will help with help with some of this, and Tarun can adjust
for me. Do you remember, not an hour ago when we were talking about
Sales Tax and FY ’17 came in lower than we expected. So, in FY ’17 Utility
Users Tax actually came in much higher than we had expected. So, this 15
percent growth rate looks at the growth between the ’18 adopted and the
’19 forecast. The problem is, they were built on different bases. So, the
growth rates that you look at in FY ’19 are going to be a little funky because we’ve used the best information we have today, obviously. And so, what
Tarun has done is, he’s looked at, okay, well, how are we actually going to
do in Utility User Tax in ’17 and ’18, and then from there let me grow the
number and that’s what we’re going to account for FY ’19, and so you’re
seeing that 15 percent jump. In reality, it’s not 15 percent. What it is is the
underlying growth assumption is much more reasonable, but that 15 percent
is just budget to projection. So, I think Tarun can talk about what the actual
projection is.
Mr. Narayan: Yeah. So, if you, for Fiscal Year 2018 it’s more in the high 6
percent, 7 percent ranges in terms of if you’re looking at actuals for ’17 and
’18, and then it’s more in the 3 percent when you get to like 2019. The big
driver is the telephone. It’s been growing at a much higher rate, the UUT that applied on basically local telephone charges. That has been growing at
double digits, almost at 20 percent in some of the prior years. We don’t have
a clear explanation. The timing of it was about two years ago we updated
our utility user with the measure to be more in line with new technology, cell
phones, bundle packages, things like that. About six months after that went
into effect. Our receipts went up exponentially. Since we don’t really get
detailed information from the providers, we don’t have a clear-cut answer of
why. The only correlation is the update of our Tax Measure.
Chair Filseth: You know, that is kind of interesting, because I don’t think I’m
paying T-Mobile any more this year than I was two or three years ago. So,
why should we be getting more tax? More subscribers, maybe?
Mr. Narayan: Yeah. Broaden the base is one possibility. We lowered our rate
to 4.75 from 5 percent. We updated the language of what it applies to. So,
it’s a combination of broadening the base and my speculation is that our tax
now more matches with the provider’s in terms of how to apply it, and that’s
part of the broadening the base. But that’s purely speculation, since we
FINAL TRANSCRIPT MINUTES
Page 69 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
don’t, other than the actual tax amount we get, we don’t really get any
information from the providers.
Council Member Tanaka: Okay, on Page 304, I noticed that the benefits are
increasing like 5.875 percent, right, then it drops dramatically as you go
from 2024 to 2028. Yeah, I mean, how do we – the benefit growth almost
seems like gravity. You just can’t stop it. How the heck are we going to take
it from like 8 percent down to like in 2027 down to 0.2 percent? How would
we ever control such a thing?
Ms. Nose: Good question. So, what I can say is that in our most recent Memorandum of Understanding’s (MOU), and just in general as we’ve been
working with our labor groups, we’ve been working to dampen the growth,
right. So, if you look at health. Health increases, you know, 8, 10 percent a
year, right. So, you’re wondering, why am I not seeing 8 or 10 percent
increases?
Council Member Tanaka: Well, it’s just more like, how did it go down to 0.2
percent, right? It seems dramatically different.
Ms. Nose: Of course. So, we have taken measures to dampen the growth
rate on certain things. So, we no longer do a 90/10 split on the health rate
increases. We have a flat rate medical now, and so right now our contracts
assume a 4 percent growth on that flat rate medical. And the assumption
behind that was, assuming an 8 percent increase, the employees would share in that 8 percent increase. The employee would pick up 50, the City
would pick up 50. So, that’s one thing where you’re going to see, the City’s
costs are only growing about 4 percent for health. And so, with that stuff
being dampened, those benefits, I’m sorry, being dampened by these
structural changes that we’ve made in our benefits, one that’s helping that
exponential growth not happen. I don’t really know what the right phrase is,
I’m sorry. And so, what you’re left to, from a benefit standpoint, is really
your other variable that’s a percentage typically, which is our pensions. And
so, actually, I can do the math on the fly, but if we looked at, so let’s take
the pension rate between 2026 and 2027.
Mr. Keene: That’s significant, you know.
Ms. Nose: Right. So, in 2026 to 2027, on the miscellaneous side, you’re
actually seeing a reduction in the pension rate, right, in the rate. So, you’re
going from 42 percent to 38.4 percent, and so you’re going to see the offset,
FINAL TRANSCRIPT MINUTES
Page 70 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
obviously, and you’re going to see your growth dampen. And on the safety
side, you’re growing from 77.5 to 78.0 percent, so what’s the quick math on
that.
Council Member Tanaka: I guess my main point is, it just seems to defy the
mega train, right, which is health care, I mean, everything is more and more
expensive. It’s like it’s inevitable. It seems to just keep on going up and
faster than the rate of inflation. Not just in the public sector, but private
sector. And so, I just don’t see how.
Mr. Keene: She said it would predicate on an 8 percent rate of growth.
Council Member Tanaka: No, I understand. It just seems like that’s a really
hard thing to do. Maybe, just assuming that we have really great
negotiations, right.
Mr. Keene: I don’t think that’s hard. I think that’s where we are right now.
We are making that sort of a cost share. I think the real challenge, I don’t
want to goof this thing up, but on Page 9 of the report, where we have the
percentage growth over time, Table 4, that table that we used to inform
stuff. I think one of the interesting things this shows is you’re sort of saying,
well, we have this low rate of growth on salary overall, that’s the top line,
the percentage, the Compound Annual Growth Rate (CAGR). When you look
at the benefits, it’s more than that over that time, average, but the more
interesting thing is to think about the ratio of benefits to the salary cost. The 69 percent ratio of benefits to salary at the beginning of this period. And
there is an 84 percent rate of benefits to salary by the end of the period in
these assumptions.
Council Member Tanaka: I totally get that. It’s just, it just seems very
unlikely that, you know, we have benefits that’s going full blast right now,
right, 12 percent? And then it suddenly comes to a screeching halt down to
0.2 percent, and I just, it just seems like that’s a really hard thing to do.
Mr. Keene: I think there’s two things. One, we have been in a period of
catch up on our negotiations on our salary ranges, for one thing. Two, we
are on a continuing escalating trajectory on the benefit costs, and we built,
not on the health, but on the pension side, we built all of the pension cost
increases into the City’s side of cost. So, in one sense, we can’t do it right
now, a better long-term comparison would be to be, what is a combined,
how much was the City offering combined on salary and pension over the
FINAL TRANSCRIPT MINUTES
Page 71 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
years in comparison to the past to the future. Because, what we are right
now going to be faced with is rising pension costs. Forget the whole UAL
discussion. So, that has to have an influence on the payroll costs when we
looked at the combined contributions we’ve been making over the years.
And I would bet that that would be a convergence that is much closer over
time. You know what I mean? In other words, if we gave a 4 percent pay
increase, I’ll just say something, four years ago, and we had a 2 percent
cost increase in pension, that’s a combined 6 percent cost that the City was
doing, if we now have a 4 percent increase in pension costs and a 2 percent increase in wage costs, we’re still putting, as a City, a 6 percent contribution
per employee, and that’s a reality of what we’re going to be dealing with in
the future. So, I can’t speak because we’re going to have to go into
negotiations, but those are the facts, I mean, to what we’re going to do, but
those are factors that I do think argue for, we can’t just look at the way
things have been in the past as to how we’re going to negotiate in the
future.
Chair Filseth: So, if I could summarize. I think what you’re hearing from
Finance Committee on this is, we see the projection, we understand the
argument. The feeling over here is that there is significant risk associated
with the projections, particularly in the out years, in terms of savings, in
terms of expenses and benefits. Is that an accurate summary?
Council Member Tanaka: Yeah, I think we have a hard time holding the line
on everything. So, I just don’t see why it’s suddenly, in 2024 we flip the
switch, right? It seems unlikely.
Mr. Keene: Again, we up these every year. Secondly, I asked Lalo who does
a ten-year forecast, because it obviously gets diceyer the further out you go
in the future. Hardly anybody does a ten-year forecast. Most people do a
five-year forecast.
Chair Filseth: I sent this to you guys a while ago, but I printed out and
brought it. I took a five-year rolling average, okay, or annual expense
growth in the General Fund in Palo Alto since 2004, or something like that,
and it’s basically long-term 4 percent a year, something like that. A little bit
less around the recession, a little bit more before that. So, what we’re
projecting is that expense growth in the General Fund will fall, in the out
years of the Long Range Financial Forecast (LRFF), will fall from its historical
trend of around 4 percent, okay, to about half that, and stay there. That
would be a happy circumstance, right. We can see that there are mechanics,
FINAL TRANSCRIPT MINUTES
Page 72 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
mechanisms by which it could happen. And what you’re hearing on this side
is, we think there’s risk involved with that, and we shouldn’t necessarily
stake large amounts of things on it just happening by itself.
Mr. Keene: May I offer a suggestion, Mr. Chairman? I can’t see anything that
would preclude the Committee from making a comment like that to
accompany this in the recommendations to the Council, if we want to
consider in the out years.
Chair Filseth: I would hope so.
Mr. Keene: We wouldn’t be arguing, I mean, I think that’s in the Committee’s prevue to do that sort of thing over the long term.
Chair Filseth: Go ahead. I like the track you’re on.
Council Member Tanaka: Okay, so on Packet Page 304, just below where I
was talking about in benefits, if you look at that service, I notice it goes from
85 percent growth to minus 28.9 percent contraction. I realize these
numbers are small, so it’s like…
Ms. Nose: Understood. It’s a reasonable question. The 85 percent is that we
are anticipating the one-year overlap of the two golf service, I’m sorry, golf
course debt service. So, in 2019 you have a spike because in 2019 you
anticipate sunsetting your existing debt, so that will be your final year of
payment on the existing debt. But we also anticipate that this year we are
going to issue the debt for the current renovation, which means you’ll have your portion thereof of your first debt service payment happening in ’19, and
so then in 2020 you see that drop off as that old debt goes away. So,
because they’re so small, the percentages are…
Council Member Tanaka: I noticed that. So, the last one here, which is, I
sent the question in to you. I don’t know if you saw it. So, on Page 4, Lalo, I
sent you the question, right? Maybe you could just answer it.
Mr. Perez: Why is the difference in the total revenue from Table 1 versus
Table 3? Okay, yes. Thank you. There two ways that we were trying to show
it. Sorry for the confusion. So, on Table 1 I’m looking at the adopted 2018
column, and you see the net one-time surplus shortfall of 3.384 percent, and
then above there’s a $207,042 revenue number. So, what we were trying to
FINAL TRANSCRIPT MINUTES
Page 73 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
show here is that when we started the year, we started with a gap. So, we
then solved the budget here. We showed it as a gap, and then when you
look at Table 3, Council Member Tanaka rightly pointed out, if you look at
the column all the way at the bottom, all of a sudden it says, total sources of
funds is $210,426. So, he was asking, why is there a 3.3 percent difference.
So, what we did here is we fixed the problem, and the fix is, as you will see
two lines up, budget stabilization contribution one time, 3384. That’s the
source of revenue. So, that’s how you reconcile those two. Sorry for the
confusion. We were just trying to make sure we showed you that we had a gap.
Chair Filseth: Council Member Holman.
Council Member Holman: The base case is like, you know, you say, business
as usual, but is there not a scenario that could be drawn out that would
include increased contribution by units?
Mr. Perez: What we think we need to do is give you the whole picture,
because we haven’t given you the update on infrastructure. That’s also
scheduled on the same night, so we’re going to give you the financials, the
long-range financial forecast and the infrastructure. So, you’re going to have
almost your full dinner tab, missing the OPEB. And I think, I’m sorry?
Ms. Nose: In January?
Mr. Perez: Yes, the 22nd. And so, I think what we need to do then is also
have labor strategy discussions with you as a Council. And I think once we
put all that together, then I think it makes more sense for us to then discuss
that and get those labor strategy options in front of you, and…
Chair Filseth: In Closed Session?
Mr. Perez: In Closed Session. And then get direction from you.
Council Member Holman: So, just as discussion points, we can have some
potentialities discussed on the 22nd? By the way, we got the Stanford letter
probably that night too, so full night. So, just as theoreticals, we can have
conversations in public about how these numbers could look more positive
and more promising and more hopeful?
FINAL TRANSCRIPT MINUTES
Page 74 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Mr. Perez: We believe you need to see the whole picture, so you can make a
better informed decision, because you also need the City Manager to bring
you the proposal, or the Proposed Budget, right. Because it could have fixes.
Council Member Holman: I understand, but we’re just looking at scenarios,
we’re looking at potentialities, we’re looking at forecasts, and so it seems
like we could work in a scenario for this. Like, what if there was a, and I’m
going to totally make this up, because who knows, if employee contributions
increased by 3 percent, how would that influence or affect this? And I
understand union sensitivities, but we’re just talking some kind of planning stuff here. We’re not talking…
Mr. Perez: I think we owe you more data than that. We need to show you,
how do we compare to surrounding jurisdictions, what are the challenges. At
the beginning of the meeting you heard me say, I can’t hire an accounting
manager, I can’t hire an assistant director. There’s other challenges, not
everywhere, not in the whole organization. So, I think we need to give you a
comprehensive package of all of our financial challenges and what are some
of the options that we foresee. And then, obviously, in the Closed Session
the discussion on labor strategy. I think you’ll have time, because we have
to do this before we adopt the budget, so there’s not a window you’re
missing.
Council Member Holman: I guess it raises a question for Terence then. It’s like, what’s appropriate for open session as opposed to Closed Session,
because if we’re not talking about labor negotiations, we’re talking about
financial planning, why wouldn’t that be an open session discussion? In other
words, talking again, scenarios, not negotiations, not proposals, not
negotiation strategies. We’re just talking about long-range financial
planning. I don’t understand why that couldn’t be a discussion in public.
Mr. Keene: Before Terence weighs in, let me, let’s get ready to answer that.
But let me just put a little more context. I think what we have before us is
useful already, right. To start to show some challenges. My own suggestion
is that without having to get real granular beyond what we’ve done here,
going to the Chair’s point about 4 percent versus say 3 percent looks more
realistic, if we were trending backwards. We don’t have to recalculate that
on everything. We could just run some numbers that say, what if it’s 4
percent? What does that do as far as, how does that change the line, the
curve, and the gap? And that’s useful information to you, because what Lalo
then will do, we have that piece as just one alternative, then when we
FINAL TRANSCRIPT MINUTES
Page 75 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
present you with the infrastructure issues, we’re going to have another gap,
and then we have this whole question about how are we going to deal with
the labor side of stuff, and I still would argue that that’s held in Closed
Session. And the reason for this is that we have requirements as to how we,
how and where we actually bargain over wages and benefits with our labor
group, and that’s sort of formalizing what it is, and I think we want to walk a
careful line between bargaining at the bargaining table and bargaining
unilaterally in public, I guess is one way to think about saying it. Maybe you
can straighten me out on that.
Terence Howzell, Principal Attorney: I think, Jim, this is perfectly right in
kind of summarizing it that way. And what I think what we’re suggesting is
that the initial conversation should happen in Closed Session, and you may
elect after that initial discussion in Closed Session, to have a discussion in
the public. But, I think you need to have a better sense of kind of what our
strategies, what our anticipated strategies are, how they may vary
depending on bargaining unit. It may vary by tier. And I think you will have
a more informed useful discussion for the public once you have a better
sense of the complexities and you’re also given some of the vocabulary that
may be necessary, so that we can walk the line of not kind of bargaining
through Council meetings, and also not suggesting that – the other danger is
that you don’t want to suggest in any way that you’re not bargaining in good faith by setting out a position in a Council meeting that suggests that you’re
not going to stray from. So, again, a Closed Session would help provide
Council with a framework from which to then, perhaps, have these
discussions in public.
Council Member Holman: So, the last part of what you said makes the most
sense to me. It seems like the most rational explanation of why not, at least
initially, have some kind of discussion about this in public. That said, it still
seems like that, well, two things. One is, will we then have a planning
discussion in public after we have an initial discussion with the Council in
Closed Session? That’s one question. And then the other is, it still seems to
me like a little bit like, I mean, I’ll accept what you’re saying, but it does
seem a little bit to me like, because the scenarios are so very, very different,
depending on the different labor groups, and where they are and who they
are, blah, blah, blah. It still seems to me something though like, because it
is so theoretical, that it wouldn’t be impacting the fair bargaining aspect. So,
will we have a subsequent discussion in public? (Crosstalk) understand
where I’m coming from. It’s like, I don’t want to step on any of the toes or
any of our agreements with our labor groups. That’s just, of course not. And,
it is a piece of understanding the Long-Range Forecast, so there’s a little bit
FINAL TRANSCRIPT MINUTES
Page 76 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
of a disjoint here of what we’re talking about and what we’re not talking
about. It’s kind of the big elephant in the room, if you will. So, I’m just
trying to rationalize for myself, and potentially questions from the public too,
that, well, how can you have this discussion without also having that
discussion?
Mr. Keene: I think we’ll just say it’s going to unfold, right. I mean, step by
step. I would just reframe it for you to think about, holy cow, like this end of
January. I mean, we’re talking about we can bring a Long-Range Forecast.
We can have some other demands placed on it with a different percentage. That gives us sort of our overall sort of glimpse of the future. We then have
this whole question about how to deal with the unfunded liability and the
pension piece, which is another strain. Then we’re going to talk about what
we’ve got to do on the infrastructure plan and the gap there. And then we
have this piece about labor. To me, I don’t think you should want to be
thinking further than just us getting to that next piece and seeing sort of the
size of the challenge, because I think that’s, and of course you all have a
little bit of a head start on your colleagues who, at the next meeting, are
going to have to have some time to catch up with you. I think one session in
there, things will start to get clearer on how we can handle that piece. The
same way about you’re going to have to discuss how do you want to handle
the reporting component of the discount rate and the UAL. We’re going to have to think about how we close the gaps.
Council Member Holman: And I can appreciate all of that. It’s like, you’ve
known me long enough to know that I’m a context person, so that’s where
this is coming from.
Mr. Keene: I would think there’s enough theoretical sort of stuff here that
we all then realize, no matter what we decide, actually it gets real really
fast. What we have to do this next year.
Chair Filseth: I think on the point that you brought up, on some level this is
important information. You know, the consequences of these things, the
public has a material interest in because the choices we make and the
decisions we arrive at, and you know, the accommodations in the
negotiations we reach with the labor groups, and so forth. I mean, these are
going to have potential impacts on the community, you know, for decades to
come. At the same time, I think we have to be careful about sort of, what
problem are we trying to solve, right, each time. So, you know, it seems to
me that on the sphere that you’re describing, there is a significant problem
FINAL TRANSCRIPT MINUTES
Page 77 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
with the public, which is, we reach agreements with bargaining groups, and
it’s pretty much done before anybody in the public ever gets to see what it
is. I mean, the public has the right to comment and have input at the
beginning of the process, because we know there’s going to be a discussion
on such and such a topic, but they have no idea what we’re going to talk
about, right? And by the time they find out the details, it’s done. I mean,
we’ve reach agreement. The only choice is an up or down vote. Does the
Council accept or reject it and so forth? And so, I can see a need that, if the
public wants to be able to weigh in at a time that there is still a chance to make an impact, it’s like, they can weight in but there’s no impact. Or they
can make an impact, but they don’t know what to weigh in on. So, I mean,
that seems to me like a problem, and you could design a solution to that
problem, which doesn’t necessarily do all kinds of other things as well. I
mean, I think it’s back to what problem are we trying to solve. That would
be my (inaudible). I think what the City Manager suggested, if I heard you
right, was pick any one of these, any of these blue lines. It would be kind of
interesting to see a scenario where there wasn’t a big change. Where the
expense growth rate seemed same to same. So, there’s the base case. And
then there’s an alternate case, what if we really don’t get the expense
growth rate down to 2 percent, it stays at 3 or 4 percent. You know, and we
could see what that is. I think that’s what you said, right?
Mr. Keene: We’re talking about just running, we don’t have to do all the
details, we just run graphs.
Ms. Nose: I can take the baseline numbers and instead of growing…
Chair Filseth: Some of us might already have taken a whack at it already.
(Crosstalk.)
Council Member Holman: I was going to say, Lalo is hiring.
Mr. Narayan: Just to add one thing, on the revenue side, that the potential
new hotels that Lalo had talked about, it’s not in these numbers at all. I just
wanted to make sure that’s clear.
Chair Filseth: I think that’s right. I think we’re sort of obsessing about the
expense side, but the revenue side is just as valid, right.
Council Member Holman: Oh, yes. When we’re talking about, well, it’s not up
there anymore, but when we’re talking about these, yeah, I heard maybe
FINAL TRANSCRIPT MINUTES
Page 78 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
three times the word service reductions, and I think from my perspective,
listening to the public in the back of my head here, what does service
reduction mean? So, is it literally service reduction, or is it not filling open
positions? Is it Staff reduction? Is it less expenditure here or there? What
does service reduction mean? Because if I’m in the public and they hear
service reduction, they’re going to hear, like, okay, street sweeping is going
to go down. Tree trimming is going to go down, don’t you dare. You know,
fewer hours at the libraries? (Crosstalk.)
Mr. Keene: I’m not throwing the Staff under the bus, but last year when they proposed tree trimming to me, let’s be honest, I said, really, you want
me to take this back. The Council is just going to put this back in. No, I think
we should try it. Okay.
Chair Filseth: Well, Jim. We knew that’s why they put it there.
Council Member Holman: I can see the humor in a lot of things, but not that.
So, you hear what I’m saying about service reductions? I think it’s important
to not be just such a sweeping statement about that term.
Mr. Keene: Well, it’s a matter of scale. Obviously.
Council Member Holman: Of course. It might be some, what I think of as
service reduction too, but again, it’s like not just say…
Mr. Keene: The gap that we’re trying to close is going to drive how much of
it is vague or this or that, versus visible, you know.
Council Member Holman: Yes. But what I’m trying to get at is like, you
know, we hear, rightly or wrongly, we do hear from the public and this is
rightly a public discussion. We hear from the public. It’s like, why does Palo
Alto have so many employees? I’m not judging that. I’m just saying if we
just go out and say like, to fill this gap we’re going to look at service
reductions, it ain’t going to be a happy reception. You hear what I’m saying.
Mr. Perez: We do, and I think from (crosstalk). We have more services that
other communities would love to have. But I think we’ve proven over the
deep recession that what we did is we changed the service delivery. I mean,
that was our first line of review. You’re right, we did have some, you know,
street sweeping is one that comes to mind, as you point out, where we
FINAL TRANSCRIPT MINUTES
Page 79 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
changed the level of service. But that was based on studies and not
everybody agreed with the study. But in other areas we saw an increase. So,
for example, the park maintenance, we ended up having more labor hours
because of the different structure of benefits. So, I think we’re mindful of
that and we’re concerned. I think, well, I’m happy to say that over the
years, that we’ve had these changes, it hasn’t been a dramatic change in
level of services. It’s been a change in how we delivered.
Chair Filseth: So, most of the stuff that I was interested in asking about
we’ve covered in great detail, and I think you guys have been exhaustive in your assessment of this. So, thank you very much. I do sort of have one
outstanding out that I’ve asked about before, and maybe you’ve answered it
already, but how do we roll OPEB into this?
Ms. Nose: I’m sorry. Repeat that.
Chair Filseth: How do we roll OPEB into this?
Mr. Perez: Okay. So, let’s talk about that process. So, OPEB, to remind
everybody, because not everybody know what OPEB is.
Chair Filseth: Let me be specific too. I think a chunk of this is, the normal
costs look different on what the discount rate assumption is. That’s going to
be true for OPEB too, so I hope that will be part of it.
Mr. Perez: Yes. So, it’s Other Post-Employment Benefits, that’s what OPEB
means. And specifically, for the City of Palo Alto is, we are talking about retire medical. We have about $154 million unfunded liability for that. It is a
two-year-old number by Government Accounting Standards Board (GASB)
requirements and CalPERS too, because we have, they manage our OPEB,
we must update the number every two years. So, with pension we do it
every year, OPEB every two years. So, we just sent the data file to Mr.
Bartel’s employees today. They need to massage it, go through it. Our goal
is by March to be able to have a draft report that we can review, and then
we would incorporate that through the Finance Committee Budget process,
the review of that, the review of the options. So, with OPEB Trust at CalPERS
you actually, we actually have options, unlike pension. We can choose
different rate of returns. We can choose different amortization schedules,
close amortization schedules for example. We closed it. We had an open
amortization schedule. So, if you imagine refinancing your house for 30
FINAL TRANSCRIPT MINUTES
Page 80 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
years every year. That’s what we were doing. So, we were really kicking that
can down the road, and we said…
Mr. Keene: Are we almost at 25 years yet now?
Mr. Perez: Yeah, I think we’re 24, 25 years now. We set aside in 2008,
March of 2008 we sent about $30 million to the Trust. So, yesterday, I think
Jim asked me the other day, so I looked it up on line. We have $101 million
in assets now. That’s grown as a result of additional deposits and interest,
certainly. So, we know that that methodology works, and that’s what you’re
trying to do with the Section 115 Trust, right. So, we’re all in favor of that. And so, we’ll give you those options, or we’ll give the Finance Committee
those options in May, and by then we’ll have a lot more information on our
Long-Range Financial discussion, our infrastructure and, hopefully, labor.
And so, at that time you can make an informed decision, or the Committee
can make an informed decision.
Chair Filseth: Got it. So, you anticipate that information being available, not
at the beginning, but at least before the end of the budget review cycle?
Mr. Perez: Correct. So, we’ll try to get it to you as fast as we can. By law,
we have to comply. If not, it’s a significant finding, so, we’re under the gun.
We got to get it done. So, not making the deadline is not an option.
Chair Filseth: I understand. So, in between now and that time, then OPEB
just sort of becomes an asterisk to this kind of discussion?
Mr. Perez: What we’re saying is, basically we’re inflating the number, which
is not the most comfortable way to do it, but that’s the only option we have
at this point.
Chair Filseth: Because, I mean, I guess theoretically we could use the old
one. The old one is too out of date, although two is out of date, but at the
moment we’re using zero, right?
Mr. Perez: So, we had the actuary firm, Bartel, take the number and give us
the next two years’ numbers. So, they did it via an actuary basis. What we
did from thereon is, we used the CPI for the outer years. So, that’s what I
meant by the outer years.
FINAL TRANSCRIPT MINUTES
Page 81 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Steve Guagliardo, Management Analyst: Thanks for the questions, Chair
Filseth. Steve Guagliardo, Office of Management and Budget. So, for the
final two years of the forecast, it does go beyond the last model that Bartel
had given us, and so we’re carrying this into what’s in the final year of his
model for those final two years. So, you’re not going to see a massive spike
there, but you are going to see refined estimates as we get that new model.
Chair Filseth: I think what I’m going to do is move the Staff
recommendation, which is, that the Finance Committee forward the Fiscal
Year 2019 to 2028 General Fund Long-Range Financial Forecast, base case and alternatives for City Council approval; and that we review, comment and
provide further direction on the City’s pension obligations and assumptions
in forming the City’s calculations and so forth and with a couple of
comments. One is that Finance Committee feels that the projections are very
sensitive to certain assumptions made for the out years, that we think there
is a significant degree of risk on, and require careful focus. And so, maybe
I’ll stop there, but I think on the scenarios, scenario two is really the
alternate scenario. Scenario one is interesting because it shows the
sensitivity of the phase-in period. Scenario three is interesting because it
shows the impact of, you know, what if there’s, I don’t want to say a black
swan event, but if there is a recession. But scenario two is really the primary
scenario. The other observation I’m going to make is, I think the interpretation is that if, in fact, the discount rate assumption in scenario two
is the real one, then the City’s Budget has a significant gap in it, which gets
added on to the unfunded liability, right. And I don’t know if that needs to be
a comment in the Motion or anything like that, but I think that’s the way to
interpret it, right? And I’ll stop there. Is there a second?
Council Member Tanaka: I’ll second it.
MOTION: Chair Filseth moved, seconded by Council Member Tanaka to
recommend the Council:
A. Approve the Fiscal Year 2019 to 2028 General Fund Long Range
Financial Forecast (Base Case) and alternatives; and
B. Include the following comment in the recommendation: “The Finance
Committee feels that the projections are very sensitive to certain
assumptions made for the out years, which carry a significant amount
of risk and require careful focus.”
FINAL TRANSCRIPT MINUTES
Page 82 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Chair Filseth: Go ahead.
Council Member Tanaka: I’ll second it, but I wanted to just ask you about on
thing, which is, so we had the benefit of kind of going at this in gory detail,
and I’m not sure that the whole Council will do the same.
Chair Filseth: Oh, that’s a good question. Go ahead.
Council Member Tanaka: So, should we not make a recommendation in
terms of which one of these ones we would recommend?
Chair Filseth: I think I am going to argue that the right way to proceed at
this point in time, is that the primary case is the base case, and scenario two is the alternative, at this point in time. I think between all us friends here, I
would be very surprised if at some point in the future that didn’t turn upside
down. But for the moment, I think the right strategy is to forward the base
case with an alternate.
Council Member Tanaka: I guess the only issue is that I don’t know if
everyone understands what 7 versus 6.2 percent is, and which one’s
realistic, right. I think that’s, because unless you really kind of dug into this,
most people would not have an idea, and this doesn’t talk about that
anywhere, right?
Mr. Keene: I think much more of the Council is attuned to this sort of 6.2
percent number, really, in general. I think the outstanding issue is, I mean,
you say it the way you say it. I think you’re saying it right. I think very quickly it will get more definition than that. And what we were really kind of
waiting on is the how and when of formally applying that, let’s say, whatever
that means, and what are the implications of that? You know to have that
implications discussion in the spirit of transparency to allow everybody to
kind of grasp, okay, we’re ready to do that. And I think the way you worded
it is perfect to set it up for the Council right now.
Chair Filseth: Because this isn’t policy, right? This is just a couple of graphs,
right? It isn’t policy. Policy is going to be very important.
Mr. Keene: And again, if you go that far and then we flesh this out with
some of the other streams into the future, infrastructure and our existing
infrastructure plan. We have all kinds of other unfunded infrastructure needs
FINAL TRANSCRIPT MINUTES
Page 83 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
that are factors out there. I don’t care whether it’s an animal shelter on one
hand and grade separating Caltrain on the other, and the labor piece. In
short order this spring, I think those things are going to get really kind of
clear, and we’ll be able to set some, we’ve got some weigh points and we
can start orienteering ourselves to where we need to go.
Council Member Tanaka: I mean, you also made a recommendation of trying
to show the more realistic out years by having the expenses kind of more in
line historically. Could you not also show that?
Chair Filseth: I think you’re going to do that, right?
Mr. Keene: He said that general enough. We know how to run some different
scenarios that we can show different graphs for you and show you how the
gap changes. I mean, it’s going to be real easy. We can have that for the
Council.
Council Member Tanaka: Do you want to supply maybe probabilities of like 7
versus 6.2 percent so that folks have an idea of…
Chair Filseth: I’ll give you my take on that one. It’s that I don’t think it’s a
probability thing. I think it’s 100 percent that it’s 6.2 percent.
Council Member Tanaka: Why don’t we just say it then, right?
Chair Filseth: I think it’s the, here’s the base case and here’s the alternate
case.
Council Member Tanaka: Which is the likely case?
Chair Filseth: I think the alternate case is the real one.
Council Member Tanaka: Well, that’s what I’m saying, that’s the likely case.
Mr. Keene: I guess you could say that, but what you want to do about it,
that’s a different matter.
Chair Filseth: Our policies have been geared around the base case, and the
plan of record is the plan of record until there is a new plan of record, right?
FINAL TRANSCRIPT MINUTES
Page 84 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
So, at the moment, as we speak, our policies are geared around the base
case. How to modify those policies, right, is the long discussion when we get
to it, I think.
Council Member Tanaka: I’m not trying to say how we do policy. I’m just
trying to say, what is realistic? And what’s realistic is scenario two with
probably more realistic expense numbers.
Council Member Holman: I’m actually supportive of what Council Member
Tanaka is saying. Because we talked about it earlier, and you mentioned the
word “transparent” earlier, Jim, and I think this is a good opportunity to do just, even if it’s a one-page primer, for the public, to see how these
variations can affect in such great degree, what our planning is about.
Because it’s not just the Council discussing this, it’s also how the public
wants to know. And if we’re going to be looking at having a big public
discussion about what we do in terms of managing this, meeting this, you
know, addressing it in a responsible way, I think we need to bring the public
along and show them what Council Member Tanaka was saying. So, just do
a little primer about, these are the different, these are a couple of different
percentages. This is how widely it affects and wildly it affects the
projections.
Chair Filseth: So, that’s going to be part of what I said, right? How about if
we said it like this. The base case is CalPERS’ projection, and then we just put the rest in. I mean, we don’t mean we put it as a footnote. I mean, state
it out front, the reference, okay, which is November 2016 CalPERS’ own
consultants, Wilshire Associates, recommend that 6.2 percent is the realistic
answer. CalPERS, for their own reasons, chose to adopt a different one. We
present both cases. How about if we did that?
Council Member Tanaka: I think the problem is, most people haven’t had the
benefit of, (inaudible). And it’s not said in the report which one is the right
way, right?
Mr. Keene: If we could just have a qualification, just for right now. I mean,
this is just letting things unfold in the venue and in the conversation you
want. The best possible conversation you want to have, that these are being
brought forward as part of our planning work on our long-range financial
forecast, which is what we, which is intended to inform policy, okay? But
that leaves open the fact that the policy decisions will follow this. Do you
FINAL TRANSCRIPT MINUTES
Page 85 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
know what I mean? Okay, and I think that’s really key. With that
understanding, it’s 11:04 PM.
Chair Filseth: All in favor?
MOTION PASSED: 3-0 Fine absent
Chair Filseth: By the way, since it’s unanimous, I hope this (crosstalk).
Mr. Perez: What I would question, and maybe I need to ask Jim instead of
you, do you want John Bartel or his team, since he has retired, to be there?
Chair Filseth: I don’t think that’s necessary.
Mr. Perez: We just wanted to plan ahead.
Mr. Keene: Jessica, will you work your usual magic on the Motion and
everything.
Jessica Brettle, Assistant City Clerk: Yes.
Mr. Keene: Okay, thank you.
Chair Filseth: The question here is, you know, the two Stanford professors.
You guys had a meeting with them this week, right?
Mr. Perez: We did, yes.
Chair Filseth: Actually, yes. So, since we’re in the questions and answers
and stuff like that, let’s ask that.
Mr. Perez: It was associated with the last item, if we didn’t cover it. So, they
refined their request to where they want a lump sum number for a number
of years, and so we made the request to CalPERS, I did it yesterday. So, I’m waiting to hear back on that. On the data that we hold, we’re going to work
with Legal to see what kind of documentation we would need to ensure that
we would have the data secured and confidential parameters. So, they
understand that and we’re going to regroup again. They think they could
FINAL TRANSCRIPT MINUTES
Page 86 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
work with the numbers based on CalPERS cooperating. And so, we’ll report
back as we move forward.
Chair Filseth: So, the ball is now in CalPERS court, not in their court.
Mr. Perez: Correct. And then pending the parameters, the feasibility and the
parameters of the agreements, if we’re able to get that. I don’t know what
their process would be for them to get, to enter into those agreements, but
my understanding from discussing with Mr. Nation, Professor Nation was
that they’ve had something similar with the Internal Revenue Service (IRS),
so that may work within the structure as well.
Council Member Tanaka: Can you tell us what the timeframe is to get this
data going? It would be great to get this kind of comparison to Bartel’s
numbers soon.
Mr. Perez: We’re really relying on CalPERS. I’m a little, I’m concerned
whether CalPERS is going to comply with that. And then the data that we
have, we just need to, I think, circle back with Legal and figure out what’s
the right contract language. And then see if its acceptable to them.
Council Member Tanaka: Do you have a timeframe?
Mr. Perez: That’s the thing I have to tell you. We’re rushing a lot of stuff for
you, for this Committee. Some of the timelines are crazy. Some of the hours
that Staff are putting in are crazy. So, as Jim said, we’re doing the best we
can. I asked to meet with them, and it took them a couple of weeks to meet with me. So, it wasn’t that we didn’t reach out. I reached out immediately to
them and said, hey, can we meet? And they couldn’t meet right away. It was
two, two and a half weeks after my request. So, I’ve been moving on it. I
haven’t been sitting on it. Like I said, I asked CalPERS and I’ll meet with
Legal and go from there.
Council Member Holman: Not a big deal, but can the three of us agree to
keep these, so you don’t have to provide more of these thick books?
Chair Filseth: Let’s see. So, upcoming meetings?
FINAL TRANSCRIPT MINUTES
Page 87 of 87 Regular Finance Committee Meeting Final Transcript Minutes 12/05/2017
Mr. Perez: This was our last meeting, so think you. The Committee has been
insightful, and we’ve done, I think, a lot of good work to set the framework
for policy discussions.
Chair Filseth: We’ve done some stuff that hasn’t been done before.
Mr. Keene: That’s right.
Mr. Perez: I want to thank the team, everybody that’s here, because we all
have to get involved. There’s a lot of hours put together for a lot of this
stuff, and more to come.
Council Member Holman: And I’d have to say, it’s a great team to work with. You all are delightful to work with, and informed and informative. It’s like
just about getting time to retire.
Chair Filseth: Happy Holidays.
Future Meetings and Agendas
ADJOURNMENT: Meeting adjourned at 11:10 P.M.