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HomeMy WebLinkAbout2018-09-18 Finance Committee Summary MinutesFINANCE COMMITTEE FINAL MINUTES Page 1 of 13 Special Meeting September 18, 2018 Chairperson Scharff called the meeting to order at 6:11 P.M. in the Community Meeting Room, 250 Hamilton Avenue, Palo Alto, California. Present: Filseth, Kou, Scharff, Tanaka Absent: Oral Communications Chair Scharff announced that there were no oral communications. Agenda Items 1. Discuss and Confirm the Workplan to Address the City Council Fiscal Year 2019 Adopted Budget Referral to Identify $4 Million in General Fund Savings. Kiely Nose, Administrative Services Director reiterated that the City Council (Council) had directed Staff to present to the Finance Committee (Committee) a work plan for a $4 million structural reduction in the General Fund (GF), discuss library hours, implications of closing the pension gap, a commensurate 50 percent level to the GF, and accounting for rising costs in the Enterprise Funds and other funds. She reiterated that the $4 million reductions had come from an analysis done by Staff that showed what Palo Alto’s (City) annual pension contribution would have been in Fiscal Year (FY) 2019 if a different discount rate had been applied. She explained that other than the pension gap there were other major competing priorities including labor contracts, Stanford fire services, and various other large contracts. Additional costs to the City for these other competing groups included a $3.5 million cost addition in labor contracts, an additional $.5 million for Stanford fire service, and an addition of $.7 million for other contracts. FINAL MINUTES Page 2 of 13 Sp. Finance Committee Meeting Final Minutes 09/18/18 James Keene, City Manager added that Staff was not ready to present potential cuts to the GF to the Committee at the time and Staff would come back with a short-term response in November 2018. He articulated to the City had the task of finding a way to essentially cut $8.7 million from the FY 2019 budget and then in FY 2020, the City needed to find another $7.7 million in reductions over what the current estimates where for FY 2020. Any amount that was not able to be deducted from the FY 2019 budget would be carried over to the FY 2020 budget. He stated that communication was key in terms of keeping the community in the loop on why these cuts had to take place. Ms. Nose continued to state that the reason for the cuts was to prevent service crowd out, provide quality of services to the community by attracting and retaining a skilled workforce, and the City needed to keep up with the rest of the Bay Area in terms of competitive compensation for skilled workers. Immediate action that Staff had proposed were to focus on the GF fund, return to the Committee in November 2018 , and review basic criteria for reductions. Basic criteria included what was legally mandated for service versus discretionary expenses, service levels that exceed other agencies or duplicate services, the complexity of divestment of current services, and the ability to quickly realize reductions in expenses. The strategic action approach included focusing on long-term competition for priorities and conduct a Citywide program review. The benefits of a strategic approach would be a solid platform for engagement with the Council, community, and employees. It would give the City a long-term tool for making decisions and establish a common framework and nomenclature Citywide. The timeline suggested for the strategic action approach included a presentation to Council in October 2018, return to the Committee in November 2018 for review of the long-range budget for FY 2020-2029, conduct stakeholder conversations with employees, community, and the Council. Then come back to the Committee in February/March 2019 for review, continue with the FY 2020 budget in May 2019, adopt a proposed budget for FY 2021 in May 2020, and continue further ongoing analysis after that. Mr. Keene voiced that the objective was going to be challenging but it was feasible. Vice Mayor Filseth articulated that it was not cutting expenses but more a question of funding the normal cost in terms of the pension. He stated that the City needed to figure out how to fund and balance the budge t in the short and long term. He wanted to address the problem head-on and not prolong it. FINAL MINUTES Page 3 of 13 Sp. Finance Committee Meeting Final Minutes 09/18/18 Chair Scharff reported that he wanted to take the proposed long-term strategic approach and then discuss what immediate action should happen for the short-term. He disclosed that three immediate options were to cut services, provide cheaper services, and eliminate services that people would not notice. He stated he did not want the City to stop working on infrastructure projects to keep services the community wanted. He suggested taking $4 million out of the Budget Stabilization Reserve (BSR) but only if the City had a strong commitment to doing the long -term strategic approach. He wanted Staff to explain why each City Department could not cut their budget by 2 percent. Mr. Keene explained that the City could operate if all departments were to cut their budgets. He reiterated that the City essentially had to cut $8.7 million and that cutting just the City’s Department’s budgets would only cover half that. He articulated that he had heard from the Council that they would like to see a strategic structural tool that is ongoing to help cut costs. Council Member Tanaka emphasized that the fundamental problem was that the City Council could not stick to their budget and always exceeded it in every category. He stated that he agreed with Vice Mayor Filseth that the problem was urgent and needed to be dealt with immediately. Mr. Keene voiced in his 10-years of working for the City that there had been no overspending of any adopted budget. There were plans in place that moved money around throughout the year so that overspending did not occur. He declared the biggest issue was that in order for the City to compete against other Cities for skilled workers the City had to have completive compensation and benefits. Vice Mayor Filseth commented that the State of California had gone in a direction that had caused a lot of damage to Cities. He agreed with Chair Scharff’s observation of looking into a long-term solution. Chair Scharff disclosed that he did not agree with Council Member Tanaka that the City Council always exceeded the budget but he did agree that the long-range financial forecast was always busted. Council Member Tanaka suggested a different alternative that if there was a suggestion to go over budget then the Council had to determine at that point in time where a cut would take place to balance the budget back out. FINAL MINUTES Page 4 of 13 Sp. Finance Committee Meeting Final Minutes 09/18/18 Council Member Kou asked Council Member Tanaka if he wanted Staff to suggest areas that could cut funds in order for there to be an increase in a different area. Council Member Tanaka confirmed that was a better alternative. He wanted Staff to suggest three or four areas that could be cut in the budget to be able to increase funds in a different area. Council Member Kou voiced her appreciation to Staff for their proposed long- term plan and how they plan to consult with stakeholders on the matter. Vice Mayor Filseth noted that he did not like Council Member Tanaka’s suggested alternative approach to the problem. MOTION: Chair Scharff moved, seconded by Vice Mayor Filseth to recommend to the City Council to: 1. Direct Staff, when they develop the next budget, to include the full normal cost in the budget; 2. Direct Staff to return with a Long Range Strategic Plan by the next budget cycle, including the normal cost and include the equivalent of 6.2 percent increase in the 415 Trust; 3. Direct Staff to return in November, 2018 with suggestions on ways to save money that are not detrimental to the organization; and 4. Direct Staff to show what it would look like if we took the rest of the money out of the Budget Stabilization Reserve for that year. Vice Mayor Filseth added that the money could come out of the Capital Infrastructure Plan or somewhere other than just the BSR. Chair Scharff suggested taking $100,000 out of the Council Contingency Fund. He suggested that Staff ask every City Departments to cut half a percent to one percent out of their budgets. Mr. Keene articulated that it was easier for Staff to come back in November with a solution to cut $4 million from the budget but not the full $8.7 million. The key to getting to the full $8.7 million budget cuts was to let Staff have FINAL MINUTES Page 5 of 13 Sp. Finance Committee Meeting Final Minutes 09/18/18 the time to fully review and analysis all areas and departments of the City. Also, to fully engage with the community and Council on the process. Ms. Nose stated that the BSR was over $45 million which was over 21 percent of the General Fund expenses. Council’s target for the BSR Fund was up to 20 percent with a goal of $18.5 million and since 2013, the City had not been below $18.5 million. If the Committee and Council decided to pull $4.4 million from the BSR Fund, the City would still be a fully functioning organization doing that as a one-time thing. Vice Mayor Filseth commented that everyone should be uncomfortable pulling $4.4 million out of the BSR Fund. Chair Scharff noted that Council Member Tanaka was overstating that the Council had always exceeded the budget and that the City had great financial stewardship. Vice Mayor Filseth added that taking $4.4 million from the BSR Fund was an idea but not the solution. Council Member Tanaka declared that at the last budget hearing the Committee had decided to cut $4 million from the budget and that never happened. Council Member Kou asked Council Member Tanaka if he was expecting a $4 million cut solution instantly. Council Member Tanaka rephrased that he was expecting the Committee and Council to find the solution right away and not have it pushed out further into the year. Mr. Keene announced that Staff and the Committee decided to slow the process down so that the City could make the best possible choices on how to tackle the deductions from the budget. MOTION PASSED: 3-1 Tanaka no Ms. Nose wanted to know what the Committee thought of a structural deduction of $4 million coming in November 2018 or if they wanted a mixture of one-time in structural. FINAL MINUTES Page 6 of 13 Sp. Finance Committee Meeting Final Minutes 09/18/18 Chair Scharff proposed it was a mixture of one-time in structural. Vice Mayor Filseth specified that the semantics where does the City Council and Committee find cuts but now it had shifted to how does the City fund the normal cost. Mr. Keene agreed with Vice Mayor Filseth and stated that had been the Council’s intention from the start. 2. Accept California Public Employees’ Retirement System (CalPERS) Pension Annual Valuation Reports as of June 30, 2017, and Review and Confirm Pension Funding and Reporting Policy Guidelines. Steve Guagliardo, Principal Management Analyst announced that the presentation was split into two groups; one discussing the CalPERS Evaluation Report and the second was discussing the potential guidelines for the Pension Funding and Reporting Policy. CalPERS was phasing in a reduction in the discount rate from a 7.5 percent to a 7 percent discount rate over 3-years. In Fiscal Year (FY) 2017 CalPERS exceeded their return on investment with 11.6 percent and in FY 2018 they predicted to exceed again with an 8.6 percent return. There were two plans with CalPERS, the miscellaneous and then safety. Miscellaneous was improved from 64.3 percent to 66.3 percent and safety stayed at 63.5 percent. Changes where assumed in the assumptions and those included labor costs from April 2016, CalPERS continued to phase in their discount rate and the December 2017 Experience Study which included retirement rates, termination rates, mortality rates, salary increases and inflation assumptions from public agencies. In terms of the Unfunded Accrued Liability (UAL), the amount increased by roughly $10 million even though it included the large investment returns from FY 2017. The funded status did increase though and that slowed the growth of the UAL. CalPERS in FY 2014 received 18.4 percent investment return rate, in FY 2015 they received a 15.4 percent investment return, in FY 2016 they received 6.1 percent in investment return, and then in FY 2017 they received 11.6 percent. Significant variables that were not accounted for were current labor contracts and FY 2018 investment return was not included in the report. CalPERS was shortening their amortization period to a 20-year base starting with the June 30, 2019, Actuarial Evaluation. James Keene, City Manager stated that there would be a jump in the year the new amortization base started. FINAL MINUTES Page 7 of 13 Sp. Finance Committee Meeting Final Minutes 09/18/18 Vice Mayor Filseth asked Staff what was being amortized over 20-years. Mr. Guagliardo answered that it was amortizing changes in any investments gained, lost, and any mortality assumptions. He explained that instead of a 30-year amortization period it was moving to a 20-year amortization period and that there would be no ramp up or ramp down. Kiely Nose, Director of Administrative Services explained that older amortizations had no ramp meaning they were flat on a graph but in FY 2017 there was a 20 percent ramp-up of a 30-year amortization schedule. In FY 2014 the gains and losses were on an 80 percent ramp up and the amortization period was 27-years. Chair Scharff questioned if the change in the amortization schedule was more accurate or less accurate. Ms. Nose concurred it would be more accurate. Chair Scharff inquired why that was not done from the beginning. Ms. Nose disclosed she did not know why they did not do it from the beginning. The reason now, she suspected, was a de-risking of their portfolio of making things more conservative and more realistic by not shielding the implications. Chair Scharff noted that the impact that the City saw was going to be a higher payment to CalPERS. Mr. Guagliardo articulated only if it was a loss but if it was a gain then it would be a lower payment. He stated that next year would be the final year of the phase-in, CalPERS would be at a 7 percent discount rate, and that would be the presumed discount rate until the Board takes further action. He continued to say that CalPERS was lowering the inflation rate from 2.625 percent to 2.5 percent. Chair Scharff asked what that meant and why where they doing that. Mr. Guagliardo reported that in the 2017 Experience Study CalPERS saw inflation across the state was lower than what CalPERS had anticipated, so they were lowering it to reflect current statistics. FINAL MINUTES Page 8 of 13 Sp. Finance Committee Meeting Final Minutes 09/18/18 Chair Scharff inquired about how that affected the numbers and if the wages counted. Mr. Guagliardo responded that the wages counted and that salaries would decrease accordingly to the lowered inflation rate. Council Member Tanaka noted that there was record salary increase so he asked Staff why the salary growth was going down. Mr. Guagliardo disclosed that the report was the projections from CalPERS and it was based on their experience statewide. It did not factor in what CalPERS did for the City. Chair Scharff reiterated that across California CalPERS was expecting Cities to go from a 2.8 percent increase on an annual basis on salaries to 2.75 percent. Mr. Guagliardo answered that was the actuarial assumption CalPERS was making. Chair Scharff requested what the City’s was last year. Mr. Keene stated that there were no geographic focuses in CalPERS so they applied statewide averages. Vice Mayor Filseth added that the average wage growth in the City was more than that but the City would not know anything until it was fully investigated. Mr. Guagliardo noted that there were reductions in the budget and overall the salary growth in the General Fund (GF) was .6 percent and that was not individual salary growth. In terms of the safety category, it did not consider the 11 positions that were eliminated from the fire department. He continued with his presentation stating that for FY 2020 there would be a 3 percent increase for miscellaneous for normal cost and a 4 percent increase for safety for the normal cost. The UAL increase would be marginal at $1,000. Council Member Tanaka requested in terms of the City-wide average salary if Staff planned to show the total cost. FINAL MINUTES Page 9 of 13 Sp. Finance Committee Meeting Final Minutes 09/18/18 Ms. Nose explained that because of the last item’s motion, it was up to the Finance Committee (Committee) to determine if the City would like to budget at a normal cost of 6 or 6.2 percent. Council Member Tanaka stated if that were to happen then the Committee could see the true total cost. Ms. Nose explained that the previous motion was that Staff budget for the 6.2 percent but not how Staff budgeted for it. The Committee could give Staff direction to do that if they wished to see the total cost articulated that way. Mr. Guagliardo continued stating that in terms of the FY 2020 normal cost discount rate the City would have an additional $4.7 million in the miscellaneous category at a 7.25 percent rate and an additional $2.3 million in the safety category. Mr. Guagliardo articulated that he was going to discuss the second portion of the item which was the Pension Funding and Reporting Policies. He stated that some potential policy guidelines included Staff to study the 6.2 percent discount rate in the budget, study the CalPERS report to maximize impacts of Additional Discretionary Payments (ADPs), amend the GF Reserve policy, transmit budgetary savings as ADPs, and establish funding level guidelines for the Public Agency Retirement Service (PARS) Pension Trust. Staff was seeking policy guidance that was discrete enough that it could be implemented but broad enough direction so if the discount rate were to change then Staff would not have to return to the Committee. Mr. Keene reiterated that the 115 Trust could be transferred to CalPERS but he suggested only to do that if there was a recession. He reiterated that the Committee should be very clear on what the boundaries of the policies should be. Chair Scharff disclosed that it was hard to determine what future Council Members would do. Mr. Keene responded that identifying implications was helpful. Chair Scharff asked Staff what the return was that the City received on its trust money versus what CalPERS received. FINAL MINUTES Page 10 of 13 Sp. Finance Committee Meeting Final Minutes 09/18/18 Ms. Nose guessed that the City had either kept pace with CalPERS or exceeded them. Mr. Keene articulated that Staff would start giving those figures to the Committee regularly. Chair Scharff suggested that if half of the 18 percent that is kept in the Budget Stabilization Reserve (BSR) be moved to a more aggressive fund that could wield a higher return for the City. Ms. Nose declared that cash flow could cause an issue with that suggested idea but Staff would research and see if the City could invest in more trusts. She added that putting the City’s trust fund with PARS allowed for greater flexibility of what they could invest in. Vice Mayor Filseth commented that the returns from the 115 Trust were comparable to CalPERS returns. He articulated that the core problem with CalPERS was they did not ask for enough money and the City had to put away more for debt than what was asked. Mr. Guagliardo reported that CalPERS allowed Cities to commit to a new, shorter amortization base. Doing that would save the City roughly $215 million in interest if the City decided to do the most aggressive payment or roughly $95.9 million with the second aggressive payment. He stated that some Cities would not lock themselves into a new payment but simply pre- pay the amount. Doing that would grant flexibility to the City if a pre- payment could not be made then there would be no repercussions. Chair Scharff wanted to know if any City had contractually committed to a newer payment. Mr. Guagliardo stated he was not aware of any City that had done that recently but Palo Alto had recommitted in 2004. Staff recommended that the Committee accept the June 20, 2017, CalPERS Annual Actuarial Valuation Report. Also, to direct staff to research and develop potential Pension Funding and Reporting Policies and return to the Committee with specific recommendations. Vice Mayor Filseth wanted to know what discount rate Staff was assuming for the required contributions for FY 2019 and FY 2020. FINAL MINUTES Page 11 of 13 Sp. Finance Committee Meeting Final Minutes 09/18/18 Mr. Guagliardo claimed it was 7.25 percent discount rate for both years. Anything after FY 2020 would be a discount rate of 7 percent. Vice Mayor Filseth stated that if nothing where to change, then the total liability would increase by the discount rate but in the last couple of years for miscellaneous it had gone up slower than the discount rate. He asked Staff if in the long-term plan, if future value of a liability should continue to decline. Ms. Nose answered if nothing were to change then that would be a correct assumption. Vice Mayor Filseth added that the decline would not be seen in the safety category. He added that the amortization payment for the year had gone up 17 percent for the GF. Mr. Guagliardo confirmed that was correct. Vice Mayor Filseth inquired that for Public Employees’ Pension Reform Act (PEPRA) if it was true that Cities in California were not allowed to introduce more tiers. Ed Shikada, Assistant City Manager articulate that he was not sure but since PEPRA was the last tier, there was nothing else to choose from. Michelle Flaherty, Deputy City Manager stated that she thought that was correct, that since PEPRA was in place a new tier could not be added. MOTION: Vice Mayor Filseth moved, seconded by Chair Scharff to recommend to the City Council to: 1. Review and discuss the June 30, 2017 CalPERS Annual Valuation Reports for the Miscellaneous and Safety Pension Plans; and 2. Review, comment and confirm further direction to City Staff regarding the establishment of a Pension Funding and Reporting Policy. Council Member Tanaka asked if the UAL, the normal cost, the marginal UAL, and the margin normal cost could be shown on the salary total cost graph in the budget documents. FINAL MINUTES Page 12 of 13 Sp. Finance Committee Meeting Final Minutes 09/18/18 Mr. Keene proposed that the Committee vocalize to Staff that other real dimensions be added to the average salary cost graph. He stated that the budget was not an agenized item and so any direction from the Committee in terms of the budget would have to happen at a separate meeting. Vice Mayor Filseth declared that the more relevant metric was normal cost by department because if the normal cost was covered then the liability was covered. He suggested that the UAL contribution be separated out from the rest of the costs. Mr. Keene emphasized that Staff’s recommendation was to come back to the Committee with more detailed specifics on the pension policy. He suggested settling on how the Committee wanted to capture and report the most accurate full cost including how the pension is evaluated. Vice Mayor Filseth wanted Staff to work on specifics and not the Committee. Mr. Keene stated that Staff would flush out the answer to the question he proposed and they would bring back more details to the Committee. Council Member Tanaka voiced that he agreed with Chair Scharff that the pensions needed to be paid down and that the City should invest in itself first. Vice Mayor Filseth claimed that if the money was put into the 115 Trust then future City Councils could not use it. Council Member Tanaka rephrased that he meant to invest in the City first instead of transferring it to CalPERS. He asked if there was a way to move some of the newest employees over to a 401K plan. Terence Howzell, Chief Assistant City Attorney declared Staff could explore that but CalPERS was not giving any suggestion that they were going to be providing a way to remove themselves from the CalPERS system. Mr. Keene added that something this complicated may have to go to the full Council. AMENDMENT: Council Member Tanaka moved, seconded by Council Member XX to explore having the newest employees move toward a defined benefit, such as deferred compensation (401k). FINAL MINUTES Page 13 of 13 Sp. Finance Committee Meeting Final Minutes 09/18/18 Mr. Keene stated Staff could look to see if it was precluded or not. AMENDMENT FAILED DUE TO LACK OF A SECOND Chair Scharff noted that he thought it was precluded. Mr. Howzell reported that the Unions would probably not agree to moving employees to a 401K plan. Mr. Keene voiced that Staff would investigate it. MOTION PASSED: 4-0 Future Meetings and Agendas Kiely Nose, Director of Administrative Services asked the Finance Committee to settle on a date for the November meeting for the Committee. She suggested November 28th, 2018. Chair Scharff commented that November 28th, 2018 was the best date. Ms. Nose reiterated that the next Committee meeting on October 2 nd would be canceled. ADJOURNMENT: Meeting was adjourned at 8:30 P.M.