The URL can be used to link to this page

Home My WebLink About2015-10-20 Finance Committee Agenda PacketFinance Committee 1 MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE CITY CLERK’S OFFICE AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. Tuesday, October 20, 2015 Special Meeting Community Meeting Room 6:00 PM Agenda posted according to PAMC Section 2.04.070. Supporting materials are available in the Council Chambers on the Thursday 10 days preceding the meeting. PUBLIC COMMENT Members of the public may speak to agendized items. If you wish to address the Committee on any issue that is on this agenda, please complete a speaker request card located on the table at the entrance to the Council Chambers/Council Conference Room, and deliver it to the Clerk prior to discussion of the item. You are not required to give your name on the speaker card in order to speak to the Committee, but it is very helpful. Call to Order Oral Communications Action Items 1. Community Services Department Recommendation to Release a Request for Proposal to Explore Options for the Delivery of Aquatics Programs and Services for the City of Palo Alto 2. New Pension Reporting Standards Government Accounting Standards Board Statement Number 68 (GASB 68) Future Meetings and Agendas Adjournment AMERICANS WITH DISABILITY ACT (ADA) Persons with disabilities who require auxiliary aids or services in using City facilities, services or programs or who would like information on the City’s compliance with the Americans with Disabilities Act (ADA) of 1990, may contact (650) 329-2550 (Voice) 24 hours in advance. 2 October 20, 2015 MATERIALS RELATED TO AN ITEM ON THIS AGENDA SUBMITTED TO THE CITY COUNCIL AFTER DISTRIBUTION OF THE AGENDA PACKET ARE AVAILABLE FOR PUBLIC INSPECTION IN THE CITY CLERK’S OFFICE AT PALO ALTO CITY HALL, 250 HAMILTON AVE. DURING NORMAL BUSINESS HOURS. Status of Items Requested by the Finance Committee Referral Date Item Title Status 2013 Police Services Utilization and Resources Study (PD) Pending 2015 Review and Discussion of the Public Art Ordinance (CSD) Pending Discussion of Usage and Replacement of Pool Vehicles (Public Works) Finance Committee Items Tentatively Scheduled Meeting Date Item Title 11/3/2015 Follow up to Pension Liability Issues: Status and Options for the Future (ASD) 11/17/2015 Close Budget and Approve CAFR for FY 2015 (ASD) 12/1/2015 New Renewable Energy Power Purchase Agreement (Utilities) Update to the Utilities Department Organization Assessment (Utilities) Local Solar Plan Update and Recommention to End the PV Partners Program When Legislative Mandates are Met (Utilities) 12/15/2015 2017-2026 General Fund Long Range Financial Forecast (ASD) Quarter FY 2016 Financial Results (ASD) Net Energy Metering (NEM) Successor Program Design Guidelines (Utilities) City of Palo Alto (ID # 6144) Finance Committee Staff Report Report Type: Action Items Meeting Date: 10/20/2015 City of Palo Alto Page 1 Council Priority: City Finances Summary Title: GASB68 Title: New Pension Reporting Standards Government Accounting Standards Board Statement Number 68 (GASB 68) From: City Manager Lead Department: Administrative Services Motion Staff recommends that the Finance Committee review and discuss the new Government Accounting Standards Board pension reporting standards known as GASB 68. Background In June 2012, the Government Accounting Standards Board (GASB) approved a new reporting statement, GASB Statement No. 68 (GASB 68), that improved the financial reporting of pensions by local governments. GASB 68, formally titled Accounting and Financial Reporting for Pensions, establishes new accounting and financial reporting standards for local governments that provide their employees with pensions. The new standard requires government agencies to report pension information to increase transparency about pension costs to help decision makers factor in the financial impact of total pension obligations. GASB 68 must be implemented by June 30, 2015 and the City of Palo Alto will comply with this requirement with the upcoming FY2015 Comprehensive Annual Financial Report (CAFR), which is scheduled to be presented to the Finance Committee in November, 2015. Discussion Local governments with pensions have a total pension liability, which is the obligation to pay deferred pension benefits in the future. When the total pension liability is greater than the pension plan’s assets there is a net pension liability, also known as unfunded pension liability. GASB 68 now requires governments to report their net pension liability on their government- wide financial statements, as well as in the proprietary fund statements, in the CAFR. Prior to GASB 68 the net pension liability was reported in the notes section of the CAFR. City of Palo Alto Page 2 Palo Alto’s pension liability is calculated as follows: FY15 CAFR Pension Liability % Funded Safety $ 102.8 M 72.01% Miscellaneous 187.1 M 71.80% Total Pension Liability $ 289.9 M The above figures are obtained from the CalPERS actuarial reports dated June 30, 2014 (Attached). As discussed above, instead of discussing the City’s pension liability in the Notes section of the CAFR, the pension liability figures will be presented for the first time in the FY2015 CAFR in the entity wide and separate proprietary fund schedules. The allocated net pension liability is presented below: General Fund Electric Fund Water Fund Gas Fund All Other Funds Total Net Pension Liability $197.2 $26.1 $11.0 $11.8 $43.8 $289.9 Percentage 68.0% 9.0% 4.0% 4.1% 14.9% 100.0% The pension liability will be allocated based on the employer contributions for FY2014 for the employees serving in each fund. The new GASB 68 reporting requirements will impact the CAFR on an annual go forward basis. As with past practice, the city will continue to pay the annual required contribution for the pension liabilities as identified in the annual CalPERS actuarial reports. The next set of reports, which inform the City of its FY 2017 pension payments and rates, are scheduled to be released late October/early November 2015. There will be a small discrepancy between the reports since the GASB 68 reports are based on actuarial analysis using employee census data that is two years in arrears while the October actuarial reports are based on current calendar year employee census data. City of Palo Alto Page 3 The City’s outside financial auditing firm, MGO, provided staff with guidance on how to conform to the GASB 68 requirements. MGO will provide a final opinion on the appropriateness of the GASB 68 allocation that will be presented in the FY2015 CAFR. Next Steps Starting with the FY2015 CAFR the GASB 68 pension liability figures will be presented in the CAFR on an annual basis. Council referred the unfunded pension liability issue to the Finance Committee to explore potential action steps to reduce it and stabilize the annual employer contribution (Report ID # 6074). Resource Impact The pension liability reported in the CAFR for GASB 68 purposes does not impact the budget. The City’s annual budget process will continue to use the pension liability figures that are provided by CalPERS in the actuarial valuation reports for the safety and miscellaneous plans in the October timeframe each year. The reports provide the employer contribution rate that is used to determine the annual pension cost for the City. Attachments:  Attachment A: GASB 68 Miscellaneous Plan Valuation Report (PDF)  Attachment B: GASB 68 Safety Plan Valuation Report (PDF) GASB 68 ACCOUNTING VALUATION REPORT (CalPERS ID: 6373437857) Rate Plan Identifier: 8 Prepared for the CITY OF PALO ALTO MISCELLANEOUS PLAN, an Agent Multiple-Employer Defined Benefit Pension Plan Measurement Date of June 30, 2014 TABLE OF CONTENTS Actuarial Certification 1 Introduction 2 Purpose of the Report 3 Summary of Significant Accounting Policies 4 General Information about the Pension Plan 4 Changes in the Net Pension Liability 7 Pension Expense and Deferred Outflows and Deferred Inflows of Resources Related to Pensions 9 Schedules of Required Supplementary Information 11 APPENDIX A – DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES RELATED TO PENSIONS Schedule of Differences between Expected and Actual Experience A-1 Deferred Outflows of Resources and Deferred Inflows of Resources for Differences between Expected and Actual Experience A-2 Schedule of Changes of Assumptions A-3 Deferred Outflows of Resources and Deferred Inflows of Resources for Changes of Assumptions A-4 Schedule of Differences between Projected and Actual Earnings on Pension Plan Investments A-5 Deferred Outflows of Resources and Deferred Inflows of Resources for Differences between Projected and Actual Earnings on Pension Plan Investments A-6 Summary of Recognized Deferred Outflows of Resources and Deferred Inflows of Resources A-7 APPENDIX B – INTEREST, TOTAL PROJECTED EARNINGS AND PENSION EXPENSE/(INCOME) Interest on Total Pension Liability and Total Projected Earnings B-1 Pension Expense/(Income) B-2 (CY) ACCTG PROC ID: 2700 (CY) REPORT PROC ID: 83743 (PY) ACCTG PROC ID: N/A (PY) REPORT PROC ID: N/A GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 1 ACTUARIAL CERTIFICATION This report provides disclosure and reporting information as required under Governmental Accounting Standards Board Statement 68 (GASB 68) for the MISCELLANEOUS PLAN of the CITY OF PALO ALTO (the “Plan”), an Agent Multiple-Employer Defined Benefit Pension Plan participating in the California Public Employees’ Retirement System (CalPERS), for the measurement period ended June 30, 2014. This information should be used for the fiscal year beginning after June 15, 2014 but ending on or before June 30, 2015. Determinations for purposes other than financial accounting requirements may be significantly different from the results in this report. Thus, the use of this report for purposes other than those expressed here may not be appropriate. This accounting valuation report relies on liabilities and related validation work performed by the CalPERS Actuarial Office as part of the June 30, 2013 annual funding valuation for the Plan. The census data and benefit provisions underlying the liabilities were prepared as of June 30, 2013 and certified as part of the annual funding valuation by the CalPERS Actuarial Office. The June 30, 2013 liabilities used for this accounting valuation are based on the actuarial assumptions recommended by the CalPERS Chief Actuary and adopted by the CalPERS Board in February 2014 as laid out in the 2014 report titled “CalPERS Experience Study and Review of Actuarial Assumptions.” These liabilities were validated as part of the June 30, 2013 funding valuation that included the estimated impact of the change in actuarial assumptions on contribution requirements. The undersigned is relying upon these prescribed assumptions and methods and is not able to render an opinion on their reasonability, as this would require a substantial amount of additional work beyond the scope of this report. This report also relies on asset information for the measurement period as supplied by the CalPERS Financial Office. The fiduciary net position as of June 30, 2014, and the changes in net position for the year then ended were audited by CalPERS’ independent auditors, Macias Gini & O’Connell LLP, as part of the audit of the Schedule of Changes in Fiduciary Net Position by Employer Rate Plan of CalPERS Agent Multiple-Employer Pension Plan. With the provided liability and asset information, the total pension liability, net pension liability and pension expense were developed for the measurement period using standard actuarial techniques. In addition, the results are based on CalPERS’ understanding of the financial accounting and reporting requirements under U.S. Generally Accepted Accounting Principles as set forth in GASB 68. The information in this report is not intended to supersede the advice and interpretations of the employer’s auditor. This report may not provide all the information necessary to complete the required disclosures under GASB 68. The employer should supplement and update the information in this report with its own financial data as necessary to complete the disclosure information required by GASB 68. The undersigned is familiar with the near-term and long-term aspects of pension valuations and meets the Qualification Standards of the American Academy of Actuaries necessary to render the actuarial opinions contained herein. The information provided in this report is dependent upon various factors as documented throughout this report, which may be subject to change. Each section of this report is considered to be an integral part of the actuarial opinions. HENRY NEEB, ASA, MAAA GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 2 Introduction This is the GASB 68 Accounting Valuation Report to be used for your fiscal year beginning after June 15, 2014 and ending on or before June 30, 2015 for your MISCELLANEOUS PLAN (Plan). GASB Statement No. 68 replaced the requirements of GASB 27 effective for fiscal years beginning after June 15, 2014. Statement 68 was issued by GASB in June 2012, requiring public employers to comply with new accounting and financial reporting standards. Statement 68 outlines a different approach to the recognition and calculation of pension obligations. Under the new GASB standards, employers that participate in a defined benefit pension plan administered as a trust or equivalent arrangement are required to record the net pension liability, pension expense, and deferred outflows/deferred inflows of resources related to pensions in their financial statements as part of their financial position. Net pension liability is the plan’s total pension liability based on entry age normal actuarial cost method less the plan’s fiduciary net position. This may be a negative liability (net pension asset). Pension expense is the change in net pension liability from the previous fiscal year to the current fiscal year less adjustments. This may be a negative expense (pension income). Deferred outflows and deferred inflows of resources related to pensions are certain changes in total pension liability and fiduciary net position that are to be recognized in future pension expense. This report may not provide all the information necessary to complete the required disclosures under GASB 68. The employer should supplement and update the information in this report with its own financial data as necessary to complete the disclosure information required by GASB 68. For example, no adjustments have been made for contributions subsequent to the measurement date. Appropriate accounting treatment of any contributions made after the measurement date is the responsibility of the employer. CalPERS recommends that the employer consult with its auditor regarding any such adjustments. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 3 Purpose of the Report The Plan participates in the CalPERS agent multiple-employer defined benefit pension plan. This GASB 68 report provides accounting and financial reporting for pensions, to be used in the employer’s financial reports. The pension expense is for the measurement period of 2013-14 and the net pension liability is measured as of June 30, 2014. Liabilities are based on the results of the actuarial calculations performed as of June 30, 2013 and were rolled forward to June 30, 2014. Fiduciary net position is based on fair value of investments as of June 30, 2014. Since GASB 68 allows a measurement date of up to 12 months before the employer’s fiscal year-end, this report can be used for fiscal years beginning after June 15, 2014 and ending on or before June 30, 2015. The following pension information is disclosed in this report:  Summary of Significant Accounting Policies  General Information about the Pension Plan ○ Plan Description, Benefits Provided and Employees Covered ○ Contribution Description ○ Actuarial Methods and Assumptions ○ Discount Rate ○ Pension Plan Fiduciary Net Position  Changes in the Net Pension Liability ○ Sensitivity of the Net Pension Liability ○ Subsequent Events ○ Recognition of Gains and Losses  Pension Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions  Schedules of Required Supplementary Information (10-Year History1): ○ Schedule of Changes in Net Pension Liability and Related Ratios ○ Schedule of Plan Contributions The use of this report for other purposes may be inappropriate. 1 Historical information is required only for measurement periods for which GASB 68 is applicable. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 4 Summary of Significant Accounting Policies For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the Plan and additions to/deductions from the Plan’s fiduciary net position have been determined on the same basis as they are reported by the CalPERS Financial Office. For this purpose, benefit payments (including refunds of employee contributions) are recognized when currently due and payable in accordance with the benefit terms. Investments are reported at fair value. GASB 68 requires that the reported results must pertain to liability and asset information within certain defined timeframes. For this report, the following timeframes are used. Valuation Date (VD) June 30, 2013 Measurement Date (MD) June 30, 2014 Measurement Period (MP) July 1, 2013 to June 30, 2014 General Information about the Pension Plan Plan Description, Benefits Provided and Employees Covered The Plan is an agent multiple-employer defined benefit pension plan administered by the California Public Employees’ Retirement System (CalPERS). A full description of the pension plan regarding number of employees covered, benefit provisions, assumptions (for funding, but not accounting purposes), and membership information are listed in the June 30, 2013 Annual Actuarial Valuation Report. Details of the benefits provided can be obtained in Appendix B of the actuarial valuation report. This report and CalPERS’ audited financial statements are publicly available reports that can be obtained at CalPERS’ website under Forms and Publications. Contribution Description Section 20814(c) of the California Public Employees’ Retirement Law (PERL) requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. The total plan contributions are determined through CalPERS’ annual actuarial valuation process. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The employer is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. For the measurement period ended June 30, 2014 (the measurement date), the average active employee contribution rate is 7.796 percent of annual pay, and the employer’s contribution rate is 25.536 percent of annual payroll. Employer contribution rates may change if plan contracts are amended. It is the responsibility of the employer to make necessary accounting adjustments to reflect the impact due to any Employer Paid Member Contributions or situations where members are paying a portion of the employer contribution. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 5 Actuarial Methods and Assumptions Used to Determine Total Pension Liability For the measurement period ended June 30, 2014 (the measurement date), the total pension liability was determined by rolling forward the June 30, 2013 total pension liability. The June 30, 2013 and the June 30, 2014 total pension liabilities were based on the following actuarial methods and assumptions: Actuarial Cost Method Entry Age Normal in accordance with the requirements of GASB Statement No. 68 Actuarial Assumptions Discount Rate 7.50% Inflation 2.75% Salary Increases Varies by Entry Age and Service Investment Rate of Return 7.50% Net of Pension Plan Investment and Administrative Expenses; includes Inflation Mortality Rate Table1 Derived using CalPERS’ Membership Data for all Funds Post Retirement Benefit Increase Contract COLA up to 2.75% until Purchasing Power Protection Allowance Floor on Purchasing Power applies, 2.75% thereafter 1 The mortality table used was developed based on CalPERS’ specific data. The table includes 20 years of mortality improvements using Society of Actuaries Scale BB. For more details on this table, please refer to the 2014 experience study report. All other actuarial assumptions used in the June 30, 2013 valuation were based on the results of an actuarial experience study for the period from 1997 to 2011, including updates to salary increase, mortality and retirement rates. The Experience Study report can be obtained at CalPERS’ website under Forms and Publications. Discount Rate The discount rate used to measure the total pension liability was 7.50 percent. To determine whether the municipal bond rate should be used in the calculation of a discount rate for each plan, CalPERS stress tested plans that would most likely result in a discount rate that would be different from the actuarially assumed discount rate. Based on the testing, none of the tested plans run out of assets. Therefore, the current 7.50 percent discount rate is adequate and the use of the municipal bond rate calculation is not necessary. The long-term expected discount rate of 7.50 percent is applied to all plans in the Public Employees Retirement Fund. The stress test results are presented in a detailed report called “GASB Crossover Testing Report” that can be obtained at CalPERS’ website under the GASB 68 section. According to Paragraph 30 of Statement 68, the long-term discount rate should be determined without reduction for pension plan administrative expense. The 7.50 percent investment return assumption used in this accounting valuation is net of administrative expenses. Administrative expenses are assumed to be 15 basis points. An investment return excluding administrative expenses would have been 7.65 percent. Using this lower discount rate has resulted in a slightly higher total pension liability and net pension liability. This difference was deemed immaterial to the agent multiple-employer plan. However, employers may determine the impact at the rate plan level for their own financial reporting purposes. Refer to page 8 of this report, which provides information on the sensitivity of the net pension liability to changes in the discount rate. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 6 CalPERS is scheduled to review all actuarial assumptions as part of its regular Asset Liability Management review cycle that is scheduled to be completed in February 2018. Any changes to the discount rate will require Board action and proper stakeholder outreach. For these reasons, CalPERS expects to continue using a discount rate net of administrative expenses for GASB 67 and 68 calculations through at least the 2017-18 fiscal year. CalPERS will continue to check the materiality of the difference in calculation until such time as we have changed our methodology. The long-term expected rate of return on pension plan investments was determined using a building- block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. In determining the long-term expected rate of return, staff took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Such cash flows were developed assuming that both members and employers will make their required contributions on time and as scheduled in all future years. Using historical returns of all the funds’ asset classes, expected compound (geometric) returns were calculated over the short-term (first 10 years) and the long-term (11-60 years) using a building-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equivalent to the single equivalent rate calculated above and rounded down to the nearest one quarter of one percent. The table below reflects long-term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. These geometric rates of return are net of administrative expenses. Asset Class New Strategic Allocation Real Return Years 1 - 101 Real Return Years 11+2 Global Equity 47.0% 5.25% 5.71% Global Fixed Income 19.0 0.99 2.43 Inflation Sensitive 6.0 0.45 3.36 Private Equity 12.0 6.83 6.95 Real Estate 11.0 4.50 5.13 Infrastructure and Forestland 3.0 4.50 5.09 Liquidity 2.0 (0.55) (1.05) 1An expected inflation of 2.5% used for this period 2An expected inflation of 3.0% used for this period Pension Plan Fiduciary Net Position The plan fiduciary net position disclosed in your GASB 68 accounting valuation report may differ from the plan assets reported in your funding actuarial valuation report due to several reasons. First, for the accounting valuations, CalPERS must keep items such as deficiency reserves, fiduciary self- insurance and OPEB expense included as assets. These amounts are excluded for rate setting purposes in your funding actuarial valuation. In addition, differences may result from early Comprehensive Annual Financial Report closing and final reconciled reserves. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 7 Changes in the Net Pension Liability The following table shows the changes in net pension liability recognized over the measurement period. Increase (Decrease) Total Pension Liability Plan Fiduciary Net Position Net Pension Liability/(Asset) (a) (b) (c) = (a) - (b) Balance at: 6/30/2013 (VD)1 $ 635,847,037 $ 413,410,472 $ 222,436,565 Changes Recognized for the Measurement Period:  Service Cost 12,441,595 12,441,595  Interest on the Total Pension Liability 46,963,318 46,963,318  Changes of Benefit Terms 0 0  Differences between Expected and Actual Experience 0 0  Changes of Assumptions 0 0  Contributions from the Employer 17,399,732 (17,399,732)  Contributions from Employees 6,344,660 (6,344,660)  Net Investment Income2 70,988,848 (70,988,848)  Benefit Payments, including Refunds of Employee Contributions (31,780,533) (31,780,533) 0 Net Changes during 2013-14 $ 27,624,380 $ 62,952,707 $ (35,328,327) Balance at: 6/30/2014 (MD)1 $ 663,471,417 $ 476,363,179 $ 187,108,238 1 The fiduciary net position includes receivables for employee service buybacks, deficiency reserves, fiduciary self-insurance and OPEB expense. As described on Page 6, this may differ from the plan assets reported in the funding actuarial valuation report. 2 Net of administrative expenses. For details, see note in Appendix B-2. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 8 Sensitivity of the Net Pension Liability to Changes in the Discount Rate The following presents the net pension liability of the Plan as of the measurement date, calculated using the discount rate of 7.50 percent, as well as what the net pension liability would be if it were calculated using a discount rate that is 1 percentage-point lower (6.50 percent) or 1 percentage-point higher (8.50 percent) than the current rate: Discount Rate - 1% (6.50%) Current Discount Rate (7.50%) Discount Rate + 1% (8.50%) Plan's Net Pension Liability/(Asset) $ 269,622,616 $ 187,108,238 $ 118,202,943 Subsequent Events There were no subsequent events that would materially affect the results presented in this disclosure. Recognition of Gains and Losses Under GASB 68, gains and losses related to changes in total pension liability and fiduciary net position are recognized in pension expense systematically over time. The first amortized amounts are recognized in pension expense for the year the gain or loss occurs. The remaining amounts are categorized as deferred outflows and deferred inflows of resources related to pensions and are to be recognized in future pension expense. The amortization period differs depending on the source of the gain or loss: Difference between projected and actual earnings 5 year straight-line amortization All other amounts Straight-line amortization over the average expected remaining service lives of all members that are provided with benefits (active, inactive, and retired) as of the beginning of the measurement period The expected average remaining service lifetime (EARSL) is calculated by dividing the total future service years by the total number of plan participants (active, inactive, and retired). The EARSL for the Plan for the 2013-14 measurement period is 3.1 years, which was obtained by dividing the total service years of 7,375 (the sum of remaining service lifetimes of the active employees) by 2,407 (the total number of participants: active, inactive, and retired). Note that inactive employees and retirees have remaining service lifetimes equal to 0. Also note that total future service is based on the members’ probability of decrementing due to an event other than receiving a cash refund. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 9 Pension Expense and Deferred Outflows and Deferred Inflows of Resources Related to Pensions Paragraph 137 of GASB 68 and Questions 267 and 268 of the GASB 68 Implementation Guide set forth guidance on implementing the standard. The employer should use this guidance for the adjusting entries concerning the net pension obligation and the initial net pension liability/(asset). As of the start of the measurement period (July 1, 2013), the net pension liability/(asset) is $222,436,565. For the measurement period ending June 30, 2014 (the measurement date), the CITY OF PALO ALTO incurred a pension expense/(income) of $14,484,819 for the Plan (see Appendix B-2 for the complete breakdown of the pension expense). Note that no adjustments have been made for contributions subsequent to the measurement date. Adequate treatment of any contributions made after the measurement date is the responsibility of the employer. As of June 30, 2014, the CITY OF PALO ALTO has deferred outflows and deferred inflows of resources related to pensions as follows: Deferred Outflows of Resources Deferred Inflows of Resources Differences between Expected and Actual Experience $ 0 $ 0 Changes of Assumptions 0 0 Net Difference between Projected and Actual Earnings on Pension Plan Investments 0 (32,413,414) Total $ 0 $ (32,413,414) The amounts above are net of outflows and inflows recognized in the 2013-14 measurement period expense. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 10 Amounts reported as deferred outflows and deferred inflows of resources related to pensions will be recognized in future pension expense as follows: Measurement Period Ended June 30: Deferred Outflows/(Inflows) of Resources 2015 $ (8,103,353) 2016 (8,103,353) 2017 (8,103,353) 2018 (8,103,355) 2019 0 Thereafter 0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 11 Schedules of Required Supplementary Information Schedule of Changes in Net Pension Liability and Related Ratios During the Measurement Period 1 Historical information is required only for measurement periods for which GASB 68 is applicable. 2 Net of administrative expenses. For details, see note in Appendix B-2. Notes to Schedule: Benefit Changes: The figures above do not include any liability impact that may have resulted from plan changes which occurred after June 30, 2013. This applies for voluntary benefit changes as well as any offers of Two Years Additional Service Credit (a.k.a. Golden Handshakes). Changes of Assumptions: There were no changes in assumptions. Measurement Period 2013-141 TOTAL PENSION LIABILITY Service Cost $ 12,441,595 Interest 46,963,318 Changes of Benefit Terms 0 Difference Between Expected and Actual Experience 0 Changes of Assumptions 0 Benefit Payments, Including Refunds of Employee Contributions (31,780,533) Net Change in Total Pension Liability 27,624,380 Total Pension Liability – Beginning 635,847,037 Total Pension Liability – Ending (a) $ 663,471,417 PLAN FIDUCIARY NET POSITION Contributions – Employer $ 17,399,732 Contributions – Employee 6,344,660 Net Investment Income2 70,988,848 Benefit Payments, Including Refunds of Employee Contributions (31,780,533) Other Changes in Fiduciary Net Position 0 Net Change in Fiduciary Net Position 62,952,707 Plan Fiduciary Net Position – Beginning 413,410,472 Plan Fiduciary Net Position – Ending (b) $ 476,363,179 Plan Net Pension Liability/(Asset) – Ending (a) - (b) $ 187,108,238 Plan Fiduciary Net Position as a Percentage of the Total Pension Liability 71.80% Covered-Employee Payroll $ 66,372,870 Plan Net Pension Liability/(Asset) as a Percentage of Covered-Employee Payroll 281.90% GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 12 Schedule of Plan Contributions1 Fiscal Year 2013-14 Actuarially Determined Contribution2 $ 17,399,732 Contributions in Relation to the Actuarially Determined Contribution2 (17,399,732) Contribution Deficiency (Excess) $ 0 Covered-Employee Payroll3, 4 $ 66,372,870 Contributions as a Percentage of Covered-Employee Payroll3 26.22% 1 Historical information is required only for measurement periods for which GASB 68 is applicable. 2 Employers are assumed to make contributions equal to the actuarially determined contributions. However, some employers may choose to make additional contributions towards their unfunded liability. Employer contributions for such plans exceed the actuarially determined contributions. 3 Covered-Employee Payroll represented above is based on pensionable earnings provided by the employer. However, GASB 68 defines covered-employee payroll as the total payroll of employees that are provided pensions through the pension plan. Accordingly, if pensionable earnings are different than total earnings for covered-employees, the employer should display in the disclosure footnotes the payroll based on total earnings for the covered group and recalculate the required payroll-related ratios. 4 Payroll from prior year $64,439,680 was assumed to increase by the 3.00 percent payroll growth assumption. Notes to Schedule: The actuarial methods and assumptions used to set the actuarially determined contributions for Fiscal Year 2013-14 were from the June 30, 2011 public agency valuations. Actuarial Cost Method Entry Age Normal Amortization Method/Period For details, see June 30, 2011 Funding Valuation Report. Asset Valuation Method Actuarial Value of Assets. For details, see June 30, 2011 Funding Valuation Report. Inflation 2.75% Salary Increases Varies by Entry Age and Service Payroll Growth 3.00% Investment Rate of Return 7.50% Net of Pension Plan Investment and Administrative Expenses; includes Inflation. Retirement Age The probabilities of Retirement are based on the 2010 CalPERS Experience Study for the period from 1997 to 2007. Mortality The probabilities of mortality are based on the 2010 CalPERS Experience Study for the period from 1997 to 2007. Pre- retirement and Post-retirement mortality rates include 5 years of projected mortality improvement using Scale AA published by the Society of Actuaries. APPENDICES  APPENDIX A – DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES RELATED TO PENSIONS  APPENDIX B – INTEREST, TOTAL PROJECTED EARNINGS AND PENSION EXPENSE/(INCOME) APPENDIX A DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES RELATED TO PENSIONS  SCHEDULE OF DIFFERENCES BETWEEN EXPECTED AND ACTUAL EXPERIENCE  DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES FOR DIFFERENCES BETWEEN EXPECTED AND ACTUAL EXPERIENCE  SCHEDULE OF CHANGES OF ASSUMPTIONS  DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES FOR CHANGES OF ASSUMPTIONS  SCHEDULE OF DIFFERENCES BETWEEN PROJECTED AND ACTUAL EARNINGS ON PENSION PLAN INVESTMENTS  DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES FOR DIFFERENCES BETWEEN PROJECTED AND ACTUAL EARNINGS ON PENSION PLAN INVESTMENTS  SUMMARY OF RECOGNIZED DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-1 Schedule of differences between expected and actual experience Increase (Decrease) in Pension Expense Arising from the Recognition of the Effects of Differences between Expected and Actual Experience (Measurement Periods) Measurement Period Differences between Expected and Actual Experience Recognition Period (Years) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter 2013-14 $0 3.1 $0 $0 $0 $0 $0 $0 $0 Net Increase (Decrease) in Pension Expense $0 $0 $0 $0 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-2 Deferred outflows of resources and deferred inflows of resources arising from differences between expected and actual experience Balances at June 30, 2014 Measurement Period Experience Losses Experience Gains Amounts Recognized in Pension Expense through June 30, 2014 Deferred Outflows of Resources Deferred Inflows of Resources (a) (b) (c) (a) - (c) (b) - (c) 2013-14 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-3 Schedule of changes of assumptions Increase (Decrease) in Pension Expense Arising from the Recognition of the Effects of Changes of Assumptions (Measurement Periods) Measurement Period Changes of Assumptions Recognition Period (Years) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter 2013-14 $0 3.1 $0 $0 $0 $0 $0 $0 $0 Net Increase (Decrease) in Pension Expense $0 $0 $0 $0 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-4 Deferred outflows of resources and deferred inflows of resources arising from changes of assumptions Balances at June 30, 2014 Measurement Period Increase in Total Pension Liability Decrease in Total Pension Liability Amounts Recognized in Pension Expense through June 30, 2014 Deferred Outflows of Resources Deferred Inflows of Resources (a) (b) (c) (a) - (c) (b) - (c) 2013-14 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-5 Schedule of differences between projected and actual earnings on pension plan investments Increase (Decrease) in Pension Expense Arising from the Recognition of Differences between Projected and Actual Earnings on Pension Plan Investments (Measurement Periods) Measurement Period Differences between Projected and Actual Earnings on Pension Plan Investments Recognition Period (Years) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter 2013-14 $(40,516,767) 5.0 $(8,103,353) $(8,103,353) $(8,103,353) $(8,103,353) $(8,103,355) $0 $0 Net Increase (Decrease) in Pension Expense $(8,103,353) $(8,103,353) $(8,103,353) $(8,103,353) $(8,103,355) $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-6 Deferred outflows of resources and deferred inflows of resources arising from differences between projected and actual earnings on pension plan investments Balances at June 30, 2014 Measurement Period Investment Earnings less than Projected Investment Earnings greater than Projected Amounts Recognized in Pension Expense through June 30, 2014 Deferred Outflows of Resources Deferred Inflows of Resources (a) (b) (c) (a) - (c) (b) - (c) 2013-14 $(40,516,767) $(8,103,353) $(32,413,414) $0 $(32,413,414) GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-7 Summary of recognized deferred outflows of resources and deferred inflows of resources Net Increase (Decrease) in Pension Expense (Measurement Periods) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter Differences between Expected and Actual Experience $0 $0 $0 $0 $0 $0 $0 Changes of Assumptions 0 0 0 0 0 0 0 Differences between Projected and Actual Earnings on Pension Plan Investments (8,103,353) (8,103,353) (8,103,353) (8,103,353) (8,103,355) 0 0 Grand Total $(8,103,353) $(8,103,353) $(8,103,353) $(8,103,353) $(8,103,355) $0 $0 APPENDIX B INTEREST, TOTAL PROJECTED EARNINGS AND PENSION EXPENSE/(INCOME)  INTEREST ON TOTAL PENSION LIABILITY AND TOTAL PROJECTED EARNINGS  PENSION EXPENSE/(INCOME) GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 B-1 Interest on Total Pension Liability and Total Projected Earnings Interest on the Total Pension Liability Amount for Period Portion of Period Interest Rate Interest on the Total Pension Liability (a) (b) (c) (a) X (b) X (c) Beginning Total Pension Liability $ 635,847,037 100% 7.5% $ 47,688,528 Service Cost 12,441,595 50% 7.5% 466,560 Benefit Payments, including Refunds of Employee Contributions (31,780,533) 50% 7.5% (1,191,770) Total Interest on the Total Pension Liability $ 46,963,318 Projected Earnings on Pension Plan Investments Amount for Period Portion of Period Projected Rate of Return Projected Earnings (a) (b) (c) (a) X (b) X (c) Beginning Plan Fiduciary Net Position excluding Receivables1 $ 410,312,475 100% 7.5% $ 30,773,436 Employer Contributions 17,399,732 50% 7.5% 652,490 Employee Contributions 6,344,660 50% 7.5% 237,925 Benefit Payments, including Refunds of Employee Contributions (31,780,533) 50% 7.5% (1,191,770) Total Projected Earnings $ 30,472,081 1 Contributions receivable for employee service buybacks, totaling $3,097,997 as of June 30, 2013, are excluded for purposes of calculating projected earnings on pension plan investments. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 B-2 Pension Expense/(Income) for Measurement Period Ended June 30, 2014 Description Amount Service Cost $ 12,441,595 Interest on the Total Pension Liability 46,963,318 Changes of Benefit Terms 0 Recognized Differences between Expected and Actual Experience 0 Recognized Changes of Assumptions 0 Employee Contributions (6,344,660) Projected Earnings on Pension Plan Investments (30,472,081) Recognized Differences between Projected and Actual Earnings on Plan Investments (8,103,353) Other Changes in Fiduciary Net Position 0 Total Pension Expense/(Income) $ 14,484,819 Note: Plan administrative expenses are not displayed in the above pension expense table. Since the expected investment return of 7.50 percent is net of administrative expenses, administrative expenses are excluded from the above table, but implicitly included as part of investment earnings. GASB 68 ACCOUNTING VALUATION REPORT (CalPERS ID: 6373437857) Rate Plan Identifier: 5080 Prepared for the CITY OF PALO ALTO SAFETY PLAN, an Agent Multiple-Employer Defined Benefit Pension Plan Measurement Date of June 30, 2014 TABLE OF CONTENTS Actuarial Certification 1 Introduction 2 Purpose of the Report 3 Summary of Significant Accounting Policies 4 General Information about the Pension Plan 4 Changes in the Net Pension Liability 7 Pension Expense and Deferred Outflows and Deferred Inflows of Resources Related to Pensions 9 Schedules of Required Supplementary Information 11 APPENDIX A – DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES RELATED TO PENSIONS Schedule of Differences between Expected and Actual Experience A-1 Deferred Outflows of Resources and Deferred Inflows of Resources for Differences between Expected and Actual Experience A-2 Schedule of Changes of Assumptions A-3 Deferred Outflows of Resources and Deferred Inflows of Resources for Changes of Assumptions A-4 Schedule of Differences between Projected and Actual Earnings on Pension Plan Investments A-5 Deferred Outflows of Resources and Deferred Inflows of Resources for Differences between Projected and Actual Earnings on Pension Plan Investments A-6 Summary of Recognized Deferred Outflows of Resources and Deferred Inflows of Resources A-7 APPENDIX B – INTEREST, TOTAL PROJECTED EARNINGS AND PENSION EXPENSE/(INCOME) Interest on Total Pension Liability and Total Projected Earnings B-1 Pension Expense/(Income) B-2 (CY) ACCTG PROC ID: 2701 (CY) REPORT PROC ID: 83744 (PY) ACCTG PROC ID: N/A (PY) REPORT PROC ID: N/A GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 1 ACTUARIAL CERTIFICATION This report provides disclosure and reporting information as required under Governmental Accounting Standards Board Statement 68 (GASB 68) for the SAFETY PLAN of the CITY OF PALO ALTO (the “Plan”), an Agent Multiple-Employer Defined Benefit Pension Plan participating in the California Public Employees’ Retirement System (CalPERS), for the measurement period ended June 30, 2014. This information should be used for the fiscal year beginning after June 15, 2014 but ending on or before June 30, 2015. Determinations for purposes other than financial accounting requirements may be significantly different from the results in this report. Thus, the use of this report for purposes other than those expressed here may not be appropriate. This accounting valuation report relies on liabilities and related validation work performed by the CalPERS Actuarial Office as part of the June 30, 2013 annual funding valuation for the Plan. The census data and benefit provisions underlying the liabilities were prepared as of June 30, 2013 and certified as part of the annual funding valuation by the CalPERS Actuarial Office. The June 30, 2013 liabilities used for this accounting valuation are based on the actuarial assumptions recommended by the CalPERS Chief Actuary and adopted by the CalPERS Board in February 2014 as laid out in the 2014 report titled “CalPERS Experience Study and Review of Actuarial Assumptions.” These liabilities were validated as part of the June 30, 2013 funding valuation that included the estimated impact of the change in actuarial assumptions on contribution requirements. The undersigned is relying upon these prescribed assumptions and methods and is not able to render an opinion on their reasonability, as this would require a substantial amount of additional work beyond the scope of this report. This report also relies on asset information for the measurement period as supplied by the CalPERS Financial Office. The fiduciary net position as of June 30, 2014, and the changes in net position for the year then ended were audited by CalPERS’ independent auditors, Macias Gini & O’Connell LLP, as part of the audit of the Schedule of Changes in Fiduciary Net Position by Employer Rate Plan of CalPERS Agent Multiple-Employer Pension Plan. With the provided liability and asset information, the total pension liability, net pension liability and pension expense were developed for the measurement period using standard actuarial techniques. In addition, the results are based on CalPERS’ understanding of the financial accounting and reporting requirements under U.S. Generally Accepted Accounting Principles as set forth in GASB 68. The information in this report is not intended to supersede the advice and interpretations of the employer’s auditor. This report may not provide all the information necessary to complete the required disclosures under GASB 68. The employer should supplement and update the information in this report with its own financial data as necessary to complete the disclosure information required by GASB 68. The undersigned is familiar with the near-term and long-term aspects of pension valuations and meets the Qualification Standards of the American Academy of Actuaries necessary to render the actuarial opinions contained herein. The information provided in this report is dependent upon various factors as documented throughout this report, which may be subject to change. Each section of this report is considered to be an integral part of the actuarial opinions. DAVID CLEMENT, ASA, MAAA, EA Senior Pension Actuary, CalPERS GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 2 Introduction This is the GASB 68 Accounting Valuation Report to be used for your fiscal year beginning after June 15, 2014 and ending on or before June 30, 2015 for your SAFETY PLAN (Plan). GASB Statement No. 68 replaced the requirements of GASB 27 effective for fiscal years beginning after June 15, 2014. Statement 68 was issued by GASB in June 2012, requiring public employers to comply with new accounting and financial reporting standards. Statement 68 outlines a different approach to the recognition and calculation of pension obligations. Under the new GASB standards, employers that participate in a defined benefit pension plan administered as a trust or equivalent arrangement are required to record the net pension liability, pension expense, and deferred outflows/deferred inflows of resources related to pensions in their financial statements as part of their financial position. Net pension liability is the plan’s total pension liability based on entry age normal actuarial cost method less the plan’s fiduciary net position. This may be a negative liability (net pension asset). Pension expense is the change in net pension liability from the previous fiscal year to the current fiscal year less adjustments. This may be a negative expense (pension income). Deferred outflows and deferred inflows of resources related to pensions are certain changes in total pension liability and fiduciary net position that are to be recognized in future pension expense. This report may not provide all the information necessary to complete the required disclosures under GASB 68. The employer should supplement and update the information in this report with its own financial data as necessary to complete the disclosure information required by GASB 68. For example, no adjustments have been made for contributions subsequent to the measurement date. Appropriate accounting treatment of any contributions made after the measurement date is the responsibility of the employer. CalPERS recommends that the employer consult with its auditor regarding any such adjustments. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 3 Purpose of the Report The Plan participates in the CalPERS agent multiple-employer defined benefit pension plan. This GASB 68 report provides accounting and financial reporting for pensions, to be used in the employer’s financial reports. The pension expense is for the measurement period of 2013-14 and the net pension liability is measured as of June 30, 2014. Liabilities are based on the results of the actuarial calculations performed as of June 30, 2013 and were rolled forward to June 30, 2014. Fiduciary net position is based on fair value of investments as of June 30, 2014. Since GASB 68 allows a measurement date of up to 12 months before the employer’s fiscal year-end, this report can be used for fiscal years beginning after June 15, 2014 and ending on or before June 30, 2015. The following pension information is disclosed in this report:  Summary of Significant Accounting Policies  General Information about the Pension Plan ○ Plan Description, Benefits Provided and Employees Covered ○ Contribution Description ○ Actuarial Methods and Assumptions ○ Discount Rate ○ Pension Plan Fiduciary Net Position  Changes in the Net Pension Liability ○ Sensitivity of the Net Pension Liability ○ Subsequent Events ○ Recognition of Gains and Losses  Pension Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions  Schedules of Required Supplementary Information (10-Year History1): ○ Schedule of Changes in Net Pension Liability and Related Ratios ○ Schedule of Plan Contributions The use of this report for other purposes may be inappropriate. 1 Historical information is required only for measurement periods for which GASB 68 is applicable. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 4 Summary of Significant Accounting Policies For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the Plan and additions to/deductions from the Plan’s fiduciary net position have been determined on the same basis as they are reported by the CalPERS Financial Office. For this purpose, benefit payments (including refunds of employee contributions) are recognized when currently due and payable in accordance with the benefit terms. Investments are reported at fair value. GASB 68 requires that the reported results must pertain to liability and asset information within certain defined timeframes. For this report, the following timeframes are used. Valuation Date (VD) June 30, 2013 Measurement Date (MD) June 30, 2014 Measurement Period (MP) July 1, 2013 to June 30, 2014 General Information about the Pension Plan Plan Description, Benefits Provided and Employees Covered The Plan is an agent multiple-employer defined benefit pension plan administered by the California Public Employees’ Retirement System (CalPERS). A full description of the pension plan regarding number of employees covered, benefit provisions, assumptions (for funding, but not accounting purposes), and membership information are listed in the June 30, 2013 Annual Actuarial Valuation Report. Details of the benefits provided can be obtained in Appendix B of the actuarial valuation report. This report and CalPERS’ audited financial statements are publicly available reports that can be obtained at CalPERS’ website under Forms and Publications. Contribution Description Section 20814(c) of the California Public Employees’ Retirement Law (PERL) requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. The total plan contributions are determined through CalPERS’ annual actuarial valuation process. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The employer is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. For the measurement period ended June 30, 2014 (the measurement date), the average active employee contribution rate is 9.029 percent of annual pay, and the employer’s contribution rate is 34.716 percent of annual payroll. Employer contribution rates may change if plan contracts are amended. It is the responsibility of the employer to make necessary accounting adjustments to reflect the impact due to any Employer Paid Member Contributions or situations where members are paying a portion of the employer contribution. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 5 Actuarial Methods and Assumptions Used to Determine Total Pension Liability For the measurement period ended June 30, 2014 (the measurement date), the total pension liability was determined by rolling forward the June 30, 2013 total pension liability. The June 30, 2013 and the June 30, 2014 total pension liabilities were based on the following actuarial methods and assumptions: Actuarial Cost Method Entry Age Normal in accordance with the requirements of GASB Statement No. 68 Actuarial Assumptions Discount Rate 7.50% Inflation 2.75% Salary Increases Varies by Entry Age and Service Investment Rate of Return 7.50% Net of Pension Plan Investment and Administrative Expenses; includes Inflation Mortality Rate Table1 Derived using CalPERS’ Membership Data for all Funds Post Retirement Benefit Increase Contract COLA up to 2.75% until Purchasing Power Protection Allowance Floor on Purchasing Power applies, 2.75% thereafter 1 The mortality table used was developed based on CalPERS’ specific data. The table includes 20 years of mortality improvements using Society of Actuaries Scale BB. For more details on this table, please refer to the 2014 experience study report. All other actuarial assumptions used in the June 30, 2013 valuation were based on the results of an actuarial experience study for the period from 1997 to 2011, including updates to salary increase, mortality and retirement rates. The Experience Study report can be obtained at CalPERS’ website under Forms and Publications. Discount Rate The discount rate used to measure the total pension liability was 7.50 percent. To determine whether the municipal bond rate should be used in the calculation of a discount rate for each plan, CalPERS stress tested plans that would most likely result in a discount rate that would be different from the actuarially assumed discount rate. Based on the testing, none of the tested plans run out of assets. Therefore, the current 7.50 percent discount rate is adequate and the use of the municipal bond rate calculation is not necessary. The long-term expected discount rate of 7.50 percent is applied to all plans in the Public Employees Retirement Fund. The stress test results are presented in a detailed report called “GASB Crossover Testing Report” that can be obtained at CalPERS’ website under the GASB 68 section. According to Paragraph 30 of Statement 68, the long-term discount rate should be determined without reduction for pension plan administrative expense. The 7.50 percent investment return assumption used in this accounting valuation is net of administrative expenses. Administrative expenses are assumed to be 15 basis points. An investment return excluding administrative expenses would have been 7.65 percent. Using this lower discount rate has resulted in a slightly higher total pension liability and net pension liability. This difference was deemed immaterial to the agent multiple-employer plan. However, employers may determine the impact at the rate plan level for their own financial reporting purposes. Refer to page 8 of this report, which provides information on the sensitivity of the net pension liability to changes in the discount rate. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 6 CalPERS is scheduled to review all actuarial assumptions as part of its regular Asset Liability Management review cycle that is scheduled to be completed in February 2018. Any changes to the discount rate will require Board action and proper stakeholder outreach. For these reasons, CalPERS expects to continue using a discount rate net of administrative expenses for GASB 67 and 68 calculations through at least the 2017-18 fiscal year. CalPERS will continue to check the materiality of the difference in calculation until such time as we have changed our methodology. The long-term expected rate of return on pension plan investments was determined using a building- block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. In determining the long-term expected rate of return, staff took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Such cash flows were developed assuming that both members and employers will make their required contributions on time and as scheduled in all future years. Using historical returns of all the funds’ asset classes, expected compound (geometric) returns were calculated over the short-term (first 10 years) and the long-term (11-60 years) using a building-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equivalent to the single equivalent rate calculated above and rounded down to the nearest one quarter of one percent. The table below reflects long-term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. These geometric rates of return are net of administrative expenses. Asset Class New Strategic Allocation Real Return Years 1 - 101 Real Return Years 11+2 Global Equity 47.0% 5.25% 5.71% Global Fixed Income 19.0 0.99 2.43 Inflation Sensitive 6.0 0.45 3.36 Private Equity 12.0 6.83 6.95 Real Estate 11.0 4.50 5.13 Infrastructure and Forestland 3.0 4.50 5.09 Liquidity 2.0 (0.55) (1.05) 1An expected inflation of 2.5% used for this period 2An expected inflation of 3.0% used for this period Pension Plan Fiduciary Net Position The plan fiduciary net position disclosed in your GASB 68 accounting valuation report may differ from the plan assets reported in your funding actuarial valuation report due to several reasons. First, for the accounting valuations, CalPERS must keep items such as deficiency reserves, fiduciary self- insurance and OPEB expense included as assets. These amounts are excluded for rate setting purposes in your funding actuarial valuation. In addition, differences may result from early Comprehensive Annual Financial Report closing and final reconciled reserves. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 7 Changes in the Net Pension Liability The following table shows the changes in net pension liability recognized over the measurement period. Increase (Decrease) Total Pension Liability Plan Fiduciary Net Position Net Pension Liability/(Asset) (a) (b) (c) = (a) - (b) Balance at: 6/30/2013 (VD)1 $ 355,054,289 $ 234,152,906 $ 120,901,383 Changes Recognized for the Measurement Period:  Service Cost 6,221,042 6,221,042  Interest on the Total Pension Liability 26,112,921 26,112,921  Changes of Benefit Terms 0 0  Differences between Expected and Actual Experience 0 0  Changes of Assumptions 0 0  Contributions from the Employer 7,615,779 (7,615,779)  Contributions from Employees 2,762,215 (2,762,215)  Net Investment Income2 40,033,488 (40,033,488)  Benefit Payments, including Refunds of Employee Contributions (19,985,106) (19,985,106) 0 Net Changes during 2013-14 $ 12,348,857 $ 30,426,376 $ (18,077,519) Balance at: 6/30/2014 (MD)1 $ 367,403,146 $ 264,579,282 $ 102,823,864 1 The fiduciary net position includes receivables for employee service buybacks, deficiency reserves, fiduciary self-insurance and OPEB expense. As described on Page 6, this may differ from the plan assets reported in the funding actuarial valuation report. 2 Net of administrative expenses. For details, see note in Appendix B-2. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 8 Sensitivity of the Net Pension Liability to Changes in the Discount Rate The following presents the net pension liability of the Plan as of the measurement date, calculated using the discount rate of 7.50 percent, as well as what the net pension liability would be if it were calculated using a discount rate that is 1 percentage-point lower (6.50 percent) or 1 percentage-point higher (8.50 percent) than the current rate: Discount Rate - 1% (6.50%) Current Discount Rate (7.50%) Discount Rate + 1% (8.50%) Plan's Net Pension Liability/(Asset) $ 148,419,847 $ 102,823,864 $ 64,946,625 Subsequent Events There were no subsequent events that would materially affect the results presented in this disclosure. Recognition of Gains and Losses Under GASB 68, gains and losses related to changes in total pension liability and fiduciary net position are recognized in pension expense systematically over time. The first amortized amounts are recognized in pension expense for the year the gain or loss occurs. The remaining amounts are categorized as deferred outflows and deferred inflows of resources related to pensions and are to be recognized in future pension expense. The amortization period differs depending on the source of the gain or loss: Difference between projected and actual earnings 5 year straight-line amortization All other amounts Straight-line amortization over the average expected remaining service lives of all members that are provided with benefits (active, inactive, and retired) as of the beginning of the measurement period The expected average remaining service lifetime (EARSL) is calculated by dividing the total future service years by the total number of plan participants (active, inactive, and retired). The EARSL for the Plan for the 2013-14 measurement period is 3.3 years, which was obtained by dividing the total service years of 2,232 (the sum of remaining service lifetimes of the active employees) by 676 (the total number of participants: active, inactive, and retired). Note that inactive employees and retirees have remaining service lifetimes equal to 0. Also note that total future service is based on the members’ probability of decrementing due to an event other than receiving a cash refund. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 9 Pension Expense and Deferred Outflows and Deferred Inflows of Resources Related to Pensions Paragraph 137 of GASB 68 and Questions 267 and 268 of the GASB 68 Implementation Guide set forth guidance on implementing the standard. The employer should use this guidance for the adjusting entries concerning the net pension obligation and the initial net pension liability/(asset). As of the start of the measurement period (July 1, 2013), the net pension liability/(asset) is $120,901,383. For the measurement period ending June 30, 2014 (the measurement date), the CITY OF PALO ALTO incurred a pension expense/(income) of $7,861,040 for the Plan (see Appendix B-2 for the complete breakdown of the pension expense). Note that no adjustments have been made for contributions subsequent to the measurement date. Adequate treatment of any contributions made after the measurement date is the responsibility of the employer. As of June 30, 2014, the CITY OF PALO ALTO has deferred outflows and deferred inflows of resources related to pensions as follows: Deferred Outflows of Resources Deferred Inflows of Resources Differences between Expected and Actual Experience $ 0 $ 0 Changes of Assumptions 0 0 Net Difference between Projected and Actual Earnings on Pension Plan Investments 0 (18,322,780) Total $ 0 $ (18,322,780) The amounts above are net of outflows and inflows recognized in the 2013-14 measurement period expense. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 10 Amounts reported as deferred outflows and deferred inflows of resources related to pensions will be recognized in future pension expense as follows: Measurement Period Ended June 30: Deferred Outflows/(Inflows) of Resources 2015 $ (4,580,695) 2016 (4,580,695) 2017 (4,580,695) 2018 (4,580,695) 2019 0 Thereafter 0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 11 Schedules of Required Supplementary Information Schedule of Changes in Net Pension Liability and Related Ratios During the Measurement Period 1 Historical information is required only for measurement periods for which GASB 68 is applicable. 2 Net of administrative expenses. For details, see note in Appendix B-2. Notes to Schedule: Benefit Changes: The figures above do not include any liability impact that may have resulted from plan changes which occurred after June 30, 2013. This applies for voluntary benefit changes as well as any offers of Two Years Additional Service Credit (a.k.a. Golden Handshakes). Changes of Assumptions: There were no changes in assumptions. Measurement Period 2013-141 TOTAL PENSION LIABILITY Service Cost $ 6,221,042 Interest 26,112,921 Changes of Benefit Terms 0 Difference Between Expected and Actual Experience 0 Changes of Assumptions 0 Benefit Payments, Including Refunds of Employee Contributions (19,985,106) Net Change in Total Pension Liability 12,348,857 Total Pension Liability – Beginning 355,054,289 Total Pension Liability – Ending (a) $ 367,403,146 PLAN FIDUCIARY NET POSITION Contributions – Employer $ 7,615,779 Contributions – Employee 2,762,215 Net Investment Income2 40,033,488 Benefit Payments, Including Refunds of Employee Contributions (19,985,106) Other Changes in Fiduciary Net Position 0 Net Change in Fiduciary Net Position 30,426,376 Plan Fiduciary Net Position – Beginning 234,152,906 Plan Fiduciary Net Position – Ending (b) $ 264,579,282 Plan Net Pension Liability/(Asset) – Ending (a) - (b) $ 102,823,864 Plan Fiduciary Net Position as a Percentage of the Total Pension Liability 72.01% Covered-Employee Payroll $ 21,895,824 Plan Net Pension Liability/(Asset) as a Percentage of Covered-Employee Payroll 469.60% GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 12 Schedule of Plan Contributions1 Fiscal Year 2013-14 Actuarially Determined Contribution2 $ 7,615,779 Contributions in Relation to the Actuarially Determined Contribution2 (7,615,779) Contribution Deficiency (Excess) $ 0 Covered-Employee Payroll3, 4 $ 21,895,824 Contributions as a Percentage of Covered-Employee Payroll3 34.78% 1 Historical information is required only for measurement periods for which GASB 68 is applicable. 2 Employers are assumed to make contributions equal to the actuarially determined contributions. However, some employers may choose to make additional contributions towards their unfunded liability. Employer contributions for such plans exceed the actuarially determined contributions. 3 Covered-Employee Payroll represented above is based on pensionable earnings provided by the employer. However, GASB 68 defines covered-employee payroll as the total payroll of employees that are provided pensions through the pension plan. Accordingly, if pensionable earnings are different than total earnings for covered-employees, the employer should display in the disclosure footnotes the payroll based on total earnings for the covered group and recalculate the required payroll-related ratios. 4 Payroll from prior year $21,258,082 was assumed to increase by the 3.00 percent payroll growth assumption. Notes to Schedule: The actuarial methods and assumptions used to set the actuarially determined contributions for Fiscal Year 2013-14 were from the June 30, 2011 public agency valuations. Actuarial Cost Method Entry Age Normal Amortization Method/Period For details, see June 30, 2011 Funding Valuation Report. Asset Valuation Method Actuarial Value of Assets. For details, see June 30, 2011 Funding Valuation Report. Inflation 2.75% Salary Increases Varies by Entry Age and Service Payroll Growth 3.00% Investment Rate of Return 7.50% Net of Pension Plan Investment and Administrative Expenses; includes Inflation. Retirement Age The probabilities of Retirement are based on the 2010 CalPERS Experience Study for the period from 1997 to 2007. Mortality The probabilities of mortality are based on the 2010 CalPERS Experience Study for the period from 1997 to 2007. Pre- retirement and Post-retirement mortality rates include 5 years of projected mortality improvement using Scale AA published by the Society of Actuaries. APPENDICES  APPENDIX A – DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES RELATED TO PENSIONS  APPENDIX B – INTEREST, TOTAL PROJECTED EARNINGS AND PENSION EXPENSE/(INCOME) APPENDIX A DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES RELATED TO PENSIONS  SCHEDULE OF DIFFERENCES BETWEEN EXPECTED AND ACTUAL EXPERIENCE  DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES FOR DIFFERENCES BETWEEN EXPECTED AND ACTUAL EXPERIENCE  SCHEDULE OF CHANGES OF ASSUMPTIONS  DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES FOR CHANGES OF ASSUMPTIONS  SCHEDULE OF DIFFERENCES BETWEEN PROJECTED AND ACTUAL EARNINGS ON PENSION PLAN INVESTMENTS  DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES FOR DIFFERENCES BETWEEN PROJECTED AND ACTUAL EARNINGS ON PENSION PLAN INVESTMENTS  SUMMARY OF RECOGNIZED DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-1 Schedule of differences between expected and actual experience Increase (Decrease) in Pension Expense Arising from the Recognition of the Effects of Differences between Expected and Actual Experience (Measurement Periods) Measurement Period Differences between Expected and Actual Experience Recognition Period (Years) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter 2013-14 $0 3.3 $0 $0 $0 $0 $0 $0 $0 Net Increase (Decrease) in Pension Expense $0 $0 $0 $0 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-2 Deferred outflows of resources and deferred inflows of resources arising from differences between expected and actual experience Balances at June 30, 2014 Measurement Period Experience Losses Experience Gains Amounts Recognized in Pension Expense through June 30, 2014 Deferred Outflows of Resources Deferred Inflows of Resources (a) (b) (c) (a) - (c) (b) - (c) 2013-14 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-3 Schedule of changes of assumptions Increase (Decrease) in Pension Expense Arising from the Recognition of the Effects of Changes of Assumptions (Measurement Periods) Measurement Period Changes of Assumptions Recognition Period (Years) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter 2013-14 $0 3.3 $0 $0 $0 $0 $0 $0 $0 Net Increase (Decrease) in Pension Expense $0 $0 $0 $0 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-4 Deferred outflows of resources and deferred inflows of resources arising from changes of assumptions Balances at June 30, 2014 Measurement Period Increase in Total Pension Liability Decrease in Total Pension Liability Amounts Recognized in Pension Expense through June 30, 2014 Deferred Outflows of Resources Deferred Inflows of Resources (a) (b) (c) (a) - (c) (b) - (c) 2013-14 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-5 Schedule of differences between projected and actual earnings on pension plan investments Increase (Decrease) in Pension Expense Arising from the Recognition of Differences between Projected and Actual Earnings on Pension Plan Investments (Measurement Periods) Measurement Period Differences between Projected and Actual Earnings on Pension Plan Investments Recognition Period (Years) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter 2013-14 $(22,903,475) 5.0 $(4,580,695) $(4,580,695) $(4,580,695) $(4,580,695) $(4,580,695) $0 $0 Net Increase (Decrease) in Pension Expense $(4,580,695) $(4,580,695) $(4,580,695) $(4,580,695) $(4,580,695) $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-6 Deferred outflows of resources and deferred inflows of resources arising from differences between projected and actual earnings on pension plan investments Balances at June 30, 2014 Measurement Period Investment Earnings less than Projected Investment Earnings greater than Projected Amounts Recognized in Pension Expense through June 30, 2014 Deferred Outflows of Resources Deferred Inflows of Resources (a) (b) (c) (a) - (c) (b) - (c) 2013-14 $(22,903,475) $(4,580,695) $(18,322,780) $0 $(18,322,780) GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-7 Summary of recognized deferred outflows of resources and deferred inflows of resources Net Increase (Decrease) in Pension Expense (Measurement Periods) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter Differences between Expected and Actual Experience $0 $0 $0 $0 $0 $0 $0 Changes of Assumptions 0 0 0 0 0 0 0 Differences between Projected and Actual Earnings on Pension Plan Investments (4,580,695) (4,580,695) (4,580,695) (4,580,695) (4,580,695) 0 0 Grand Total $(4,580,695) $(4,580,695) $(4,580,695) $(4,580,695) $(4,580,695) $0 $0 APPENDIX B INTEREST, TOTAL PROJECTED EARNINGS AND PENSION EXPENSE/(INCOME)  INTEREST ON TOTAL PENSION LIABILITY AND TOTAL PROJECTED EARNINGS  PENSION EXPENSE/(INCOME) GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 B-1 Interest on Total Pension Liability and Total Projected Earnings Interest on the Total Pension Liability Amount for Period Portion of Period Interest Rate Interest on the Total Pension Liability (a) (b) (c) (a) X (b) X (c) Beginning Total Pension Liability $ 355,054,289 100% 7.5% $ 26,629,072 Service Cost 6,221,042 50% 7.5% 233,290 Benefit Payments, including Refunds of Employee Contributions (19,985,106) 50% 7.5% (749,441) Total Interest on the Total Pension Liability $ 26,112,921 Projected Earnings on Pension Plan Investments Amount for Period Portion of Period Projected Rate of Return Projected Earnings (a) (b) (c) (a) X (b) X (c) Beginning Plan Fiduciary Net Position excluding Receivables1 $ 233,203,719 100% 7.5% $ 17,490,279 Employer Contributions 7,615,779 50% 7.5% 285,592 Employee Contributions 2,762,215 50% 7.5% 103,583 Benefit Payments, including Refunds of Employee Contributions (19,985,106) 50% 7.5% (749,441) Total Projected Earnings $ 17,130,013 1 Contributions receivable for employee service buybacks, totaling $949,187 as of June 30, 2013, are excluded for purposes of calculating projected earnings on pension plan investments. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 B-2 Pension Expense/(Income) for Measurement Period Ended June 30, 2014 Description Amount Service Cost $ 6,221,042 Interest on the Total Pension Liability 26,112,921 Changes of Benefit Terms 0 Recognized Differences between Expected and Actual Experience 0 Recognized Changes of Assumptions 0 Employee Contributions (2,762,215) Projected Earnings on Pension Plan Investments (17,130,013) Recognized Differences between Projected and Actual Earnings on Plan Investments (4,580,695) Other Changes in Fiduciary Net Position 0 Total Pension Expense/(Income) $ 7,861,040 Note: Plan administrative expenses are not displayed in the above pension expense table. Since the expected investment return of 7.50 percent is net of administrative expenses, administrative expenses are excluded from the above table, but implicitly included as part of investment earnings. City of Palo Alto (ID # 6211) Finance Committee Staff Report Report Type: Action Items Meeting Date: 10/20/2015 City of Palo Alto Page 1 Summary Title: Recommendation to Solicit for Aquatic Services Title: Community Services Department Recommendation to Release a Request for Proposal to Explore Options for the Delivery of Aquatics Programs and Services for the City of Palo Alto From: City Manager Lead Department: Community Services Recommendation Staff recommends that Council direct the Community Services Department to release a Request for Proposal to explore options for the delivery of aquatic programs and services for the City of Palo Alto. Background During the summer season which runs from mid-June through mid-August, the City of Palo Alto Aquatics program offers a variety of activities for the community including family recreation swim, adult lap swim, youth swim lessons for ages birth to 13 years, facility rentals for private pool parties, a youth competitive swim (PASA - Palo Alto Stanford Aquatics), and an adult competitive swim team (Rinconada Masters). Once the Palo Alto Unified School District begins their academic year typically in mid-August which we call “late summer,” the Aquatics program continues to offer the same activities excluding swim lessons. During this time, family recreation swim and facility rentals are only available on weekends since a majority of our staff are back in school and have limited work availability. The Aquatics off-season program runs from mid-September through mid-May, and includes limited activities offered daily such as adult lap swim, the youth competitive swim (PASA - Palo Alto Stanford Aquatics), and the adult competitive swim team (Rinconada Masters). In years past, the Aquatics program has attempted to offer youth swim lessons during the fall and spring seasons but due City of Palo Alto Page 2 to the difficulty hiring and retaining staff, youth lessons are only offered during the summer season. Discussion The Community Services Department (CSD) would like to explore contracting out additional aquatics services provided at Rinconada Pool, and potentially other satellite pools in the community that the City rents during the summer. Currently, the City has existing contracts to provide the Masters Swim Program and the Palo Alto Youth Swim Program PASA, while City staff provides the year round Lap Swim Program, Learn-to-Swim Program and Summer Recreation Swim. This past summer the City managed programs (Lap Swim, Learn-to-Swim and Summer Recreation Swim), struggled to hire and retain adequate pool staff to meet community demand. This has been a growing challenge for several years and this summer it reached its tipping point. In order to meet the demand for the 2015 summer swim lessons and the recreation swim program, CSD had to enter into an emergency contract with an outside vendor to mitigate the staffing shortages. Working on a very short timeline, CSD was able to write and approve a contract with Team Sheeper LLC, a professional third party aquatics service provider, who was able to mobilize quickly and provide qualified professional swim instructors and lifeguards to support the Palo Alto aquatics programs. As a result CSD narrowly met its commitments to the parents that enrolled their children in swim lessons in the spring. Currently CSD staff is managing the fall aquatics Lap Swim Program and we continue to face difficulties with pool staff shortages, which is also compromising the program and limiting community access to Rinconada Pool. There are several reasons the City aquatics program is experiencing difficulty hiring and retaining staff. The pay rates for lifeguards and swim instructors are not as competitive compared to other employment opportunities for high school and college students. The City offers mostly seasonal work opportunities and not year round part time employment. The majority of the pool staff are students and after summer they are no longer available to work. Those that live and go to school in the area often continue working at the pool but this only represents a small number of the aquatics staff. Provision of aquatics services for cities in the region is delivered in a number of ways. For example the City of Menlo Park contracted out their entire Aquatics program to Team Sheeper, Inc. and it now operates in a private public City of Palo Alto Page 3 partnership as Menlo Swim & Sport. While contracting out is gaining interest from cities most cities within the area operate their aquatics program in-house or through a hybrid model like the City of Palo Alto, whereby a portion of the program is contracted out, typically their swim teams or clubs, while swim lessons and recreation swim remain in-house. The City of Morgan Hill has a unique partnership with the YMCA to run their recreation programs. As partners, the City of Morgan Hill and YMCA partner to provide high quality health and fitness, youth, teen, family, and senior programs including aquatics for residents and the surrounding community to enjoy. Currently, the City of Palo Alto provides a hybrid program where the Aquatics program is predominantly run in- house with the exception of our Master’s and PASA program which is provided by contractors. To address the issue of ongoing challenges to hire and retain aquatics staff CSD is drafting a Request for Proposals (RFP) for aquatics services for summer 2016. If agreeable to the Finance Committee and City Manager’s Office, CSD will release the RFP in late October 2015, evaluate proposals in December/January and bring a recommendation to Council in early Spring 2016 for possible contracting out of additional aquatics services. Contractor(s) responding to the RFP would be able to submit proposals to manage the Learn-to-Swim program, the Palo Alto Youth Swim Program, Masters Swim Program, Lap Swim and Recreation Swim. Proposals would be accepted for one, some, or all of these services depending on the applicant’s area of expertise, capacity and interest. An internal meeting between Administrative Services (ASD), People Strategies and Operations (PSO) Departments and the City Manager’s Office was held on September 22 to discuss the CSD proposal to issue an RFP for aquatics services. Staff are in agreement with the approach outlined above, that would allow CSD to explore alternative options for the delivery of aquatics programs service through an RFP process. Recognizing that an RFP for aquatics services could impact an SEIU regular staff member, and several SEIU hourly staff, a Meet and Confer process is necessary. As such PSO intends to notify SEIU at their monthly regularly scheduled meeting on October 15 about the possibility of an RFP for aquatics services. Rinconada pool is a magnificent community asset. Exploring options for how we might better deliver aquatics programs and services to maximize community City of Palo Alto Page 4 benefit is a prudent course of action in CSD’s view. By issuing an RFP to explore options the City may be able to improve the overall aquatics program with additional services and increased access to Rinconada pool for the Palo Alto community. Timeline  October 15, 2015 – PSO meets with SEIU to notify them of the possible RFP  October 20, 2015 – Finance Committee presentation and discussion of the RFP  November, 2015 – Pending Finance Committee and CMO direction, RFP released  March, 2016 – Council action on the to be determined scope of aquatics services to be contracted out Resource Impact The City cost recovery for aquatics programs and services, as decribed in recent Cost of Services Study, is below: Total Direct Expenses Total Indirect Expenses Total Full Costs Total Fee Revenue Total General Fund Subsidy Direct Cost % Recovery Full Cost % Recovery $623,895 $259,043 $882,938 $507,150 $375,788 81% 57% The intent of the RFP is to provide an enhanced level of service at or below current cost. Should alternative proposals require additional funding, staff will evaluate fees for that service to ensure cost recovery goals are met while being competitive in the marketplace. Policy Implications This proposal is aligned with Comprehesive Plan goal G1: Effective and Efficient Delivery of Community Services.