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HomeMy WebLinkAbout2024-06-04 Finance Committee Summary MinutesFINANCE COMMITTEE SUMMARY MINUTES Page 1 of 10 Regular Meeting June 4, 2024 The Finance Committee of the City of Palo Alto met on this date in the Community Meeting Room and by virtual teleconference at 5:30 PM. Present In Person: Burt (Chair), Lauing, Veenker Present Remotely: None Absent: None CALL TO ORDER Chair Burt called the meeting to order. Roll was called with three present. Public Comments 1. Ken H. encouraged the Committee to lease room K4 to the Living Wisdom High School. He advised there is income at Cubberley not being tapped. 2. Eric M. agreed with Ken H. about leasing room K4 to Living Wisdom School. He opined helping at-risk teens should take priority over other programs at Cubberley. 3. Kshama K. remarked that most of the students at Living Wisdom School have had some kind of difficulty in other educational environments but have been successful with Living Wisdom School. They have a growing waitlist and need more space and would be grateful if they could have K4. Chair Burt requested a Staff report explaining the request the school has had, how it aligns with available spaces at Cubberley, and what prevents them from being able to provide them more space. Action Items ITEMS HEARD OUT OF ORDER. ITEM 2 HEARD BEFORE ITEM 1 1. Recommend City Council Adopt a Resolution Amending the Gas Utility Long-term Plan (GULP) Objectives, Strategies and Implementation Plan, Amending the Gas Utility Reserves Management Practices, and Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service); CEQA Status: Not a Project Under Public Resources Code 15378(b)(5) and Exempt Under Public Resources Code 15273(a) and Discussion of the Utilities Advisory Commission’s Proposed Alternatives. SUMMARY MINUTES Page 2 of 10 Finance Committee Regular Meeting Summary Minutes: 6/4/2024 Dean Batchelor, Utilities Director, announced they were bringing the long-term hedging program back. Council approved a one-year hedging program to buy some insurance which ends in November of this year. He stated they have three options, one from Staff as well as options that came back from the UAC. There are some large impacts to that large hedging program and there is one that has no cost to it. He thought the UAC put one option in for not looking at any type of increase, just opening up the $5 was because of the cost they have already established on the 12.5 percent for the gas. They did not want to add more to that. They would have the option to talk about that gas transfer in Item Number 4. He cautioned that decisions made that night, the increase of that 12.5 percent might go up a certain amount. Karla Daily, Utilities Assistant Director, provided a slide presentation discussing the recommendation to amend the gas utility long-term plan and the gas utility reserves management practicing including a background, winter 2022-23 price surge, and gas monthly index prices. Jason Huang, Resource Planner, resumed the presentation discussing that Council approved a capped-price winter gas purchasing strategy for winter 2023-24, staff recommendation for funding reserve to self-insure against future short-term price spikes, levels of market price protection, customer bill impact, and reserve funds collected – different adder scenarios. Director Daily then went on with the presentation discussing a comparison of alternatives, proposed changes to GULP, proposed changes to gas utility reserves management practices, UAC recommended options, and next steps. Chair Burt and Council Member Veenker asked for clarification about the 5.2 percent increase. Mr. Huang confirmed that it would be the 5.2 percent plus the aforementioned 12.5 percent increase totaling a 17.7 percent increase under this proposal. Chair Burt asked what the previous reserve amount was before it was drained in 2023. Director Daily stated they took $2 million out of reserves to deal with the price spike. Director Batchelor added they did not have a rate stabilization reserve established. They would create this other reserve that would just hold the rate stabilization as they had been asked to do. Vice Mayor Lauing asked for a calculation of what the 6-cent added does instead of the 10.5. Mr. Huang answered that would be about 3.2 percent for the winter and 2.7 for the summer. Assistant City Manager Nose asked Staff to articulate how the 3 percent crosswalks between the 12.5 percent July increase they currently have and what would be the additional increase felt in November. SUMMARY MINUTES Page 3 of 10 Finance Committee Regular Meeting Summary Minutes: 6/4/2024 Director Daily explained they are additive so any hedging strategy that costs any money would be in addition to the 12.5 percent increase that will be proposed on June 17 to Council. Vice Mayor Lauing recalled they way they did it last year turned out to be pretty expensive insurance. He thought they should rule that out. Another option was to decide this was a one- off and they are probably covered for this year. One of his thoughts about this adder as it was discussed at UAC and in this document, he was not sure $11 million was necessary in all these scenarios. He was interested in getting the total down and not essentially taxing the consumers in advance because they are paying the insurance policy. The 0.6 helps in that regard because it takes it down to 6.5, keeps the rate down, and gives them some adder. They will do it for three years then stop so they would not have the big extra reserve there. The backup recommendation for UAC has the most appeal or they can say this is good and wait a year. The advantage of having the adder is after the first year they will have a little bit of money to spend to bail folks out for that one month. Council Member Veenker was in line with Vice Mayor Lauing’s comments. She liked the idea of the adder in the reserve. She wanted to know how they came up with 11.3 as the bogey for the reserve. She asked if they should make some kind of recommendation on the cap. She felt better about $3.00 or $4.00 than $2.00 or $5.00 and was curious about her colleague’s thoughts. She did not think they wanted to completely insulate gas users from the market because they do not want to incentivize them to keep using it but on the other hand do not want to be punitive. She preferred a moderate approach that builds up a reserve. She asked if they did UAC alternative 1, would that mean 15.5 as opposed to 17.7. She thought the idea of self-insuring was better than going to the market and buying the caps that would be thrown away if not used. Mr. Huang answered he tried to replicate a scenario where they would be protected against that $5 per therm they got during the winter of 2023. He backed out of that $5 per therm in the max commodity charge to see how much was needed after four years. He took a horizon of five years because he did not think they would hit that mark every year. After year 4, it would be a protection of up to $5 for 1 month, $3.50 for 2 months, and then $3.00 for 3 months. Director Daily pointed out a low maximum commodity charge and low adder did not work well together. The three levers are related to each other. The price of the insurance from last winter will expire at the end of October so as far as what customers are feeling, they do not consider that as part of the base case. They ignored that in determining these increases. There is one charge going away and potentially another charge coming in if they decide to put an adder on the bill. She commented that the UAC did have a discussion about the general philosophical desire to pass gas price signals through the customers and a consideration for low income customers and they were interested in ways to protect low income customers. She had legal questions about that and did not have an answer to share on that front. Vice Mayor Lauing thought the UAC was more in favor of the latter. SUMMARY MINUTES Page 4 of 10 Finance Committee Regular Meeting Summary Minutes: 6/4/2024 Chair Burt queried if the current rates they had adopted assumed the expiration of the cap. He asked if he was correct in recalling drawing down $2 million in 2022-23 to mitigate but the impact was $2 plus 11.3 or 11.3 total impact on the rate payers. He was in support of self- insurance but was not sure there was a need to create as much of a reserve nor place as low of a max commodity charge as they were discussing. He was concerned with the big rate increases already being implemented this year and wanted to avoid adding to that if possible. He was inclined to spread the accumulation of reserve over four years and put a max charge of $3. He suggested they should level the charge out over the year rather than go up and down. Director Daily confirmed the current rates assumed the expiration of the of the cap. She pointed out that this is something customers do not see on their bills as it is imbedded in the commodity charge. Director Batchelor remarked the impact on the rate payers was more than 11.3 but they drew down because they could only go to the $4 mark. The $1 they could have passed through was almost $2 million. There was discussion of different adder scenarios. Assistant City Manager Nose stated Staff would have to do some machinations to figure out what a blended July rate would be to mitigate the volatilities. MOTION: Chair Burt moved, seconded by Vice Chair Lauing to recommend that the City Council adopt a resolution amending the Gas Utility Long-term Plan (GULP) Objectives, Strategies and Implementation Plan, Amending the Gas Utility Reserves Management Practices, Amending the FY 2025 Gas Fund Budget, and Amending Rate Schedules G-1 (Residential Gas Service), G-2 (Residential Master-Metered and Commercial Gas Service), G-3 (Large Commercial Gas Service), and G-10 (Compressed Natural Gas Service) reflecting a $0.055 per therm adder implemented for 3 years with a transition to a maximum Commodity Charge of $3.00 per therm. MOTION PASSED: 3-0 2. Accept June 30, 2023 Actuarial Valuation of Palo Alto's Retiree Healthcare and Other Post Employment Benefits and Recommend to the City Council to Approve Annual Actuarially Determined Contribution for Fiscal Year 2025 and 2026; CEQA Status – Not a Project Doug Pryor, Foster & Foster Consultant, provided a slide presentation discussing the City of Palo Alto Retiree Healthcare Plan including an overview, purpose of valuation, historical benefits paid, historical participant counts, CERBT investment options, plan assets, historical returns, historical funded status, changes since 2021 valuation, baseline actuarially determined contribution (ADC), historical and baseline projected ADC’s, UAAL and funded ratio projection, funding options, actuarially determined contribution, 10-year projection – optional contribution, and UAAL and funded ratio projection (baseline vs. optional contribution). Director Lai commented that Mr. Pryor provided a baseline and optional scenario. She clarified that on May 21 Committee moved on the optional with a two-year phase in and they were SUMMARY MINUTES Page 5 of 10 Finance Committee Regular Meeting Summary Minutes: 6/4/2024 seeking confirmation of that direction. From an actuarial perspective it would be called optional. From their local perspective, that option aligns with Council’s policy that was approved. Vice Mayor Lauing queried how it went from $80 million unfunded liability from $120 million so quickly. He wanted to know what the unfunded liability was before slide 12. He indicated the broader question to be if something more than these two things should be done. Mr. Pryor explained the height of the bar is $244 million. The red line for that data point was $164 million. The difference between the liability and the assets is the $120 million as of June 30, 2021. Going to June 30, 2023, the top of the bar is $277 million. The assets there are $157 million. The difference is $120 million in unfunded liability. The following slide indicates a $40 million increase in the liability, an assumption change of $17 million, and the investment loss of $34 million offset by some higher contributions. Director Lai referenced the historical funded status slide and explained the height of the bar indicates the liability showing how it fluctuates. Council Member Veenker wanted an explanation of the statements, “It is not known whether the recent change in healthcare premiums will be ongoing or an anomaly due to the significant governmental support of healthcare costs over the past two years. Because it is unknown whether these changes are the beginning of a trend or merely a temporary anomaly, this report models short term significant rises in healthcare costs in alignment with inflation”. She talked about working on a healthcare round table for the state where they recommended cost targets for affordability be put into place by the state and they set cost targets for all forms of healthcare. Mr. Pryor explained they are assuming premiums are going to increase well above inflation rate. They have built into the model in the near term around 8 percent annual increases in the premiums. The model scales that down over time. While 8 percent is the short term expectation, that cannot continue for the next 50 year as they project this out. He added the big drivers were how much premiums increase in the future and the investment return. Chair Burt asked why the historical returns slide went to 08/09. He asked how far out the projected premium cost goes before it trails downward. He stated they just recently got the two-year actuarial but he assumed they had the 21-22 numbers previously. He asked what the experts think the typical rates of return are going to be for this fiscal year. Mr. Pryor stated the trust was initiated in March 2008. They had assets for 07/08 but they were in there for a short period of time so they started at the first full year. He explained that the projected premium cost has minor reductions almost immediately and then drops gradually over a long timeframe. The 6.25 percent long term return assumption was based on a survey their firm did on 8 independent outside investment advisor’s beliefs were on future returns at that point in time. He remarked the CERBT report indicated the valuation date of June 30, 2023, through the end of April was about 6.1 percent return for the year not annualized. SUMMARY MINUTES Page 6 of 10 Finance Committee Regular Meeting Summary Minutes: 6/4/2024 Director Lai explained they do the actuarial every two years so this contains the 2023 data. The last report Foster and Foster did contained the 2021 data point. Kiely Nose, Assistant City Manager, stated they did know some of the actuarial. They did it more conservative two years ago in terms of financial planning anticipating they would have a bad year in 2022. They did not assume conservative enough. They put in some factor for wage growth. They did a 0 percent return that was clearly insufficient. Had they not done those, they would have seen a bigger jump. They made slight variations to hedge for the anticipated volatility but they were not sufficient. Council Member Veenker announced she checked the healthcare cost targets issued on April 24. The Office of Healthcare Affordability’s Board approved a statewide healthcare spending target of 3 percent phased in over 3 years, 3.5 percent in 2025-26, 3.2 percent in 2027-28, and 3 percent for 2029 and beyond. Director Lai referenced the UAAL and funded ratio projection chart explaining that it illustrates the policy and how it is going to help them get ahead of the original plan. They are going to hit that funded level sooner and consequently have to contribute more, as well. The policy as it stands has merits recognizing there are volatilities. When it comes to actuarial studies, they are modeling for 20 years. They need to take the short term volatility as it stands. She thought staying the course for a couple of years and then looking at it was a good suggestion because they have a policy and tweaks in this have significant financial impact. They do not want to overreact and consequently have to curb services or priorities in other areas. Chair Burt added this is based upon a 5.75 rate of return investment and trailing 10 years is 7.2 percent based upon an 8 percent increase then in a few years starting to trickle down but in 5 years it would still be at 7 percent on healthcare. Director Lai pointed out there are multiple components so it was 7 percent on the health premium, not investment return. Vice Mayor Lauing remarked the other way to head this off in the future was not to have as many fixed head count. Chair Burt stated if you have the unfunded retiree amount, another way to look at this was what is going to be the value of those dollars in those future years. As a percentage of the budget or projected population, those numbers are less consequential. Council Member Veenker asked if they affirm the two-year phase in of the ADC and have a couple of different conservative assumptions, can they adjust in a few years if they are ahead of the game. Mr. Pryor instructed that the actuarial reports are revisited every two years in detail including looking at the impact of the state’s approach to see if that is going to impact their healthcare trend assumption. Coming back to the investment return assumption, 6.25 going forward is SUMMARY MINUTES Page 7 of 10 Finance Committee Regular Meeting Summary Minutes: 6/4/2024 their best estimate for where returns will be in the future. They do not view that as being conservative. The investment return assumption is their best estimate. MOTION: Council Member Veenker moved, seconded by Vice Mayor Lauing to recommend that the City Council: 1. Review and accept the June 30, 2023 actuarial valuation of Palo Alto's Retiree Healthcare Plan (Attachment B); and 2. Approve funding of the annual Actuarial Determined Contribution (ADC) for Fiscal Year 2025 and Fiscal Year 2026 using a two-year phase-in of the adjusted assumptions. MOTION PASSED: 3-0 3. Accept the Fiscal Year 2024 Third Quarter Financial Status Report Rocelyn Fernando, Finance Manager, gave a slide presentation discussing the FY 2024 3rd Quarter Financial Report including highlights of general fund revenue, general fund expenditures highlights, general fund budget stabilization reserve, and enterprise funds change in net position. Council Member Veenker wanted to know if it was typical that they were 75 percent of the way through the fiscal year and the numbers are in the 60s but line up together on the executive summary. Christine Paras, Administrative Services Assistant Director, answered that they cut off at March. Property taxes are not due until April so that revenue comes later. Sales tax is on a two to three month delay. They get a cleanup payment in August for sales tax. These trends are typical for this time of year. Vice Mayor Lauing asked if they were comfortable that they were on target for whatever was budgeted for the Police and Fire Departments. Director Lai explained that in Attachment A they had a presentation of the adopted and adjusted budgets and the actuals. That spoke more to the budget versus actuals. She affirmed they were confident those two operations would come within the adjusted budget. Director Paras added in this slide they showed 76.6 percent. In police, they are slightly about the 75 percent target and fire slightly below. She felt like they would land right on target at the end of the year for those two departments. Chair Burt questioned if it was pointed out what the percent increase was on an annualized basis for each of those and how those two compare versus what they were projecting annually. He asked if the 9.2 percent higher than the same quarter the previous year on the revenue side was something they could draw conclusions on. He asked what was projected for the year end SUMMARY MINUTES Page 8 of 10 Finance Committee Regular Meeting Summary Minutes: 6/4/2024 in year over year revenue increases. He asked if 2023 was an abnormally low year regarding the increase on revenue on permits, licenses, and other fees on slide 2. Director Lai explained the agenda report indicated they had legal expenses of $1.4 million related to the settlement of Green vs. The City which they had a reserve for already. They had general expenses for a first set of refunds issued to the active class members related to some previously determined obligations. The anomaly seen in that last row is already accounted for. If they extrapolate that would not be an informative exercise. She pointed out on slide 2 $247,000 was fiscal 24 and relationally that was 66 percent. Looking at the last two columns, fiscal 23’s budget was $224,000 and relationally they were at about 67 percent. They are tracking fairly consistently. Assistant City Manager Nose added they would have to look at the budget in terms of what the 2024 budget reflected. She advised they and prior Finance Committees have found looking at the last two columns most helpful. That shows how they are doing at this point in time. The budget will change every year. The assumptions are going to adjust. The same was true on the expense side. She described how some anomalies caused the expenditure to be higher on the third slide than last year. She advised that a better indicator was looking at departments. She explained the permits, licenses, and other fees are the gross permits and licenses that have come in for new construction. At the end of the year, they adjust it for what the percentage completion is since they are on a rolling reimbursement basis. That number will likely come down. She stated these numbers were not reliable in indicating if they were up versus historic this year or down last year. MOTION: Chair Burt moved, seconded by Vice Mayor Lauing to recommend the City Council accept the third quarter financial status report. MOTION PASSED 3:0 4. Continue Discussion on the Fiscal Year (FY) 2025 Budget Wrap-Up and Recommended FY 2025 Budget including the FY 2025 Municipal Fee Schedule for City Council Adoption Director Lai announced they were bringing this back for consideration of one item and maybe others for the Committee to review. They are continuing the budget wrap-up for May 21. She provided a slide presentation to include Finance Committee wrap-up outline. Item 4 Public Comment 1. Jasmina B. announced that UNAFF became a member of the Chamber of Commerce. She mentioned the discussion with Council the day prior talking about 445 Bryant Street as a possibility for collaboration. 2. Karen H. requested the Committee give consideration to the requests made by the museum for their unfunded projects. She added if they could do all of it this fiscal year SUMMARY MINUTES Page 9 of 10 Finance Committee Regular Meeting Summary Minutes: 6/4/2024 would be outstanding but half this year and the second half the next fiscal year to be applied to the museum build would also be appreciated. Chair Burt asked a clarifying question on the history museum. They put a half million toward the hardshell and then it was a Staff commitment that an additional half million would be put in the next year’s budget toward the build out. He raised the question of reducing the Real Property Investment Reserve down to $1 million and if so where to apply it. His inclination was to apply it to reducing the Budget Stabilization Reserve. Paul Harper, Budget Manager, confirmed his understanding of the history museum project to be correct. Director Lai said they would maintain the gas tax equity transfer at $2 million from the May 21 direction and take the $1.5 million from the first bullet point and continue to preserve the Uncertainty Reserve for the benefit of the General Fund. Vice Mayor Lauing asked which reserve Staff had a preference for. Director Lai answered the idea would be to try to keep the Budget Stabilization around the 18.5 percent target and put the rest in Uncertainty Reserve giving the most flexibility. Council Member Veenker raised the option of putting some into reserve and spending some. She wanted to lift up to the Committee revisiting the HSRAP likelihood. Chair Burt thought that was worth considering but he recalled they had put that into a Parking Lot for things they would reconsider at the mid-year update. He asked if they received greater depth on AbilityPath’s request than what came to the Committee. Director Lai answered they had a workplan list where Staff would continue to analyze and research certain items or pilot it without appropriations but there was no list that said they would bring that back at mid-year. She explained that AbilityPath’s request was to try to create seed funding. She asked if they wanted to listen about the nonprofits in August and see where the City’s fiscal year ends. Assistant City Manager Nose stated in the supplemental memo they provided information on AbilityPath’s request. She characterized it as startup funds to leverage to help build a donor base for programming. They expect to come back to Council in a study session to get general dialog around these kinds of issues. Chair Burt thought listening about the nonprofits in August and see where the City’s fiscal year ends sounded like a good scenario. Council Member Veenker supported looking at it again at the mid-year budget review. SUMMARY MINUTES Page 10 of 10 Finance Committee Regular Meeting Summary Minutes: 6/4/2024 MOTION: Chair Burt moved, seconded by Vice Mayor Lauing to recommend the City Council Adjust the recommended Adjustments to the FY 2025 General Fund Budget for Council Approval by: 1. Decreasing the Real Property Investments Reserve by $1.5 million to $1.0 million in FY2025 and ongoing. 2. Funding the Budget Stabilization Reserve at the 18.5% level of Expenses in FY 2025; and 3. Increasing the Uncertainty Reserve with remaining savings in FY 2025 for use in the FY 2026 Budget planning process. MOTION PASSED 3-0 Assistant City Manager Nose announced the next Finance Committee meeting would be August 6. Director Lai added they would look at the Human Services and nonprofit contracts and talk about the process. Adjournment: The meeting was adjourned at 8:35 P.M.