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HomeMy WebLinkAbout2024-09-17 Finance Committee Summary MinutesFINANCE COMMITTEE SUMMARY MINUTES Page 1 of 5 Regular Meeting September 17, 2024 The Finance Committee of the City of Palo Alto met on this date in virtual teleconference at 5:30 PM. Present In-Person: Burt (Chair), Veenker Absent: Lauing Call to Order Chair Burt convened the meeting. The clerk called roll and declared two were present. Public Comments There were no speakers. Agenda Items 1. Accept California Public Employees’ Retirement System (CalPERS) Pension Annual Valuation Reports. Administrative Services Director/Chief Financial Officer Lauren Lai introduced the team. She announced they were transmitting to the Finance Committee the annual CalPERS Valuation Report for the period ending June 30, 2023. The report was typically two years in arrears. The purpose of the report was to guide the fiscal 2026 budget development and the long-range financial forecast. They would cover several areas, in particular the pension funding sources, some of the trends and strategies in the funding sources, the status of the pension plans, and next steps in the budget development. The goal this evening was to receive the CalPERS’ report. She displayed a slide related to the three pension funding sources and outlined the percentages of each source. She discussed the position of those sources and the strategy in addressing pension and the outcomes. She noted that the City did not have control of the CalPERS investment portfolio. She detailed the earnings of the CalPERS investment, which was good and showing recovery from the prior year; CalPERS employee contributions; and CalPERS employer contributions. Regarding CalPERS employee contributions, she noted that 60 percent of staff was in PEPRA, and the pension would become less expensive with more moving in PEPRA. SUMMARY MINUTES Page 2 of 5 Finance Committee Meeting Summary Minutes: 09/17/2024 Concerning CalPERS employer contributions, a pension trust had been set up, which consisted of $84M, and improved the funding status. She stated that Attachments B and C were the actuarial reports for the safety and miscellaneous plans, and she highlighted changes in the estimated employer contributions for FY2026 and noted there were no significant changes to the CalPERS’ actuarial assumptions. She spoke of the phase-in period for investment gains and losses, which had been incorporated in modeling the long-range financial forecasting. She furnished a table showing investment gains and losses and slides showing normal cost and unfunded actual liability as a percentage of payroll and the unfunded liability for safety and miscellaneous. She wanted to continue to monitor and track the funded status. The pension would be studied every four years in alignment with the CalPERS ALM study, which would likely be undertaken in 2026. It would determine if the policy should be modified and goals would be tracked. She presented a slide and outlined some anticipated changes. She mentioned that the labor agreements ran through 2026 and the FY2025 staffing additions would be 29 positions or an increase of 2.7 FTEs. They would bring to the Finance Committee the long-range financial forecast in December/January, which would incorporate a base scenario and alternative scenarios. In May, they would bring the proposed budget, and in June the Committee would recommend the adoption of the budget for the upcoming fiscal year. Public Comment There were no public comments. Council Member Veenker referenced Table 3 in the Staff Report and requested an explanation of the actuals for fiscal years 2024 through 2027. Administrative Services Director/Chief Financial Officer Lai explained why there were numbers for FY2025 and 2026. Chair Burt suggested the header be changed because those were not the actual percent return years but were the years it would be impacted. Administrative Services Director/Chief Financial Officer Lai responded that the titles of the headers would be updated. Council Member Veenker asked concerning Table 2 if the ADC numbers for safety would reduce if the City stayed on track to reduce the pension liability by 90 percent by 2036. Administrative Services Director/Chief Financial Officer Lai did not have that information at the meeting but would return with it. Assistant City Manager Kiely Nose added that there were three inputs to crafting those percentages, which she detailed. Chair Burt queried if there was a projected date to eliminate the unfunded pension liability; where the impact of the accelerated contribution could be found and how much the SUMMARY MINUTES Page 3 of 5 Finance Committee Meeting Summary Minutes: 09/17/2024 acceleration was; and what was driving the safety peak to go back up, as he thought it had been on a long-term decline trend. CalPERS Actuary Matthew Biggart replied, regarding eliminating the unfunded pension liability, that the amortization schedule and alternatives page showed when the last payment was to be made. He expressed that safety was primarily driven by the ramp up of the investment loss from the prior year. Office of Management and Budget Paul Harper answered that the 115 Trust was the accelerated funding to fund the unfunded liability. Administrative Services Director/Chief Financial Officer Lai remarked, regarding the safety peak, that the loss in 2022 had been a setback, so CalPERS had a 5 year ramp up to accelerate early contributions, and there was a 20-year amortization in Table 2. Assistant City Manager Nose added that for the investment loss, $1.5M would be paid in 2025 and $2.5M in 2026, and only 40 percent of annual debt payment was realized. It would keep going up over a 5-year period and then hold steady for 20. She noted that there were tables in the actuarial reports. Chair Burt understood that the FY2024 number of 9.3 percent worked out to better than the target over a 5-year period. He requested that revised numbers include trailing years and previous projections. Assistant City Manager Nose voiced that the pension modeling tool could be referred to. Every four years, the revised numbers included trailing years and previous projections. In the future, the revised numbers would include numbers from previous reports. Administrative Services Director/Chief Financial Officer Lai added that actual payroll was also a factor. Council Member Veenker wanted to know the confidence level in reaching 90-percent funded status by 2036 and what might hinder it and what actions to reach it should be advanced. According to Packet Page 8, she thought it looked rosy. Administrative Services Director/Chief Financial Officer Lai expressed that the agency had been very proactive with the employee benefit policy, so the accelerated funding was effective. The tradeoff was that contributing more to this may be that other services or priorities may not be funded. There was a policy to look at it every four years and track the objectives and determine if the objectives were still favorable or if they should be modified or if something differently should be done. At year end, Council always had an opportunity to contribute to it from the General Fund. She had not intended to imply it was rosy. Packet Page 8 was saying one-time contributions would pay down liability more. SUMMARY MINUTES Page 4 of 5 Finance Committee Meeting Summary Minutes: 09/17/2024 Assistant City Manager Nose mentioned, concerning reaching 90-percent funded status by 2036, that there were risks, which included investment earnings. She explained that other factors could contribute to the liability calculation, which were out of the City’s control. The City had control of prefunding. Salary growth, etc., were variables that could impact reaching the goal. There was routine monitoring to observe the variables. The actuarial analysis was being synced with the ALM studies. Chair Burt inquired if medical cost was a factor, if a projected increase in lifespan had been built into the formula, and what the impact of having significantly more employees would be. Assistant City Manager Nose replied that there was a separate medical fund but lifespan was a factor. She noted that there was a mortality rate sensitivity table in the Actuarial Report. CalPERS Actuary Biggart outlined what the ALM and Experience Study focused on. As for lifespan, projections were used for how mortality may evolve. He believed there was an adjustment for mortality improvement. He remarked that it was trying to be determined how to handle numbers from the COVID period. In general, there would not be an expected change in normal cost from new employees. Assuming there would be no changes to the amortization schedule, unfunded accrued liability would be a smaller percentage of payroll. Council Member Veenker proposed adding the alternative scenarios of increased population, staffing, etc., to the LRFF paragraph on Page 12 of the Staff Report. Administrative Services Director/Chief Financial Officer Lai responded that she would take that information but it was not how the long-range financial forecast had been built before. She requested to speak with CalPERS Actuary Biggart offline regarding the matter. She understood that the Committee wanted staff to factor in a ramp up in staffing. Council Member Veenker felt that could be one of the several alternative scenarios in a long- range financial forecast. Administrative Services Director/Chief Financial Officer Lai voiced that staff needed to contemplate those assumptions and they would take the feedback into consideration. Chair Burt thought it was important because he did not consider the current staffing population to be the right baseline. Administrative Services Director/Chief Financial Officer Lai wanted to adhere to the conversation of the CalPERS report because there were more nuances aside from the expenditure side, which included revenue assumptions, in the long-range financial forecast. MOTION: Council Member Veenker moved, seconded by Council Member Burt, to recommend the City Council accept the June 30, 2023 CalPERS Annual Valuation reports for the Miscellaneous and Safety Pension Plans. SUMMARY MINUTES Page 5 of 5 Finance Committee Meeting Summary Minutes: 09/17/2024 MOTION PASSED: 2-0-1 (Lauing absent) Future Meetings and Agendas Assistant City Manager Kiely Nose declared that the October 1 Finance Committee meeting would be cancelled, so the next meeting would be October 15. Administrative Services Director/Chief Financial Officer Lauren Lai added that the one known agenda item tentatively included the Parking Fund Parking Permit Program status update. Adjournment: The meeting was adjourned at 6:20 PM.