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HomeMy WebLinkAbout2022-06-07 Finance Committee Agenda Packet 1 Materials related to an item on this agenda submitted to the Finance Committee after distribution of the agenda packet are available for public inspection in the city’s website at www.cityofpaloalto.org FINANCE COMMITTEE Tuesday, June 7, 2022 Special Meeting Community Meeting Room & Virtual 5:30 PM Supplemental Report Added Pursuant to AB 361 Palo Alto City Council and Committee meetings will be held as “hybrid” meetings with the option to attend by teleconference/video conference or in person. To maximize public safety while still maintaining transparency and public access, members of the public can choose to participate from home or attend in person. Information on how the public may observe and participate in the meeting is located at the end of the agenda. HOW TO PARTICIPATE VIRTUAL PARTICIPATION CLICK HERE TO JOIN (https://cityofpaloalto.zoom.us/j/99227307235) Meeting ID: 992 2730 7235 Phone:1(669)900-6833 The meeting will be broadcast on Cable TV Channel 26, live on YouTube at https://www.youtube.com/c/cityofpaloalto, and streamed to Midpen Media Center at https://midpenmedia.org. PUBLIC COMMENTS Public Comments will be accepted both in person and via Zoom meeting. All requests to speak will be taken until 5 minutes after the staff’s presentation. Written public comments can be submitted in advance to city.council@cityofpaloalto.org and will be provided to the Committee and available for inspection on the City’s website. Please clearly indicate which agenda item you are referencing in your email subject line. CALL TO ORDER ORAL COMMUNICATIONS Members of the public may speak to any item NOT on the agenda. ACTION ITEMS 1. Fiscal Year 2022 Third Quarter Financial Status Report 2. Review and Approval of the Fiscal Year 2023 Investment Policy 3. Accept June 30, 2021 Actuarial Valuation of Palo Alto's Retiree Healthcare and Other Post Employment Benefits, Approve Annual 2 Finance Committee Regular Meeting June 7, 2022 Actuarially Determined Contributions for Fiscal Years 2023 and 2024, and Affirm Additional Payments to Employers' Benefit Trust Fund Supplemental Report Added FUTURE MEETINGS AND AGENDAS ADJOURNMENT PUBLIC COMMENT INSTRUCTIONS Members of the Public may provide public comments to hybrid meetings via email, in person, teleconference, or by phone. 1. Written public comments may be submitted by email to city.council@cityofpaloalto.org. 2. In person public comments please complete a speaker request card located on the table at the entrance to the Council Chambers, and deliver it to the City Clerk prior to discussion of the item. 3. Spoken public comments using a computer or smart phone will be accepted through the teleconference meeting. To address the Council, click on the link below to access a Zoom-based meeting. Please read the following instructions carefully. • You may download the Zoom client or connect to the meeting in- browser. If using your browser, make sure you are using a current, up-to-date browser: Chrome 30+, Firefox 27+, Microsoft Edge 12+, Safari 7+. Certain functionality may be disabled in older browsers including Internet Explorer. Or download the Zoom application onto your phone from the Apple App Store or Google Play Store and enter the Meeting ID below • You may be asked to enter an email address and name. We request that you identify yourself by name as this will be visible online and will be used to notify you that it is your turn to speak. • When you wish to speak on an Agenda Item, click on “raise hand.” The Clerk will activate and unmute speakers in turn. Speakers will be notified shortly before they are called to speak. • When called, please limit your remarks to the time limit allotted. • A timer will be shown on the computer to help keep track of your comments. 4. Spoken public comments using a phone use the telephone number listed below. When you wish to speak on an agenda item hit *9 on your phone so we know that you wish to speak. You will be asked to provide your first and last name before addressing the Council. You will be advised how long you have to speak. When called please limit your remarks to the agenda item and time limit allotted. Click to Join Zoom Meeting ID: 992-2730-7235 Phone: 1(669)900-6833 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) 48 hours or more in advance. City of Palo Alto (ID # 14106) Finance Committee Staff Report Meeting Date: 6/7/2022 Report Type: Action Items City of Palo Alto Page 1 Title: Fiscal Year 2022 Third Quarter Financial Status Report From: City Manager Lead Department: Administrative Services RECOMMENDATION Staff recommends that the Finance Committee review and accept the Third Quarter financial report, and forward it to the City Council. EXECUTIVE SUMMARY The purpose of this report is to provide the Finance Committee with information on the financial status of the City’s General Fund and Enterprise Funds as of the end of the 3rd Quarter of Fiscal Year (FY) 2022 (July 1, 2021 through March 31, 2022). Attachment A contains a line by line report of major General Fund revenues and expenditures for 3rd Quarter Year-to-Date (YTD), as well as a comparison to the FY 2022 Adopted Budget and Adjusted Budget as of March 31, 2022. Through the nine months completion of the current fiscal year, the City’s general and enterprise funds are performing within FY 2022 budgetary levels. As a result of actions taken in the FY 2022 Midyear Budget Report (CMR 13801), the Budget Stabilization Reserve (BSR) is currently at $40.7 million, which is above the City Council recommended 18.5 percent level of $38.7 million by $2.0 million. As reported in the FY 2023 Proposed Operating Budget, it is estimated that there will be a surplus of approximately $14 million in the General Fund in FY 2022; however, these funds have been programed for use of one-time needs in FY 2023 as well as establishing a reserve for funding a number of service reinvestments for a second year in FY 2024. For more information, see the Budget Balancing Strategy of the Transmittal Letter in the FY 2023 Proposed Operating Book. Staff will return as part of the review of the FY 2022 Annual Comprehensive Financial Report with year-end budget adjustments to recognize these funds and align the budget with the actuals. DISCUSSION General Fund Revenue Highlights for FY 2022 3rd Quarter Year to Date (YTD) The following is a table which highlights the City’s major revenue sources for the 3rd Quarter YTD, compared to the same period of the prior year. Revenue for each period is expressed as a percentage of Adjusted/Final Budget. 1 Packet Pg. 3 City of Palo Alto Page 2 Table 1: FY 2022 Third Quarter General Fund Revenue (000's) 3rd Quarter Actuals Adjusted Budget % change FY 2022 %FY 2021 % Property Tax 4.4%$53,228 64.1%$53,173 61.5% Sales Tax 12.5%28,184 65.4%25,030 65.4% Charges for Services 15.2%24,932 83.2%24,414 73.8% Transient Occupancy Tax 215.8%8,428 93.7%4,830 51.8% Utility User Tax 3.5%14,370 77.8%14,080 76.7% Permits and Licenses 9.9%8,273 58.3%8,366 52.4% Documentary Transfer Tax 31.6%7,137 123.3%6,875 97.3% All Other Revenue Sources 35.0%42,424 70.9%34,062 65.4% Total Revenue 19.6%$186,976 72.8%$170,830 66.6% FY 2022 FY 2021 $34,136 $32,709 18,432 16,378 20,755 18,009 7,895 2,500 11,174 10,797 4,820 4,384 $136,097 $113,755 8,802 6,689 30,083 22,289 Property Tax. At the close of third quarter, property tax revenue receipt was $34.1 million, 64.1 percent of the adjusted budget, and an increase of 4.4 percent over the same period in the prior year. Property tax is received from the County of Santa Clara during the second, third, and fourth quarters of the calendar year. Unlike revenue streams that were highly dependent on consumer spending or travel, such as sales tax and transient occupancy tax, property tax revenues remained relatively flat during the COVID-19 pandemic. The compound annual growth rate (CAGR) over the 10 years has been approximately 8.2 percent. The FY 2022 secured and unsecured property tax assessed values (AV) growth rates are 4.0 percent and 1.7 percent, respectively, an average of 3.9 percent. The lower than historical growth reflects impacts typical during recessions and/or economic downturns lagging one year after more than more economically sensitive revenues such as sales and transient occupancy tax. In the FY 2023 Proposed Budget presentation on May 2, 2022, the estimate for FY 2022 was revised upward to $56.8 million, $3.6 million or 6.8 percent higher than the adjusted budget. Included in this forecast is $6 million in expected Excess Educational Revenue Augmentation Fund (ERAF) 1 minus $1.5 million set aside for the at-risk amount due to the lawsuit by the California School Boards of Association and its Education Legal Alliance against the Controller of the State of California for over the calculation methodology of the Excess ERAF. The County of Santa Clara’s Finance Agency and Office of the Assessor, the entities responsible for managing the property tax billing, collection, and processing changes (e.g. sales, assessment appeal, etc.) forecasts indicate the upward revised FY 2022 forecast of $56.8 million will be met or exceeded. FY 2021 actual property tax revenue was $56.6 million which included $5.6 million for ERAF distributions from the County of Santa Clara. Though Excess ERAF receipt has steadily grown the last nine years, excess ERAF is not considered a permanent local revenue source. Lastly, The Governor’s Budget Trailer May Revise has a provision that could potentially cap excess ERAF 1 Packet Pg. 4 City of Palo Alto Page 3 payments at current levels, staff will continue to evaluate this, the impacts, and work with the Council on any opposition to this. Sales Tax. As of the third quarter, sales tax revenue has seen an increase of $2.1 million or 12.5 percent, from the same period last year. Due to timing of the California Department Tax and Fee Administration (CDTFA) sales tax distribution, third quarter sales tax represents seven months of sales tax activity and does not represent sales tax activity for the full three quarters of the fiscal year. Actual performance for this fiscal year will not be known until August/September. The FY 2023 Proposed Operating Budget presentation revised the FY 2022 forecast estimate to $31.5 million, $3.3 million or 11.7 percent higher than the adjusted budget based on performance to date, recent consumer trends, and the projected outlook by City’s sale’s tax consultant. Transient Occupancy Tax (TOT). TOT revenues reached $7.9 million through the end of the third quarter, an increase of 215.8 percent over the prior year. As of the writing of this report and due to the one-month timing delay in receipts, the third quarter results represent 7.5 months of TOT receipts. Though receipts remain below pre-pandemic levels, recovery has been strong over the FY 2021 receipt of $5.2 million. The FY 2023 Proposed Operating Budget presentation revised the FY 2022 forecast estimate to $13.2 million, $4.8 million or 57.1 percent higher than the adjusted budget based on performance to date. If the current trends continue, receipts are likely to exceed this forecast as well. The two Marriott hotels are fully open with total of 293 rooms, The Westin Hotel and Clement Hotel and two smaller hotels opened in the first and second fiscal year quarters, and performance of the two on-line hoteliers has strengthened. As of February 2022, hotel average daily room and occupancy rates were $181 per day and 57.2 percent, respectively. This represents an increase of 62.7 percent and 57.8 percent over the prior year, respectively. In comparison, the same period of the prior year it was $112 and 36.2 percent. The occupancy percentage ranges from 20 percent to over 90 percent with overall rising room rates; however, a minority of hotels lowered their room rates over the prior year’s average. Documentary Transfer Tax. Cash receipts total $8.8 million, or 123.3 percent of the FY 2022 Adjusted Budget are $2.1 million higher than prior year receipts for the same period. This revenue source is volatile since it is highly dependent on sales volume and the mix of commercial and residential sales. Actual receipts to date have exceeded expectation based on historical averages. Based on an additional month of receipts, actual receipts will exceed this revised forecast as well, by how much is not certain due to the volatility of this revenue source. Driving this performance is an increase in the number of sale transactions by 14.2 percent, a handful of large commercial sales, and many sales between $5 million to $16 million. The FY 2023 Proposed Operating Budget presentation revised the FY 2022 forecast estimate to $9.6 million, $2.5 million or 35.2 percent higher than the adjusted budget. 1 Packet Pg. 5 City of Palo Alto Page 4 Charges for Services. Through the first three quarters of FY 2022 is up by $2.7 million, or 15.2 percent of the same period last year mainly due to the following: • Paramedic service fees increased $0.75 million over the same period from last year due to higher rate and more trips in current year. • Golf course revenues increased $0.67 million • Program and classes increased $0.92 million All Other Revenue Sources. The third quarter revenue has continued to be higher than the same period of last year due the American Rescue Plan Act distribution of $6.85 million received in May 2021 and recognized as revenue in FY 2022. As of the writing of this report, the second half of the ARPA distribution has not yet been received by the City. In addition, the following other revenue sources showed growth compared to the same period in the prior year for items such as Motor vehicle tax, fines and penalties by $0.1 million, Rental Income by $0.8 million8, and Charges to Other funds with an increase of $1.6M mainly for the cost of providing services to work groups in other City funds. General Fund Expense Highlights Table 2 highlights General Fund expenses by department for FY 2022 third quarter, compared to the same period of prior year. Each quarter’s expenses are expressed as a percentage of the Adjusted Budget for each year. Table 2: FY 2022 Third Quarter General Fund Expenses (000's) FY 2022 FY 2021 % chg FY 2022 %FY 2021 % Police $31,975 $30,241 5.7%$44,346 72.1%$40,547 74.6% Fire 28,147 26,178 7.5%37,731 74.6%34,735 75.4% Community Services 19,370 18,929 2.3%32,958 58.8%28,786 65.8% Public Works 12,010 12,656 -5.1%20,000 60.1%19,984 63.3% Planning & Development Services 12,438 11,339 9.7%21,554 57.7%19,612 57.8% Library 6,218 6,250 -0.5%9,145 68.0%8,655 72.2% Administrative Services 6,561 5,578 17.6%9,614 68.2%8,338 66.9% All Other Departments 13,816 14,196 -2.7%39,100 35.3%26,320 53.9% Total Expenses $130,535 $125,367 4.1%$214,448 60.9%$186,977 67.0% 3rd Quarter Actuals Adjusted Budget Actual expenses through the first three quarters of the fiscal year total $130.5 million, a 4.1 percent increase over prior year expenses, but overall expenses are tracking at 60.9 percent of 1 Packet Pg. 6 City of Palo Alto Page 5 adjusted budget which is lower than FY 2021 at 67.0 percent through the third quarter. Actual expenditures plus encumbrances are right in line with the adjusted budget at 69.0 percent. As a service driven organization, the largest expenses are salaries and benefits. Total General Fund salary and benefits expenditures through March 2022 are approximately $97.8 million, or 73.1 percent of the $133.8 million adjusted budget, compared to $93.9 million in the same period in the prior year. While the third quarter salary and benefit trend is consistent with prior year and is on target for quarterly trends, it should be noted that overtime expense, paid leave, and workers compensation expense are trending higher than previous year due to vacancies across all departments, employees separating from the City for various reasons (i.e. retirement or other agencies), and increases in workers compensation cases. Police and Fire The expense budget for the Police and Fire Departments comprise approximately 46 percent of total General Fund expenditures for the third quarter, which is consistent with prior year trends. The following table highlights Police and Fire salaries and overtime for the third quarter. Net overtime cost analysis for the Police and Fire Departments can be found in Attachment B. Table 3: Public Safety Salaries and Overtime Expenses (000's) FY 2022 FY 2021 % chg FY 2022 %FY 2021 % Police - Salaries $12,358 $12,862 -3.9%$18,341 67.4%$17,713 72.6% Police - Overtime 1,581 1,028 53.8%1,244 127.1%944 108.9% Total Police 13,939 13,890 0.4%19,585 71.2%18,657 74.4% Fire - Salaries 9,754 10,294 -5.2%14,102 69.2%13,529 76.1% Fire - Overtime 3,585 2,118 69.3%2,704 132.6%2,971 71.3% Total Fire 13,339 12,412 7.5%16,806 79.4%16,500 75.2% Total Public Safety Salaries & Overtime $27,278 $26,302 3.7%$36,391 75.0%$35,157 74.8% 3rd Quarter YTD Actuals Adjusted Budget Police overtime is 53.8 percent higher than FY 2021 and represents 127.1 percent of the adjusted budget due to backfilling vacancies and adding staffing resources to the 24/7 dispatch center. As of this writing, the Department has 9 vacancies: six police officers (not including five additional "hire-ahead" police officers authorized in February), one dispatcher, two records specialists, and approximately 11 staff members on various categories of leave/light-duty. Although overtime is tracking higher, overall the Department is trending within budget for all salary categories and anticipates doing so through the remainder of FY 2022. The Department’s 1 Packet Pg. 7 City of Palo Alto Page 6 net overtime cost is $0.5 million after deducting the reimbursements and salary savings due to vacancies, analysis is included in Attachment B. Fire overtime is 69.3 percent higher than FY 2021 and 132.6 percent of the adjusted budget. In order to maintain operational standards (e.g., minimum staffing levels, response times, etc.), the Fire Department is required to backfill vacant positions using overtime with current staff, so vacancies are the primary driver of increased overtime costs. In any given year, there are typically three to five cases of attrition in the Department; however, the Department had up to twelve vacant positions in FY 2022. Additionally, backfill is also required when employees utilize leave (e.g., workers’ compensation, family medical leave, Strike Team, sick leave, etc.), and usage of leave balances has increased since the onset of the pandemic. While overtime actuals can vary year-to-year, the budget generally remains constant, but can be modified as staffing levels change. During the FY 2022 mid-year budget review, funding in the amount of $682,500 was allocated for the backfill of five new fire fighter positions associated with the SAFER grant as well as $90,000 for backfill related to the paramedic certification pilot program. It should be noted that there is a correlation between the amount of overtime and salary/benefit expenditures. Since they are both used together to fund employee costs, increases to one typically results in decreases to the other to offset costs for overall salaries and benefits. For example, the 12 vacant positions generated salary and benefit savings during the vacancy periods, but have been backfilled by other staff using overtime in equivalent positions or staff in an acting role who receive wage differentials. The Department is actively searching for ways to stay within budget as FY 2022 overtime costs have increased compared to prior years due to higher levels of vacancies and leave. Of the 12 vacancies this year, eight have been filled and the employees are currently in the fire academy. Those positions have been backfilled using overtime, but overall salary/benefits costs are otherwise tracking within budget. The Department anticipates that overtime costs and salary will begin to stabilize once vacancies are filled and staff complete academy training. The Department’s net overtime cost is $3.2 million after deducting the reimbursements and salary savings due to vacancies, analysis is included in Attachment B. Enterprise Funds The following is a summary of change in net position for each of the Enterprise Funds for the nine months ended March 31, 2022, including a comparison of results from the same period last year. 1 Packet Pg. 8 City of Palo Alto Page 7 Table 4: Enterprise Funds Change in Net Position Increase FY 2022 FY 2021 (Decrease)% Change Water 4,834 8,457 (3,623)$ -42.84% Electric (7,155)7,125 (14,280)-200.42% Fiber Optic 1,035 1,030 5 0.49% Gas 1,703 4,235 (2,532)-59.79% Wastewater collection 86 753 (667)-88.58% Wastewater treatment 2,260 2,970 (710)-23.91% Refuse 4,866 4,425 441 9.97% Storm Drainage 2,411 2,611 (200)-7.66% Airport 2,759 504 2,255 447.42% Total Change in Net Position 12,799$ 32,110$ (19,311)$ -60% 3rd Quarter YTD Actuals Water Fund decreased $3.6 million, or 42.84 percent, from prior year due to overall decrease in revenues mainly from residential sales as a result of voluntary use reduction caused by drought conditions. Electric Fund decreased $14.3 million, or 200.42 percent, from prior year due to overall decrease in revenues and increase in expenses. The Sale to Customers decreased $3.0 million due to lower consumption and expenses increased through the 3rdquarter due to increase in electric supply purchases costs as a result of low hydroelectric supply. Gas Fund decreased $2.5 million, or 59.79 percent, from prior year due to higher gas market prices offset by overall increase of largely from commercial and retail. Wastewater Collection Fund decreased $0.67 million, or 88.58 percent, from prior year due to overall decrease in revenues primarily from commercial retail and increase in operating expenses such as administrative and general expenses, and depreciation expenses. Wastewater Treatment Fund decreased $0.71 million, or 23.91 percent from prior year due to the increase in operating expenses which may reimburse by other partners based on year-end true-up calculations. Refuse Fund increased $0.44 million, or 9.97 percent, from prior year due to decrease in operating expenses resulting from full payment of Sunnyvale Materials Recovery and Transfer Station (SMaRT Station) debt service share and landfill post-closure rent. Storm Drain Fund increased $0.46 million, or 21.33 percent from prior year due to 2.5 percent rate increase and partially offset by the decrease in operating costs. Airport Fund increased $2.26 million or 447.2 percent from prior year due to federal grants received from Federal Aviation Administration. 1 Packet Pg. 9 City of Palo Alto Page 8 RESOURCE IMPACT There are no financial impacts recommended in this report. Staff will return to Council as part of the review of the FY 2022 Annual Comprehensive Financial Report with year-end budget adjustments to recommend any adjustments needed to align budgets with actuals. STAKEHOLDER ENGAGEMENT This report has been coordinated between the Treasury Division, Accounting Division, and the Office of Management and Budget in the Administrative Services Department, as well as with City departments ENVIRONMENTAL REVIEW This is not a project under Section 21065 for purposes of the California Environmental Quality Act (CEQA). . Attachments: • Attachment A: FY 2022 Third Quarter Financial Report • Attachment B: FY 2022 Q3 Public Safety Overtime Analysis 1 Packet Pg. 10 5/26/20229:03 AM   ATTACHMENT A CITY OF PALO ALTO GENERAL FUND THIRD QUARTER FINANCIAL REPORT FISCAL YEAR ENDING JUNE 30, 2022 (in thousands)   BUDGET ACTUALS (as of 3/31/2022) Adopted Adjusted Pre % of Adj Categories Budget Budget Encumbr Encumbr Actual Budget* Revenues & Other Sources Sales Tax 28,184 28,184 ‐              ‐                  18,432 65% Property Tax 51,228 53,228 ‐              ‐                  34,136 64% Transient Occupancy Tax 8,428 8,428 ‐              ‐                  7,895 94% Documentary Transfer Tax 7,137 7,137 ‐              ‐                  8,802 123% Utility Users Tax 14,370 14,370 ‐              ‐                  11,174 78% Motor Vehicle Tax, Penalties & Fines 1,434 1,434 ‐              ‐                  727 51% Charges for Services 24,515 24,932 ‐              ‐                  20,755 83% Permits & Licenses 7,761 8,273 ‐              ‐                  4,820 58% Return on Investment 852 852 ‐              ‐                  878 103% Rental Income 14,403 14,403 ‐              ‐                  10,300 72% From Other Agencies 10,277 11,044 ‐              ‐                  7,045 64% Charges To Other Funds 14,165 14,165 ‐              ‐                  10,640 75% Other Revenues 504 526 ‐              ‐                  491 93% Total Revenues 183,259 186,976 ‐              ‐                  136,097          73% Operating Transfers‐In 23,121 22,802 ‐              ‐                  17,101 75% Encumbrances and Reappropriation 150 11,101 ‐              ‐                   ‐                    ‐                Contribution from Development Services Reserves 800 1,040 ‐              ‐                   ‐                    ‐                Total Sources of Funds 207,329 221,918 ‐              ‐                  153,198          73% Expenditures & Other Uses City Attorney 3,945 4,363 ‐             513                 2,779               75% City Auditor 972 1,001 200            587                 211                  100% City Clerk 1,327 1,383 42              62                   757                  62% City Council 433 470 ‐             25                   209                  50% City Manager 3,319 3,770 119            75                   2,237              64% Administrative Services 8,923 9,614 54              346                 6,561               72% Community Services 31,052 32,958 268            4,884              19,370             74% Fire 35,677 37,731 175            492                 28,147             76% Human  Resources 3,878 4,029 50              19                   2,556              65% Library 8,903 9,145 130            212                 6,218               72% Office of Emergency Services 1,237 1,409 ‐             254                 795                  74% Office of Transporation 1,747 1,892 47              55                   1,198               69% Planning and Development Services 17,673 21,554 393            3,564              12,438             76% Police 43,116 44,346 88              447                 31,975             73% Public Works 18,755 20,000 343            2,708              12,010             75% Non‐Departmental 13,478 20,782 24              205                 3,076               16% Total Expenditures 194,435 214,448 1,934         14,448           130,535          69% Operating Transfers‐Out 4,296 5,498 ‐              ‐                  4,124               75% Transfer to Infrastructure 10,406 10,406 ‐              ‐                  7,804               75% Total Use of Funds 209,137 230,352 1,934        14,448           142,463          69% Net Change to BSR (1,808) (8,434) 10,735              Budget Amendments in the General Fund Authorized by Council thru 3/31/2022: (4,000)                        FY 2022 Mid‐Year Amendments in Various Funds: CMR #13801 (2/7/22) (2,626)                        Total Budget Amendments Authorized by Council (6,626)                        BSR Balance 35,962              40,655                         BSR % of Adopted Total Use of Funds 17.2% 19.4% * Adopted BSR reflects FY 2021 Year‐End Estimate at the time of the FY 2022 Budget Adoption. Adjusted BSR reflects FY 2021 Year‐End Actuals based on the ACFR.  Prelim Q1 Report Utilities Transfer Litigation Reserve:  CMR #13439 (10/25/21)  1.a Packet Pg. 11 At t a c h m e n t : A t t a c h m e n t A : F Y 2 0 2 2 T h i r d Q u a r t e r F i n a n c i a l R e p o r t ( 1 4 1 0 6 : F i s c a l Y e a r 2 0 2 2 T h i r d Q u a r t e r F i n a n c i a l S t a t u s R e p o r t ) Attachment B Q3 2020 2021 2022 POLICE DEPARTMENT Overtime Expense Adopted Budget (A)$1,842,231 $944,186 $944,186 Modified Budget (B)1,842,231 944,186 1,244,186 Net Overtime Cost - see below 441,197 366,045 492,181 Variance to Budget 1,401,034 578,141 752,005 Overtime Net Cost Actual Expense $2,566,590 $1,431,959 $1,580,917 Less Reimbursements California OES/FEMA (Strike Teams) - - - Stanford Communications 110,177 64,906 79,470 Utilities Communications Reimbursement 54,086 33,191 41,175 Local Agencies (C)9,329 2,412 3,842 Police Service Fees 205,126 467,167 118,767 Total Reimbursements 378,717 567,676 243,253 Less Department Vacancies (A)1,746,677 498,238 845,483 Net Overtime Cost $441,197 $366,045 $492,181 Department Vacancies (number of days)6,192 1,494 2,477 Workers' Compensation Cases 30 14 4 Department Disabilities (number of days)700 1,007 709 FIRE DEPARTMENT Overtime Expense Adopted Budget (D)$1,672,872 $1,931,121 $1,931,121 Modified Budget (E)2,086,872 2,971,460 2,703,621 Net Overtime Cost - see below 1,831,059 1,792,228 3,247,965 Variance to Budget 255,813 1,026,424 (544,344) Overtime Net Cost Actual Expense $2,018,548 $2,840,968 $3,584,536 Less Reimbursements California OES/FEMA (Strike Teams) 114,000 887,531 - Total Reimbursements 114,000 887,531 - Less Department Vacancies (D)73,489 161,208 336,571 Net Overtime Cost $1,831,059 $1,792,228 $3,247,965 Department Vacancies (number of days)173 1,942 891 Workers' Compensation Cases 33 14 27 Department Disabilities (number of days)227 387 1,048 NOTES: (A)The FY 2021/22 Police Department budget was reduced by 11.0 Police Officers and $900,000 in overtime. (B)The FY 2022 Modified Budget includes $300,000 for backfill overtime related to support for the unhoused. (C)Includes Animal Control Services contract with Los Altos and Los Altos Hills. (D)The FY 2021/22 Fire Department budget was reduced by the equivalent of 8.0 sworn positions. The overtime budget was increased over the prior year by approximately $250,000 to extend the cross-staffing of Medic-61. (E)The FY 2022 Modified Budget includes $90,000 for backfill overtime related to the paramedic certification pilot program and $682,500 for backfill overtime related to SAFER grant positions. Public Safety Departments Overtime Analysis for Fiscal Years 2020 through 2022 1.b Packet Pg. 12 At t a c h m e n t : A t t a c h m e n t B : F Y 2 0 2 2 Q 3 P u b l i c S a f e t y O v e r t i m e A n a l y s i s ( 1 4 1 0 6 : F i s c a l Y e a r 2 0 2 2 T h i r d Q u a r t e r F i n a n c i a l S t a t u s R e p o r t ) City of Palo Alto (ID # 14378) Finance Committee Staff Report Meeting Date: 6/7/2022 Report Type: Action Items City of Palo Alto Page 1 Title: Review and Approval of the Fiscal Year 2023 Investment Policy From: City Manager Lead Department: Administrative Services Recommendation Staff recommends that Finance Committee recommend that the City Council approve the City’s Investment Policy (Policy) (Attachment A) without any changes. Discussion The Investment Policy (Policy) requires that the Policy be reviewed, and any changes proposed by Staff be approved by the City Council during the annual budget process. This year the Policy is being brought to the Finance Committee first. For Fiscal Year 2023, staff is proposing no changes to the Policy. Resource Impact There are no budget impacts associated with the approval of the Investment Policy and the City’s investment portfolio continues to be managed in-house with existing staff resources. Policy Implications This recommendation does not represent any change to City policies. Environmental Review The actions requested in this report do not constitute a project for the purposes of the California Environmental Quality Act (CEQA). Attachments: • Attachment A: Proposed City of Palo Alto Investment Policy, Fiscal Year 2023 2 Packet Pg. 13 Fiscal Year 2023 1 Attachment A PROPOSED CITY OF PALO ALTO Investment Policy Fiscal Year 2022-23 With No Changes INTRODUCTION The City of Palo Alto invests its pooled idle cash according to State of California law and the charter of the City of Palo Alto. In particular, the City follows “The Prudent Investor Standard” cited in the State Government Code (Section 53600.3). Under this standard, all governing bodies of local agencies or persons authorized to make investment decisions on behalf of the City are trustees and therefore fiduciaries subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. INVESTMENT PHILOSOPHY The basic principles underlying Palo Alto's investment philosophy is to ensure the safety of public funds, provide that sufficient money is always available to meet current expenditures, and achieve a reasonable rate of return on its investments. The City's preferred and chief practice is to buy securities and to hold them to their date of maturity rather than to trade or sell securities prior to maturity. The City may, however, elect to sell a security prior to its maturity should there be a significant financial need. If securities are purchased and held to their maturity date, then any changes in the market value of those securities during their life will have no effect on their principal value. Under a buy and hold philosophy, the City is able to protect its invested principal. The economy, the money markets, and various financial institutions (such as the Federal Reserve System) are monitored carefully to make prudent investments and to assess the condition of the City’s portfolio. INVESTMENT OBJECTIVES The primary objectives, in priority order, of investment activities shall be safety, liquidity, and yield: 2.a Packet Pg. 14 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 2 1. Safety: Safety of principal is the foremost objective of the investment program. Investments shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. The objective will be to mitigate credit risk and interest rate risk. a) Credit risk is the risk that an obligation will not be paid and a loss will result. The City will seek to minimize this risk by:  Limiting investment to the safest types of securities or minimum credit quality rating as listed in the “Authorized Investment” section  Diversifying its investments among the types of securities that are authorized under this investment policy b) Interest rate risk is the risk that changes in interest rates will adversely affect the value of an investor’s portfolio. For example, an investor with large holdings in long-term bonds has assumed significant interest rate risk because the value of the bonds will fall if interest rates rise. The City can minimize this risk by:  Buying and holding its securities until maturity  Structuring the investment portfolio so that securities mature to meet cash flow requirements To further achieve the objective of safety, the amount that can be invested in all investment categories, excluding obligations of the U.S. Government and its agencies, is limited either as a percentage of the portfolio or by a specific dollar amount. These limits are defined under the “Authorized Investments” section. 2. Liquidity: Liquidity is the second most important objective of the investment program. The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by maintaining a portion of the portfolio in liquid money market mutual funds or local government investment pools. In addition, the City will maintain one month’s net cash needs in short term and/or liquid investments and at least $50 million shall be maintained in securities maturing in less than two years. Although the City’s practice is to buy and hold securities to maturity, since all possible cash demands cannot be anticipated, the portfolio will consist of securities with active secondary or resale markets should the need to sell a security prior to maturity arises. 3. Yield: Yield on the City’s portfolio is last in priority among investment objectives. The investment portfolio shall be designed to obtain a market rate of return that reflects the authorized investments, risk constraints, and liquidity needs outlined in the City’s investment policy. Compared to similar sized cities, the City of Palo Alto should be able to take advantage of its relatively large reserve balances to achieve higher yields through long-term investments. In addition, the City will strive to maintain the level of investment of idle funds as close to 100 percent as possible. 2.a Packet Pg. 15 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 3 ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) RESPONSIBILITIES In addition to and subordinate to the Safety, Liquidity, and Yield investment objectives, investments that support sound environmental, social and governance (ESG) objectives are also considered. While the City’s portfolio is not classified as an ESG portfolio, investments in entities that support community well-being through practices that emphasize safe and environmentally sound objectives; fair labor practices; and equality of rights regardless of sex, race, age, disability, or sexual orientation, is encouraged. Direct investments in entities that manufacture tobacco products, firearms, and engage in direct production or drilling of fossil fuels is discouraged. This section applies to new investments (after November 5, 2018) only and does not require divestment of existing investments. Investments in Certificates of Deposit (CDs) and Negotiable Certificates of Deposit are exempt from the ESG investing objective. SCOPE A. This investment policy shall apply to all financial assets of the City of Palo Alto as accounted for in the Annual Comprehensive Financial Report (ACFR), including but not limited to the following funds: 1. General Fund 2. Special Revenue Funds 3. Debt Service Funds 4. Capital Project Fund 5. Enterprise Funds 6. Internal Service Funds 7. Trust and Agency Funds B. The policy does not cover funds held by the California Public Employees Retirement System (CalPERS), the California Employers’ Retiree Benefit Trust (CERBT), Deferred Compensation programs (e.g. ICMA, Hartford), the Authority for California Cities Excess Liability (ACCEL), and the Public Agency Retirement Services (PARS) Section 115 Irrevocable Trust. C. Investments of bond proceeds shall be governed by the provisions of the related bond indentures. GENERAL INVESTMENT GUIDELINES 1. The maximum stated final maturity of individual securities in the portfolio should be ten years. 2. A maximum of 30 percent of the par value of the portfolio shall be invested in securities with maturities beyond five years. 3. The City shall maintain a minimum of one month’s net cash needs in short term and/or 2.a Packet Pg. 16 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 4 liquid investments. 4. At least $50 million shall be maintained in securities maturing in less than two (2) years. 5. Should the ratio of the market value of the portfolio to the book value of the portfolio fall below 95 percent, the Administrative Services Department will report this fact to the City Council within a reasonable time frame and evaluate whether there is any risk of holding any of the securities to maturity. 6. Commitments to purchase securities newly introduced on the market shall be made no more than three (3) working days before pricing. 7. Whenever possible, the City will obtain three or more quotations on the purchase or sale of comparable securities and take the higher yield on purchase or higher price on sale. This rule will not apply to new issues, which are purchased at market no more than three (3) working days before pricing, as well as to LAIF, City of Palo Alto bonds, money market accounts and mutual funds, all of which shall be evaluated separately. 8. Where the Investment Policy specifies a percentage limitation for a particular category of investment, that percentage is applicable only at the date of purchase. A later increase or decrease in a percentage resulting from a change in the portfolio’s assets or values shall not constitute a violation of that restriction. As soon as possible, percentage limitations will be restored as investments mature in each category. AUTHORIZED INVESTMENTS The California Government Code (Sections 53600 et seq.) governs investment of City funds. The following investments are authorized: 1. U.S. Government Securities (e.g. Treasury notes, bonds and bills) Securities that are backed by the full faith and credit of the United States a) There is no limit on purchase of these securities. b) Securities will not exceed 10 years maturity. c) All purchased securities must have an explicit or a de facto backing of the full faith and credit of the U.S. Government. 2. U.S. Government Agency Securities – Obligations issued by the Federal Government agencies (e.g. Federal National Mortgage Association, etc.). a. There is no limit on purchase of these securities except for: 2.a Packet Pg. 17 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 5  Callable and Multi-step-up securities provided that: - The potential call dates are known at the time of purchase - The interest rates at which they “step-up” are known at the time of purchase - The entire face value of the security is redeemed at the call date - No more than 25 percent of the par value of the portfolio b. Securities will not exceed 10 years maturity. 3. California State, California Local Government Agencies, and other United States State Bonds a) Having at time of investment a minimum Double A (AA/Aa2) rating as provided by a nationally recognized rating service (e.g. Moody’s, Fitch, and/or Standard and Poor’s). b) May not exceed 40 percent of the par value of the portfolio. c) Investments include: i) Registered state warrants or treasury notes or bonds of the State of California and bonds, notes, warrants, or other evidences of indebtedness of any local agency within California, including bonds payable solely out of the revenues from a revenue producing property owned, controlled, or operated by the state or local agency or by a department, board, agency, or authority of the state or local agency. ii) Registered treasury notes or bond of any of the 49 United States in addition to the State of California, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by a state or by a department, board, agency or authority of any of the other 49 United States, in addition to the State of California. 4. Certificates of Deposit (CD) - A debt instrument issued by a bank for a specified period of time at a specified rate of interest. Purchase of CD’s are limited to: a) May not exceed 20 percent of the par value of the portfolio. b) No more than 10 percent of the par value of the portfolio in collateralized CDs in any institution. c) Purchase collateralized deposits only from federally insured large banks that are rated by a nationally recognized rating service (e.g. Moody’s, Fitch, and/or Standard and Poor’s). 2.a Packet Pg. 18 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 6 d) For non-rated banks, deposit should be limited to amounts federally insured (FDIC). – See Appendix C e) Rollovers are not permitted without specific instruction from authorized City staff. 5. Banker's Acceptance Notes (BA) – Bills of exchange or time drafts drawn on and accepted by commercial banks. Purchase of banker’s acceptances are limited to: a) No more than 30 percent of the par value of the portfolio. b) Not to exceed 180 days maturity. c) No more than $5 million with any one institution. 6. Commercial Paper - Short-term unsecured obligations issued by banks, corporations, and other borrowers. Purchases of commercial paper are limited to: a) Having highest letter or numerical rating as provided for by a nationally recognized rating service (e.g. Moody’s, Fitch, and/or Standard and Poor’s). b) No more than 15 percent of the par value of the portfolio. c) Not to exceed 270 days maturity. d) No more than $3 million or 10 percent of the outstanding commercial paper of any one institution, whichever is lesser. 7. Local Agency Investment Fund (LAIF) – A State of California managed investment pool may be used up to the maximum permitted by California State Law. 8. Short-Term Repurchase Agreements (REPO) – A contractual agreement between a seller and a buyer, usually of U.S. government securities, whereby the seller agrees to repurchase the securities at an agreed upon price and, usually, at a stated time. Purchases of REPO’s must: a) Not to exceed 1 year. b) Market value of securities that underlay a repurchase agreement shall be valued at 102 percent or greater of the funds borrowed against those securities. c) A Master Repurchase agreement must be signed with the bank or dealer. 2.a Packet Pg. 19 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 7 9. Money Market Deposit Accounts – Liquid bank accounts which seek to maintain a net asset value of $1.00. 10. Mutual Funds which seek to maintain a net asset value of $1.00 and which are limited essentially to the above investments and further defined in note 9 of Appendix A a) No more than 20 percent of the par value of the portfolio. b) No more than 10 percent of the par value with any one institution. 11. Negotiable Certificates of Deposit (NCD) issued by nationally or state-chartered banks and state or federal savings institutions and further defined in note 11 of Appendix A. Purchases of negotiable certificates of deposit: a) May not exceed 20 percent of the par value of the portfolio. b) No more than $5 million in any one institution. 12. Medium-Term Corporate Notes – Issued by corporation organized and operating within the United States or by depository institutions licensed by the United States or any state and operating with the United States. a) Not to exceed 5 years maturity. b) Securities eligible for investment shall have a minimum rating of AA or Aa2 from a nationally recognized rating service (e.g. Moody’s, Fitch, and/or Standard & Poor’s). c) No more than 10 percent of the par value of the portfolio. d) No more than $5 million of the par value may be invested in securities of any single issuer, other than the U.S. Government, its agencies and instrumentality. e) If securities owned by the City are downgraded by Moody’s, Fitch, or Standard & Poors to a level below AA or Aa2, it shall be the City’s policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio. 13. Supranational Organizations Securities – Supranational organizations refer to International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC) and Inter-American Development Bank (IADB). a. Securities will not exceed 5 years maturity. b. No more than 20 percent of the par value of the portfolio. c. No more than 10 percent of the par value with any one institution. 2.a Packet Pg. 20 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 8 d. Securities eligible for investment shall have a minimum rating of AA or Aa2 from a nationally recognized rating service (e.g. Moody’s, Fitch, and/or Standard & Poor’s). e. Limited to United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by IBRD, IFC, and IADB. Appendix A provides a more detailed description of each investment vehicle and its security and liquidity features. Most of the City's short-term investments will be in securities which pay principal upon maturity, while long-term investments may be in securities that periodically repay principal, as well as interest. Most of the City's investments will be at a fixed rate. However, some of the investments may be at a variable rate, so long as that rate changes on specified dates in pre- determined increments. PROHIBITED INVESTMENTS: Includes all investments not specified above, and in particular: 1. Reverse repurchase agreements 2. Derivatives, as defined in Appendix B Appendix B provides a more detailed description of each investment, which is prohibited, for City investment. AUTHORIZED INVESTMENT PERSONNEL Idle cash management and investment transactions are the responsibility of the Administrative Services Department. The Administrative Services Department is under the control of the Director of Administrative Services (Director), as treasurer, who is subject to the direction and supervision of the City Manager. The Assistant Directors of Administrative Services (Assistant Director), who reports to the Director, are authorized to make all investment transactions allowed by the Statement of Investment Policy. The Assistant Director may authorize the Manager of Treasury, Debt & Investments and/or Senior Management Analyst (Manager and/or Analyst) to enter into investments within clearly specified parameters. The Investment function is under the supervision of the Assistant Director. The Assistant Director is charged with the responsibility to manage the investment program (portfolio), which includes developing and monitoring the City's cash flow model and developing long-term revenue and financing strategies and forecasts. The Manager and/or Analyst are subject to the direction and supervision of the Assistant Director. The Manager and/or Analyst assist the Assistant Director, in the purchase and sale of securities. The Manager and/or Analyst also prepare the quarterly report, and record daily all investment transactions as to the type of investment, amount, yield, and maturity. Cash flow projections are 2.a Packet Pg. 21 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 9 prepared as needed. In all circumstances, approval from the Director of Administrative Services is required before selling securities from the City's portfolio. The Manager and/or Analyst may also transfer no more than a total of $10 million a day from the City's general account to any one financial institution, without the prior approval of the Assistant Director. No other person has authority to make investment transactions without the written authority of the Director or Assistant Director of Administrative Services. USE OF BROKERS AND DEALERS The Administrative Services Department maintains a list of acceptable dealers. A dealer acts as a principal in security transactions, selling securities from and buying securities for their own position. A dealer must have: a) At least three years experience operating with California municipalities; b) Maintain an inventory of trading securities of at least $10 million; and c) Be approved by the Assistant Director before being added to the City's list of approved dealers; including individual traders or agents representing a dealer: A dealer will be removed from the list should there develop a history of problems to include: failure to deliver securities as promised, failure to honor transactions as quoted, or failure to provide accurate information. SAFEKEEPING AND CUSTODY All securities shall be delivered to the City's safekeeping custodian and held in the name of the City of Palo Alto, with the exception of the following investments: a) Certificates of deposit, which may be held by the City itself. b) City shares in pooled investment funds, under contract. c) Mutual funds d) Local Agency Investment Fund (LAIF) 2.a Packet Pg. 22 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 10 POLICY REVIEW AND REPORTING ON INVESTMENTS Monthly, the Administrative Services Department will review performance in relation to Council adopted Policy. Quarterly, the Department will report to Council investment activity, including: the portfolio’s performance in comparison to policy, explain any variances from policy, provide any recommendations for policy changes, and discuss overall compliance with the City’s Investment Policy. In addition, the Department will provide Council with: a) A detailed list of all securities, investments and monies held by the City, and b) Report on the City’s ability to meet expenditure requirements over the next six months. Annually, the Administrative Services Department will present a Proposed Statement of Investment Policy, to include the delegation of investment authority, to the City Council for review during the annual budget process. All proposed changes in policy must be approved by the Council prior to implementation. Adopted by City Council October 22, 1984 Amended by City Council June 11, 2001 Monthly reporting effective January 1985 Amended by City Council June 17, 2002 Amended and Adopted by City Council June 24, 1985 Amended by City Council June 17, 2003 Amended by City Council December 2, 1985 Amended by City Council June 28, 2004 Amended by City Council June 23, 1986 Amended by City Council June 20, 2005 Amended by City Council June 22, 1987 Amended by City Council June 12, 2006 Amended by City Council August 8, 1988 Amended by City Council June 11, 2007 Amended by City Council November 28, 1988 Amended by City Council June 09, 2008 Amended by City Council June 26, 1989 Amended by City Council June 15, 2009 Amended by City Council May 14, 1990 Amended by City Council June 28, 2010 Amended by City Council June 24, 1991 Amended by City Council June 20, 2011 Amended by City Council June 22, 1992 Amended by City Council June 18, 2012 Amended by City Council June 23, 1993 Amended by City Council June 03, 2013 Amended by City Council June 20, 1994 Amended by City Council June 16, 2014 Amended by City Council June 19, 1995 Amended by City Council June 15, 2015 Amended by City Council June 24, 1996 Amended by City Council June 13, 2016 Amended by City Council June 23, 1997 Amended by City Council June 27, 2017 Amended by City Council January 26, 1998 Amended by City Council November 5, 2018 Amended by City Council June 22, 1998 Amended by City Council June 24, 2019 Amended by City Council June 28, 1999 Adopted by City Council June 22, 2020 Amended by City Council June 19, 2000 Amended by City Council June 21, 2021 2.a Packet Pg. 23 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 11 APPENDIX A EXPLANATION OF PERMITTED INVESTMENTS 1. U.S. Government Securities: United States Treasury notes, bonds, bills, or certificates of indebtedness or those for which the faith and credit of the United States are pledged for the payment of principal and interest. 2. U.S. Government Agency Securities: U.S. Government Agency Obligations include the securities of the Federal National Mortgage Association (FNMA), Federal Land Banks (FLB), Federal Intermediate Credit Banks (FICB), banks for cooperatives, Federal Home Loan Banks (FHLB), Government National Mortgage Association (GNMA), Federal Home Loan Mortgage Corporation (FHLMC), Student Loan Marketing Association (SLMA), Small Business Administration (SBA), Federal Farm Credit (FFC), and Federal Agricultural Mortgage Corporation (FAMC or FMAC). Federal Agency securities are debt obligations that essentially result from lending programs of the Government. Federal agency securities differ from other types of securities, as well as among themselves. Their characteristics depend on the issuing agency. It is possible to distinguish three types of issues: (A) participation certificates (pooled securities), (B) Certificates of interest (pooled loans), (C) notes, bonds, and debentures. The securities of a few agencies are explicitly backed by the full faith and credit of the U.S. Government. All other issues purchased by the City have the de facto backing from the federal government, and it is highly unlikely that the government would let any agency default on its obligations. 3. Certificates of Deposit: A certificate of deposit (CDs) is a receipt for funds deposited in a bank, savings bank, or savings and loan association for a specified period of time at a specified rate of interest. Denominations are $250,000 and up. The first $250,000 of a certificate of deposit is guaranteed by the Federal Deposit Insurance Corporation (FDIC), if the deposit is with a bank or savings bank, or the Savings Association Insurance Fund (SAIF), if the deposit is with a savings and loan. CDs with a face value in excess of $250,000 can be collateralized by U.S. Government Agency and Treasury Department securities or first mortgage loans. Government securities must be at least 110 percent of the face value of the CD collateralized in excess of the first $250,000. The value of first mortgages must be at least 150 percent of the face value of the CD balance insured in excess of the first $250,000. Generally, CDs are issued for more than 30 days and the maturity can be selected by the purchaser. 4. Bankers' Acceptance: A Banker's Acceptance (BA) is a negotiable time draft or bill of exchange drawn on and accepted by a commercial bank. Acceptance of the draft irrevocably obligates the bank to pay the bearer the face amount of the draft at maturity. BAs are usually created to finance the import and export of goods, the shipment of goods within the United States and storage of readily marketable staple commodities. In over 70 years of usage in the United States, there has been no known instance of principal loss to any investor in BAs. In addition to the guarantee by the accepting bank, the transaction is identified with a specific commodity. Warehouse receipts verify that the pledged commodities exist, and, by definition, these commodities are readily marketable. The sale of the underlying goods generates the 2.a Packet Pg. 24 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 12 necessary funds to liquidate the indebtedness. BAs enjoy marketability since the Federal Reserve Bank is authorized to buy and sell prime BAs with maturities of up to nine months. The Federal Reserve Bank enters into repurchase agreements in the normal course of open market operations with BA dealers. As are sold at a discount from par. An acceptance is tied to a specific loan transaction; therefore, the amount and maturity of the acceptance is fixed. 5. Commercial Paper: Commercial paper notes are unsecured promissory notes of industrial corporations, utilities, and bank holding companies. Interest is discounted from par and calculated using actual number of days on a 360-day year. The notes are in bearer form, with maturities up to 270 days selected by the purchaser, and denominations generally start at $100,000. There is a small secondary market for commercial paper notes and an investor may sell a note prior to maturity. Commercial paper notes are backed by unused lines of credit from major banks. Some issuer's notes are insured, while some are backed by irrevocable letters of credit from major banks. State law limits a City to investments in United States corporations having assets in excess of five hundred million dollars with an "A" or higher rating by a nationally recognized rating service for the issuer's debentures. Cities may not invest more than 25 percent of idle cash in commercial paper. 6. Local Agency Investment Fund Demand Deposit: The Local Agency Investment Fund LAIF) was established by the State to enable treasurers to place funds in a pool for investments. The City is limited to an investment of the amount allowed by LAIF (currently $75 million). LAIF has been particularly beneficial to those jurisdictions with small portfolios. Palo Alto uses this fund for short-term investment, liquidity, and yield. 7. Repurchase Agreements: A Repurchase Agreement (REPOS) is not a security, but a contractual arrangement between a financial institution or dealer and an investor. The agreement normally can run for one or more days. The investor puts up funds for a certain number of days at a stated yield. In return, the investor takes title to a given block of securities as collateral. At maturity, the securities are repurchased and the funds repaid, plus interest. Usually, amounts are $500,000 or more, but some REPOS can be smaller. 8. Money Market Deposit Accounts: Money Market Deposit Accounts are market-sensitive bank accounts, which are available to depositors at any time, without penalty. The interest rate is generally comparable to rates on money market mutual funds, though any individual bank's rate may be higher or lower. These accounts are insured by the Federal Deposit Insurance Corporation or the Savings Association Insurance Fund. 2.a Packet Pg. 25 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 13 9. Mutual Funds: Mutual funds are shares of beneficial interest issued by diversified management companies, as defined by Section 23701 M of the Revenue and Taxation Code. To be eligible for investment, these funds must: a) Attain the highest ranking in the highest letter and numerical rating provided by not less than two of the three largest nationally recognized rating services; or b) Have an investment advisor registered with the Securities and Exchange Commission with not less than five years’ experience investing in the securities and obligations, as authorized by subdivisions (a) to (n), inclusive, of Section 53601 of the California Government Code, and with assets under management in excess of five hundred million dollars; and c) Invest solely in those securities and obligations authorized by Sections 53601 and 53635 of the California Government Code. Where the Investment Policy of the City of Palo Alto may be more restrictive than the State Code, the Policy authorizes investments in mutual funds that shall have minimal investment in securities otherwise restricted by the City's Policy. Minimal investment is defined as less than 5 percent of the mutual fund portfolio; and d) The purchase price of shares of beneficial interest purchased shall not include any commission that these companies may charge. e) Have a net asset value of $1.00. 10. Callable Securities and Multi-Step-ups: Callable securities are defined as fixed interest rate government agency securities that give the issuing agency the option of returning the invested funds at a specific point in time to the purchaser. Multi-step-ups are government agency securities in which the interest rate increases ("steps-up") at preset intervals, and which also have a callable option that allows the issuing agency to return the invested funds at a preset interval. Callable and multi-step-ups are permitted, provided that:  the potential call dates are known at the time of purchase;  the interest rates at which they “step-up” are known at the time of purchase; and  the entire face value of the security is redeemed at the call date. 2.a Packet Pg. 26 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 14 11. Negotiable Certificates of Deposit (NCD): NCDs are large-dollar-amount, short-term certificate of deposit. Such certificates are issued by large banks and bought mainly by corporations and institutional investors. They are payable either to the bearer or to the order of the depositor, and, being negotiable, they enjoy an active secondary market, where they trade in round lots of $5 million. Although they can be issued in any denomination from $100,000 up, the typical amount is $1 million also called a Jumbo Certificate of Deposit. State law prohibits the investment of local agency funds in negotiable certificates of deposit issued by a state or federal credit union if a member of the legislative body of the local agency, or any person with investment decision making authority in the administrative, manager’s, budget, auditor-controller’s, or treasurer’s offices of the local agency also serves on the board of directors, other credit committee or the supervisory committee of the state or federal credit union issuing the negotiable certificate of deposit. 12. Medium-Term Corporate Notes: All corporate and depository institution debt securities with a maximum remaining maturity of five years or less, issued by corporations organized and operating within the United States or by depository institutions licensed by the United States or any state and operating within the United States. According to California Government Code Section 53601, “Notes eligible for investment under this subdivision shall be rated in a rating category of “A” or its equivalent or better by a nationally recognized rating service. Purchase of medium-term notes shall include other instruments authorized by this section and shall not exceed 30 percent of the agency’s moneys that may be invested pursuant to this section.” 13. Supranational Securities: California Government Code Section53601 defines allowable supranational securities as United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development, the International Finance Corporation, and Inter-American Development Bank. Supranationals are well capitalized and in most cases have strong credit support from contingent capital calls from their member countries. Section 53601 was amended effective January 1, 2015 to allow local agencies to invest in the senior debt obligations of these three supranational issuers which are eligible for purchase and resale within the United States. These entities were established with the purpose of ending poverty and raising the standard of living around the world through sustainable economic growth. a) The supranationals are international organization owned by member countries. These are:  International Bank for Reconstruction and Development (IBRD or World Bank), a member of the World Bank Group, provides direct loans and guarantees to sovereigns and government-backed projects  International Finance Corporation (IFC), a member of the World Bank Group, supports the creation and growth of private companies through direct lending and equity investment, attracting third party capital, and providing advisory services  Inter-American Development Bank (IADB), a member of the 2.a Packet Pg. 27 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 15 Inter-American Development Bank Group, provides loans, grants, and guarantees to sovereigns in Latin America and the Caribbean b) Additional characteristics shared by the IBRD, IFC, and IADB include:  Headquartered in Washington, D.C. with the United States as the largest shareholder of each organization  Rated AAA/Aaa by S&P and Moody’s 2.a Packet Pg. 28 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 16 APPENDIX B EXPLANATION OF PROHIBITED INVESTMENTS 1. Reverse Repurchase Agreements: A Reverse Repurchase Agreement (Reverse REPO) is a contractual agreement by the investor (e.g. local agency) to post a security it owns as collateral, and a bank or dealer temporarily exchanges cash for this collateral, for a specific period of time, at an agreed-upon interest rate. During the period of the agreement, the local agency may use this cash for any purpose. At maturity, the securities are repurchased from the bank or dealer, plus interest. California law contains a number of restrictions on the use of Reverse REPOS by local agencies. 2. Derivatives: A derivative is a financial instrument created from, or whose value depends on (is derived from), the value of one or more underlying assets or indices. The term "derivative" refers to instruments or features, such as collateralized mortgage obligations, forwards, futures, currency and interest rate swaps, options, caps and floors. Except for those callable and multi- step-up securities as described under Permitted Investments, derivatives are prohibited. Certain derivative products have characteristics which could include high price volatility, liquid markets, products that are not market-tested, products that are highly leveraged, products requiring a high degree of sophistication to manage, and products that are difficult to value. According to California law, a local agency shall not invest any funds in inverse floaters, range notes, or interest-only strips that are derived from a pool of mortgages. 2.a Packet Pg. 29 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 17 APPENDIX C GLOSSARY OF INVESTMENT TERMS AGENCIES: Federal agency and instrumentality securities. ASKED: The price at which securities are offered. BID: The price offered by a buyer of securities (when one sells securities, one asks for a bid). See “Offer”. BROKER: A person or institution that conducts investment transactions on behalf of the buyer and seller of the investment and earns a commission on the transaction. COLLATERAL: Securities, evidence of deposit, or other property, which a borrower pledges to secure repayment of a loan. Also refers to securities pledged by a bank to secure deposits of public monies. ANNUAL COMPREHENSIVE FINANCIAL REPORT (ACFR): The official annual report for the City of Palo Alto. It includes combined financial statements for each individual fund and account group prepared in conformity with Generally Accepted Accounting Principles and pronouncements set forth by the Governmental Accounting Standards Board (GASB). The ACFR also includes supporting schedules that are necessary to demonstrate compliance with finance-related legal and contractual provisions, extensive introductory material, and a detailed statistical section. COUPON: The annual rate of interest that a bond’s issuer promises to pay the bondholder on the bond’s face value or the certificate attached to a bond evidencing interest due on a payment date. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account. DEBENTURE: A bond secured only by the general credit of the issuer. DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: (1) delivery versus payment (DVP); and (2) delivery versus receipt (DVR). DVP is delivery of securities with an exchange of money for the securities. DVR is delivery of securities with an exchange of a signed receipt for the securities. DISCOUNT: The difference between the acquisition cost of a security and its value at maturity when quoted at lower than face value. A security that sells below original offering price shortly after sale, is also is considered to be at a discount. DISCOUNT SECURITIES: Non-interest-bearing money market instruments that are issued a discount and that are redeemed at maturity for full face value (e.g., U.S. Treasury Bills). 2.a Packet Pg. 30 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 18 DIVERSIFICATION: Dividing investment funds among a variety of securities that offer independent returns. FEDERAL AGRICULTURAL MORTGAGE CORPORATION (“FAMC” or “FMAC”): A federal agency established in 1988 to provide a secondary market for farm mortgage loans. Informally called Farmer Mac. FEDERAL CREDIT AGENCIES: Agencies of the Federal Government that were established to supply credit to various classes of institutions and individuals (e.g., S&Ls, small business firms, students, farmers, farm cooperatives, and exporters). FEDERAL DEPOSIT INSURANCE CORPORATION (“FDIC”): A federal agency that insures all types of deposits received at an insured bank, including deposits in a checking account, negotiable order of withdrawal (NOW) account, savings account, money market deposit account (MMDA) or time deposit such as a certificate of deposit (CD). FDIC insurance covers depositors' accounts at each insured bank, dollar-for-dollar, including principal and any accrued interest through the date of the insured bank's closing, up to the insurance limit. The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities or municipal securities, even if these investments are purchased at an insured bank. The FDIC does not insure U.S. Treasury bills, bonds or notes, but these investments are backed by the full faith and credit of the United States government. The standard maximum deposit insurance amount is described as the “SMDIA” in FDIC regulations. The SMDIA is $250,000 per depositor, per insured bank. FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open-market operations. FEDERAL HOME LOAN BANKS (“FHLB”): Government-sponsored wholesale banks (currently 12 regional banks) which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions, and insurance companies. The mission of the FHLBs is to liquefy the housing-related assets of its members, who must purchase stock in their District Bank. FEDERAL NATIONAL MORTGAGE ASSOCIATION (“FNMA”): FNMA, like GNMA, was chartered under the Federal National Mortgage Association Act in 1938. FNMA is a federal corporation working under the auspices of the Department of Housing and Urban Development (HUD). It is the largest single provider of residential mortgage funds in the United States. Fannie Mae, as the corporation is called, is a private stockholder-owned corporation. The corporation’s purchases include a variety of adjustable mortgages and second loans, in addition to fixed-rate mortgages. FNMA’s securities are also highly liquid and are widely accepted. FNMA assumes and guarantees that all security holders will receive timely payment of principal and interest. FEDERAL OPEN MARKET COMMITTEE (“FOMC”): The FOMC consists of seven 2.a Packet Pg. 31 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 19 members of the Federal Reserve Board and five of the 12 Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of government securities in the open market, as a means of influencing the volume of bank credit and money. FEDERAL RESERVE SYSTEM: The central bank of the United States created by Congress and consisting of a seven-member Board of Governors in Washington, D.C., 12 regional banks, and about 5,700 commercial banks that are members of the system. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (“GNMA” or “Ginnie Mae”): Securities that influence the volume of bank credit that is guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. A security holder is protected by the full faith and credit of the U.S. Government. Ginnie Mae securities are backed by the FHA, VA, or FMHM mortgages. The term “pass-throughs” is often used to describe Ginnie Maes. LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow, and reasonable amount can be done at those quotes. LOCAL GOVERNMENT AGENCY: A local government agency is any city, county, city and county, district, or other local governmental body or corporation, including the California State Universities (CSU) and University of California (UC) systems, K-12 schools and community colleges empowered to expend public funds. LOCAL GOVERNMENT INVESTMENT FUND (“LAIF”): Monies from local governmental units may be remitted to the California State Treasurer for deposit in this special fund for the purpose of investment. MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold. MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties to repurchase-reverse repurchase agreements that establish each party’s rights in the transactions. A master agreement will often specify, among other things, the right of the buyer (lender) to liquidate the underlying securities in the event of default by the seller (borrower). MATURITY: The date upon which the principal or stated value of an investment becomes due and payable. MONEY MARKET: The market in which short-term debt instruments (e.g., bills, commercial paper, and bankers’ acceptances) are issued and traded. OFFER: The price asked by a seller of securities (when one buys securities, one asks for an offer). See “Asked” and “Bid”. 2.a Packet Pg. 32 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 20 OPEN MARKET OPERATIONS: Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank, as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve’s most important and most flexible monetary policy tool. PORTFOLIO: A collection of securities that an investor holds. PRIMARY DEALER: A group of government securities dealers that submit daily reports of market activity and positions, and monthly financial statements to the Federal Reserve Bank of New York, and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC) -- registered securities broker-dealers, banks, and a few unregulated firms. PRUDENT INVESTOR RULE: An investment standard cited in the California Government Code Section 53600 et seq. Under this standard, all governing bodies of local agencies or persons authorized to make investment decisions on behalf of the City are trustees and therefore fiduciaries subject to the prudent investor standard. When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. QUALIFIED PUBLIC DEPOSITORIES: A financial institution that: (1) does not claim exemption from the payment of any sales, compensating use, or ad valorem taxes under the laws of this state; (2) has segregated for the benefit of the commission eligible collateral having a value of not less than its maximum liability; and (3) has been approved by the Public Deposit Protection Commission to hold public deposits. RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price. SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank’s vaults for protection. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues following the initial distribution. SECURITIES AND EXCHANGE COMMISSION: An agency created by Congress to administer securities legislation for the purpose of protecting investors in securities transactions. STRUCTURED NOTES: Notes issued by instrumentalities (e.g., FHLB, FNMA, SLMA) and by corporations, that have imbedded options (e.g., call features, step-up coupons, floating rate coupons, derivative-based returns) in their debt structure. The market performance of structured notes is affected by fluctuating interest rates; the volatility of imbedded options; and shifts in the yield curve. 2.a Packet Pg. 33 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t Fiscal Year 2023 21 SUPRANATIONALS: International institutions that provide development financing, advisory services and/or financial services to their member countries to achieve the overall goal of improving living standards through sustainable economic growth. The California Government Code Section 53601 allows local agencies to purchase the United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), or Inter- American Development Bank (IADB). TIME CERTIFICATE OF DEPOSIT: A non-negotiable certificate of deposit, which cannot be sold prior to maturity. TREASURY BILLS: A non-interest-bearing discount security that is issued by the U.S. Treasury to finance the national debt. Most T-bills are issued to mature in three months, six months, or one year. TREASURY BONDS: Long-term, coupon-bearing U.S. Treasury securities that are issued as direct obligations of the U.S. Government, and having initial maturities of more than 10 years. TREASURY NOTES: Medium-term, coupon-bearing U.S. Treasury securities that are issued as direct obligations of the U.S. Government, and having initial maturities of two to 10 years. YIELD: The rate of annual income return on an investment, expressed as a percentage. YIELD-TO-CALL (YTC): The rate of return an investor earns from a bond assuming the bond is redeemed (called) prior to its nominal maturity date. YIELD-TO-MATURITY: The current income yield minus any premium above par or plus any discount from par in purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity. ZERO-COUPON SECURITIES: Security that is issued at a discount and makes no periodic interest payments. The rate of return consists of a gradual accretion of the principal of the security and is payable at par upon maturity. 2.a Packet Pg. 34 At t a c h m e n t : A t t a c h m e n t A : P r o p o s e d C i t y o f P a l o A l t o I n v e s t m e n t P o l i c y , F i s c a l Y e a r 2 0 2 3 ( 1 4 3 7 8 : A d o p t i o n o f t h e F i s c a l Y e a r 2 0 2 3 I n v e s t m e n t City of Palo Alto (ID # 14112) Finance Committee Staff Report Meeting Date: 6/7/2022 Report Type: Action Items City of Palo Alto Page 1 Title: Accept June 30, 2021 Actuarial Valuation of Palo Alto's Retiree Healthcare and Other Post Employment Benefits, Approve Annual Actuarially Determined Contributions for Fiscal Years 2023 and 2024, and Affirm Additional Payments to Employers' Benefit Trust Fund From: City Manager Lead Department: Administrative Services RECOMMENDATION Staff recommends that the Finance Committee recommend the City Council: 1. Review and accept the June 30, 2021 actuarial valuation of Palo Alto’s Retiree Healthcare Plan; 2. Approve full funding of the annual Actuarial Determined Contribution (ADC) for Fiscal Year 2023 and Fiscal Year 2024 using the staff recommended adjusted assumptions; and 3. Affirm the continued the practice of transmitting amounts at a lower 6.25 percent discount rate as an additional discretionary payment to the City’s California Employers’ Retiree Benefit Trust (CERBT) Fund. EXECUTIVE SUMMARY In accordance with the Governmental Accounting Standards Board (GASB), the City Council is required to review and approve the actuarial valuation for retiree healthcare plan on a bi- annual basis for the upcoming two fiscal years and approve funding of the annual Actuarial Determined Contribution (ADC). This current study presents the fund’s status as of June 30, 2021 and will be used to inform the FY 2023 and FY 2024 annual operating budgets. This report was finalized after the development of the FY 2023 Proposed Budget. Therefore, funding levels in the FY 2023 Proposed Budget reflect the out years of the prior study completed on June 30, 2019 (CMR 11284). Funding levels recommended by the Finance Committee as part of this discussion will be included as an amendment to the FY 2023 Proposed Budget and included for City Council adoption of the budget on June 20, 2022. The City continues to selecta Strategy 1 asset allocation, currently projected at a 6.75 percent discount rate for the California Employers’ Retirement Benefit Trust (CERBT) Fund, managed by CalPERS. Beginning with the June 30, 2019, valuation (CMR 11284), the City Council directed staff to calculate additional discretionary payments (“prefunding”) equivalent to a 6.25 percent discount rate and transmit amounts above payments at a 6.75 percent discount rate to the 3 Packet Pg. 35 City of Palo Alto Page 2 CERBT Fund. Through FY 2022, a total of $3.5 million in additional contributions are expected to be made to the CERBT. The June 30, 2021, valuation includes several changes that have favorably impacted the CERBT fund status, primarily due to healthcare and economic fluctuations resulting from the COVID-19 pandemic and continued proactive funding contributions: • 2020-21 investment returns of 27.5 percent (6.75 percent target); • Lower than anticipated healthcare premiums; and • Accumulated contributions (full ADC payments and prefunding) These favorable changes are advised to be taken in consideration of an uncertain environment. Current portfolio earning is not expected to meet target return this year (FY 2022) and it is not known whether the recent change in healthcare premiums will be ongoing or an anomaly due to the significant governmental support of healthcare costs over the past two years. Because we do not know whether these favorable changes are the beginning of a trend, or merely a temporary anomaly, this report includes several options to fund Other Post-Employment Benefit (OPEB) obligations for Finance Committee review and discussion beyond the typical recommended “baseline” strategy. • Recommended Funding: consider alternative assumptions that are intended to better align with the current economic outlook and proactive funding of long-term liabilities. • Alternative 1 (“baseline”): reflects the ADC for current City Council approved funding levels and actuary assumptions. The below table provides a summary of the options and a comparison of costs to the FY 2023 Proposed Budget in all funds. A more detailed discussion of these options is included in this report. All options reflect expected savings when compared to assumptions currently built in the FY 2023 Proposed Budget as reviewed by the Committee in May. Staff recommends that any savings remain unallocated and fall to respective funds fund balance/reserves based on standing policies, unless otherwise directed. Table 1: Funding for the FY 2023 OPEB Obligations FY 2023 OPEB Funding $ Change FY 2023 Proposed Budget (based on June 30, 2019 valuation) $16.9M - Recommended Funding Adjusted Assumptions • Zero percent return 2021-22 • Proactive contribution at lower discount rate of 6.25 in ADC • Shorten Amortization period (from 22 to 15 years) • Additional funding for FY 2023 Proposed staffing $14.6M ($2.3M) Alternative: Baseline • Current approved funding levels • Proactive contribution at lower discount rate of 6.25 in ADC $12.3M ($4.6M) 3 Packet Pg. 36 City of Palo Alto Page 3 *Approximately 65 percent of costs are allocated to the General Fund. BACKGROUND The City of Palo Alto offers its employees and retirees a Retiree Healthcare benefit plan which is managed and administered by the California Public Employees’ Retirement System (CalPERS), a State of California Retiree Healthcare Trust program. Bi-annually staff contracts with an actuary firm that provides an actuarial report detailing the latest status of the City of Palo Alto’s Retiree Healthcare plans for employees and retirees. The actuarial report is used to calculate the annual ADC to the trust. In addition, updates on the rate of return, funding status, and changes to the trust based on various impacts are detailed in the report. Unlike the pension actuary reports, this actuary details impacts by Fund, Department, Employee Group, and Healthcare Plans selected. There are four groups of benefits within the CalPERS Retiree Healthcare benefit plans. Table 1 below outlines the different benefits levels by Group. These benefit levels are negotiated and approved as part of the employee contracts. Employees and retirees have an open enrollment window in October each year in which they can make changes to their healthcare plans that take effect in January of the following year. Table 2: City of Palo Alto Retiree Healthcare Benefit Plans and Tiers Miscellaneous Safety: Fire Safety: Police Group 1 Retired before January 1, 2007; eligibility starting at the age 50 and 5 years of service; full premium up to family coverage Retired before January 1, 2007; eligibility starting at the age of 50 and 5 years of service; full premium up to family coverage Retired before March 1, 2009; eligibility starting at the age of 50 and 5 years of service; full premium up to family coverage Group 2 Retired between January 1, 2007 and May 1, 2011; eligibility starting at the age 50 and 5 years of service; same as Group 1, but premium limited to 2nd most expensive medical plan Retired between January 1, 2007 and December 1, 2011; eligibility starting at the age 50 and 5 years of service; same as Group 1, but premium limited to 2nd most expensive medical plan Retired between March 1, 2009 and April 1, 2015 (POA), between January 1, 2007 and June 1, 2012 (PMA) ; eligibility starting at the age 50 and 5 years of service; same as Group 1, but premium limited to 2nd most expensive medical plan Group 3 (Retirees) Retired after Group 2, did not elect into Group 4, benefit same as active employees Group 3 (Active EEs) Currently active, not in Group 4. Flat Dollar Caps equal to actives N/A (All active Group 3 IAFF & FCA elected into Group 4) N/A (All active Group 3 POA & PMA elected into Group 4) Group 4 Vesting Schedule: 10 years gets 50%, 20 years gets 100%, formula amount Vesting Schedule: 10 years gets 50%, 20 years gets 100%, formula amount Vesting Schedule: 10 years gets 50%, 20 years gets 100%, formula amount CalPERS Projected Contribution Levels The actuary report has two components to the annual billing of the employer portion of retiree healthcare contributions that comprise the Actuarial Determined Contribution (ADC), 1) the Normal Cost (NC), and 2) the Unfunded Actuarial Accrued Liability (UAAL). 3 Packet Pg. 37 City of Palo Alto Page 4 • NC: This reflects a rate of contribution for the plan of retirement healthcare benefits provided to current employees based on the current set of assumptions. • Employer Amortization of UAAL: This is an annual payment calculated to pay down an agency’s unfunded accrued liability. Assuming every assumption in the actuarial valuation was accurate, an organization would eliminate its unfunded pension liability if it made these payments annually for 30 years. The City Council approved a closed period to amortize the entire net pension liability over a specific timeframe, and 22 years of payments remain as of June 30, 2021. The total liability will vary from one year to the next because of assumption changes and actuarial experience that is different from anticipated, such as actual investment returns that do not meet expectations. As established by the City Council, the City’s CERBT Fund is invested in a Strategy 1 asset allocation at a 6.75 percent discount rate. Beginning with the June 30, 2019, valuation (CMR 11284), consistent with the City’s proactive pension funding policy, the City Council approved the calculation of ADC at a lower 6.25 percent discount rate, transmitting the amounts above a 6.75 percent discount rate as an additional discretionary payment (“prefunding”) to the CERBT Fund. Other proactive measures to mitigate the increasing costs of healthcare plans for current and future retirees include cost sharing with employees, capping the plans covered, and establishing a flat contribution that can be adjusted with each labor agreement for active employees. The City’s CERBT Fund was established in May 2008 at a level of $33 million and it has grown to $164 million as of March 31, 2022. DISCUSSION Summary of Actuarial Report June 30, 2021 Staff contracted with Bartel Associates, LCC (BA) for this retiree healthcare actuarial report (Attachment A) to determine the City’s retiree healthcare liability and the ADC for Fiscal Years 2023 and 2024. The actuarial analysis is based on current employees’ accrued benefit, and retired employees as of June 30, 2021. This updated valuation includes several changes that have favorably impacted the CERBT fund status, primarily due to healthcare and economic fluctuations resulting from the COVID-19 pandemic. Most notably, investment returns for 2020-21 reached an unprecedented level of 27.5 percent for the period. This level of return had a significant impact on the overall status of the fund and is not expected to continue in future periods. Healthcare premiums were lower than anticipated likely due to government funding of pandemic-related healthcare costs, deferral of individual healthcare visits during the pandemic due to personal safety decisions and public health orders and use of CalPERS reserves to keep premiums down. 3 Packet Pg. 38 City of Palo Alto Page 5 The full impact on healthcare costs resulting from the pandemic is yet to be determined and is expected to be factored into future valuation reports based on actual experience in costs. As an actuarial study, the calculation is based on the information at this time, which reflects this significantly lower cost. Staff and Bartel Associates are skeptical on the longevity of these lower costs, versus the immediate result of the variables noted previously. Beginning with this valuation, based on the favorable changes, baseline projections reflect accumulated contributions to the CERBT may be used to pay a portion of the annual retiree medical costs. This is a result of asset growth, where returns generated on higher asset levels are sufficient to contribute toward a portion of the annual benefit payments. The ability to use returns for this purpose is a goal of the prefunding strategy and a sign that a good practice is in place. Achieving this status was anticipated to occur as a result of prefunding, however, has occurred sooner than anticipated due to the favorable impacts discussed above. Discount Rate Assumptions The City Council has taken great interest to ensure long-term liability assumptions and costs for pension and OPEB are being proactively addressed, including the adoption of a Pension Policy that assumes a 6.2 percent discount rate for pension costs compared to CalPERS rate of 7.0 percent (CMR 11722) and starting in FY 2023 a potential phased-in reduction to 5.3 percent or alternative rate as designated by Council, to better align with market survey results included in the most recent CalPERS Asset Liability Management (ALM) study. Additionally, the City Council has taken actions to invest at an estimated discount rate for OPEB of 6.75 percent and transmit additional contributions to prefund OPEB obligations at the equivalent of a 6.25 percent discount rate. Through FY 2022, a total of $3.5 million in additional contributions are expected to be contributed to the CERBT. Discussed above, the ADC is impacted when actual experience differs from assumptions. One of the more significant impacts to ADC occurs when actual investment returns do not meet expectations. The following graph presents historical returns, looking back to 2008-09. 3 Packet Pg. 39 City of Palo Alto Page 6 Figure 1: Historical Returns of the OPEB Trust (Market Value of Plan Assets (MVA) and Expected Return) Projected Unfunded Actuarial Accrued Liability This actuarial report includes the plan’s “Funded Status.” As of June 30, 2021, the CERBT Trust is funded at 70 percent, up 1,200 basis points from 58 percent in the June 30, 2019 actuarial valuation. As of June 30, 2021, the Unfunded Actuarial Accrued Liability (UAAL) was $80.0 million for all funds and $51.5 million for the General Fund. Beginning with the June 30, 2013 valuations, the City aligned its actuarial analysis to align with GASB’s rules regarding the “implied subsidy”. The calculation of implied subsidy requires an agency to recognize that it pays the same medical premiums for active employees as those that are retired. The implied subsidy identifies and accounts for the agency paying the same blended premium for both active employees and retirees, even though the medical cost for active employees is lower than retirees. Palo Alto had 874 active employees and 1,009 retirees as of June 30, 2021. The calculation increases the UAAL by $15.1 million or 18.9 percent; without the implied subsidy the UAAL for all funds would be at $64.9 million. Table 3: Unfunded Actuarial Accrued Liability (UAAL) As of June 30, 2019* As of June 30, 2021 Projected June 30, 2022 Citywide – UAAL $122,972 $80,027 $76,159 General Fund – UAAL $82,624 $51,522 $49,032 Funded Ratio) 49.0% 67.2% 70.0% Citywide UAAL % Change from prior valuation -35.0% -38.1% * The June 30, 2019 values are based on a 6.75 percent discount rate. Beginning June 30, 2021, the discount rate has been reduced from 6.75 to 6.25 percent Sensitivity Analysis: Discount Rate and Amortization Period CalPERS recognizes the varying assumptions that may impact a plan’s unfunded actuarial 3 Packet Pg. 40 City of Palo Alto Page 7 accrued liability and therefore a retiree healthcare plan’s funding status, especially the implications of the discount rate and amortization assumptions. Therefore, in addition to the actuarial assumptions used to develop this annual evaluation, BA includes a sensitivity analysis of the retiree healthcare plan. Table 4 below reflects the impact on UAAL resulting from a reduction in the discount rate. Table 5 reflects the impact on ADC if the UAAL is amortized over different timeframes. It should be noted that the Council has adopted a Pension Funding Policy seeking to reach a 90 percent funded level in what remains to be approximately 14-15 years, a shorter period that the sensitivity scenarios below. Table 4: Discount Rate Sensitivity 6.25% (Current) 5.75% 5.25% Citywide – UAAL $80,027 $94,571 $110,567 General Fund – UAAL $51,522 $60,886 $71,184 Funded Ratio 67.2% 63.4% 59.8% Table 5: Amortization Sensitivity 22 Years (Current) 20 Years 18 Years Normal Cost $6,316 $6,316 $6,316 UAAL Amortization $5,112 $5,459 $5,887 Total ADC $11,428 $11,775 $12,203 ADC (% of payroll) 10.3% 10.6% 11.0% * Includes administrative expenses Funding for the FY 2023 Including Actuarial Determined Contribution (ADC) This section outlines staff’s recommended funding level for OPEB obligations beginning in FY 2023 for Finance Committee review and discussion and an alternative. Due to the uncertainties noted previously that are unique to this report and given the limited data on the impacts of COVID-19, staff recommend alternatives assumptions that are rooted in the City’s Pension Funding Policy, may be adjusted later in a subsequent fiscal year, and position the City to smooth potential volatility in projected liabilities. A key result of the recovery period as the pandemic moves into an endemic is a need to foster and work towards stability as an organization; this stability helps ensure continued focus on high priority projects, supports recruitment and retention efforts in a competitive labor market, and ensures a readiness and nimbleness to adapt to changes. Acknowledging these lessons, staff recommends the Finance Committee consider an alternative funding approach that adjusts assumptions based on current data and the principles noted above. Staff have also outlined an alternative, or “baseline” scenario for consideration. This funding level may be adjusted annually based on City Council direction, so long as the baseline ADC is met. Staff Recommended Funding for FY 2023 OPEB Obligations Staff recommend adjusting funding from the typical baseline calculation to better align with the current economic outlook, the current instability in the assumptions used to calculate the 3 Packet Pg. 41 City of Palo Alto Page 8 baseline and continue to proactively fund long-term liabilities. Recommended revisions to baseline assumptions include: o Assume a zero percent investment return for the current 2021-22 period: The most recent March 31, 2022 quarterly report from CERBT reported year-to-date investment returns of negative 1.39 percent as compared to a 6.75 percent target. This scenario assumes investment returns of zero percent for the period ending June 30, 2022 to hedge against returns that may not be realized. o Exclude proactive contributions at a lower discount rate towards the ADC: Consistent with the pension proactive funding, this would treat the proactive contributions assuming a lower discount rate of 6.25 as if in a separate “trust” or “saving account.” ADC calculations will remain at consistent levels and these proactive contributions remain additive to baseline calculations of liability. o Assume a shortened amortization period from 22 to 15 years: This change in the amortization period will more closely align OPEB with the City’s Pension Policy goals to reach a 90 percent funded status over 15 years (by FY 2036). The City Council previously approved a 30-year closed amortization period of which 22 years remain as of June 30, 2021. o Assume additional normal costs or “pay-go” costs: Adjust funding to include costs for the recommended additional staffing as approved or being considered for approval in FY 2023. This option results in an FY 2023 Proposed ADC of $14.6 million citywide ($9.2 million in the General Fund), a $2.3 million reduction from the $16.9 million ADC in the FY 2023 Proposed Operating Budget. Baseline The baseline calculation reflects standard actuarial calculations and existing City Council direction assuming the Strategy 1 asset allocation at a 6.75 percent discount rate, and additional discretionary payment to the CERBT Fund at the equivalent of a 6.25 percent discount rate. Unlike the CalPERS pension plan, additional City contributions do not go into a separate Section 115 trust; instead, they remain in the plan and are included as assets in the CERBT each subsequent year, impacting the calculation of the ADC. This treatment of prefunding contributions included in assets and effectively reduce the ADC each future year. At the request of staff, BA included an adjusted calculation to exclude the additional 6.25 contributions in ADC calculations to ensure consistent treatment as the Pension 115 Trust Fund. The exclusion of this additional contribution from ADC will ensure that the City maintains prefunding at consistent levels, similar to how contributions are made to the Pension Trust. Overall, this baseline reflects an FY 2023 Proposed ADC of $12.3 million citywide ($7.7 million in the General Fund), a $4.6 million reduction from the $16.9 million ADC in the FY 2023 Proposed Operating Budget. FY 2023 Proposed Staffing Additional Normal Cost Contributions 3 Packet Pg. 42 City of Palo Alto Page 9 To be factored in all calculations of funding for FY 2023 is the potential addition of nearly 60 full-time staff since the June 30, 2021 valuation date: 20 full-time positions during FY 2022, and nearly 40 full-time positions in the FY 2023 Proposed Budget (mostly in the General Fund). As reported in this valuation, the average salary of active employees is approximately $120,000 and the variable portion of ADC, or normal cost for current employees, is 5.6 percent of payroll. Under these assumptions, the retiree healthcare cost of the additional staffing is approximately $400,000. Staff recommends that this associated retiree health cost be included in the final budget for Council consideration for FY 2023 adoption in alignment with the assumptions in the recommended option above. Stakeholder Engagement The transmittal of the actuarial valuation as of June 30, 2021 begins conversations regarding the fiscal outlook for the City’s OPEB liabilities and the appropriate contribution for the FY 2023 Actuarial Determined Contribution. Public discussion will be held with the Finance Committee on June 7, 2022, prior to City Council review and adoption of the FY 2023 Budget, currently scheduled for June 20, 2022. Resource Impact The FY 2023 Proposed Budget includes an ADC of $16.9 million, an increase of $0.5 million from FY 2022 Adopted levels of $16.4 million. Staff recommendations in this report result in funding levels of $14.6 million, a net savings of $2.3 million from the FY 2023 Proposed Budget in all funds. Funding levels recommended by the Finance Committee will be included as an amendment to the FY 2023 Proposed Budget for City Council adoption of the budget on June 20, 2022. Staff will incorporate this direction on an ongoing basis beginning in FY 2024. Future funding is subject to City Council approval through the annual budget process. The recent market fluctuations and overall impact of the current pandemic are yet to be fully realized. These reports are calculated bi-annually and reflect market conditions at that point in time. This Trust experienced gains in this most recent report, however, will continue to be closely monitored. Environmental Review This report is not considered a project for the purposes of the California Environmental Quality Act (CEQA). Environmental review is not required. Attachments: • Attachment A: OPEB June 30, 2021 Actuarial Valuation 3 Packet Pg. 43 CITY OF PALO ALTO RETIREE HEALTHCARE PLAN June 30, 2021 Actuarial Valuation Contributions for 2022/23 & 2023/24 Mary Beth Redding, Vice President & Actuary Deanna Van Valer, Assistant Vice President & Actuary Joseph Herm, Actuarial Analyst Michelle Shen, Actuarial Analyst Bartel Associates, LLC June 2, 2022 CONTENTS O:\Clients\City of Palo Alto\Projects\OPEB\2021 val\Reports\BA PaloAltoCi 22-06-02 OPEB 6-30-21 Funding Report.docx Topic Page Benefit Summary 1 Implied Subsidy 7 Participant Statistics 9 Actuarial Assumptions Highlights 15 Actuarial Methods 21 Assets 23 Results 25 Results – Details 39 Sensitivity Analysis 49 Contribution Basis Results 53 Comparison to Other Agencies 62 Actuarial Certification 65 Exhibits 66 Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 44 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 1 BENEFIT SUMMARY  Eligibility  Retire directly from the City under CalPERS (age 501 and 5 years of CalPERS service or disability)  Medical Provider  CalPERS health plans (PEMHCA)  CalPERS administrative fees paid by City  Retiree Medical Benefit for Current Retirees: Hired < 1/1/04 (1/1/05 SEIU, 1/1/06 PAPOA) & Did Not Elect into Group 4  GROUP 1 Retirees: Retired < 1/1/07 (3/1/09 for PAPOA)  Benefit = Full premium up to family coverage  GROUP 2 Retirees: Retired after GROUP 1 and before 5/1/11 (12/1/11 IAFF/FCA, 6/1/12 PMA, 4/1/15 POA)  Benefit = Same as above but premium limited to 2nd most expensive Basic (non-Medicare) medical plan in the Bay Area Region/Region 1 (PERSCare in 2021, Health Net SmartCare in 2022)  GROUP 3 Retirees: Retired after GROUP 2  Benefit = same amount as active employees, which may change from time to time and in the future as bargaining agreements change (see next section for cap amounts) 1 Age 52 for Miscellaneous New Hires under PEPRA June 2, 2022 2 BENEFIT SUMMARY  Retiree Medical Benefit for Current Actives: Hired < 1/1/04 (1/1/05 SEIU, 1/1/06 PAPOA) & Did Not Elect into Group 4  GROUP 3 Future Retirees: Currently active and did not elect into Group 4  No active Group 3 POA, PMA, IAFF or FCA  Only remaining Group 3 actives in MGMT, SEIU, UMPAPA (69 active members)  Benefit = up to full premium, but limited to flat dollar caps same as active contribution SEIU/Mgmt/UMPAPA* Other Groups 2021 & 2022 2021 & 2022 Single $ 871 $ 840 2-Party 1,742 1,680 Family 2,260 2,180 * For UMPAPA only, the 2021 caps are the same as for the “Other Groups” Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 45 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 3 BENEFIT SUMMARY  Retiree Medical Benefit for those: Hired ≥ 1/1/04 (1/1/05 SEIU, 1/1/06 PAPOA) & Employees Hired Before These Dates Electing into Group 42  GROUP 4 Future Retirees: Government Code §22893 “Vesting Schedule” (based on all CalPERS Service)3: Years of Service % Years of Service % < 10 0% 13 65% 10 50% 14 70% 11 55% ↓ ↓ 12 60% > 20 100%  100% vesting for disability retirements  Vesting applies to 100/90 formula amounts, which are the maximum amounts payable by the City (retirees pay any difference between these amounts and actual premiums): 2021 2022 Single $ 798 $ 816 2-Party 1,519 1,548 Family 1,937 1,977  If have 20 years City service do not need to retire directly from City 2 All currently active POA/PMA, IAFF/FCA are Group 4. Some Mgmt/Conf and some SEIU remained in Group 3, and some elected into Group 4. 3 Minimum 5 years City Service. June 2, 2022 4 BENEFIT SUMMARY  Dental, Vision & Medicare Part B  None  Surviving Spouse Benefit  100% of retiree benefit continues to surviving spouse if retiree elects CalPERS pension survivor allowance  Waived Re- election  Waived retirees/beneficiaries may re-elect coverage at a future date  Summary of Changes Since the Prior Valuation  None Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 46 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 5 BENEFIT SUMMARY Pay-As-You- Go ($000s) Fiscal Year Cash Implied Subsidy Total 2020/21 $ 10,631 $ 2,346 $ 12,977 2019/20 10,344 2,384 12,728 2018/19 9,960 2,197 12,157 2017/18 9,660 2,444 12,104 2016/17 9,713 2,203 11,916 2015/16 9,681 1,960 11,641 2014/15 8,995 1,916 10,911 2013/14 7,317 - 7,317 2012/13 8,766 - 8,766 2011/12 8,165 - 8,165 2010/11 6,216 - 6,216 2009/10 5,519 - 5,519 June 2, 2022 6 BENEFIT SUMMARY Monthly Benefit Cap Amounts 2021 2022 Group Single 2-Party Family Single 2-Party Family Group 14 $1,307.86 $2,615.72 $3,400.44 $1,304.00 $2,608.00 $3,390.40 Group 2 1,294.69 2,589.38 3,366.19 1,153.00 2,306.00 2,997.80 Group 3 SEIU/Mgmt 871.00 1,742.00 2,260.00 871.00 1,742.00 2,260.00 Group 3 UMPAPA 840.00 1,680.00 2,180.00 871.00 1,742.00 2,260.00 Group 3 Others5 840.00 1,680.00 2,180.00 840.00 1,680.00 2,180.00 Group 4 (100% vest) 798.00 1,519.00 1,937.00 816.00 1,548.00 1,977.00 % Decrease from Group 1 (assumes Group 1 is in most expensive plan) Group 2 1% 1% 1% 12% 12% 12% Group 3 SEIU/Mgmt 33% 33% 34% 33% 33% 33% Group 3 UMPAPA 36% 36% 36% 33% 33% 33% Group 3 Others 36% 36% 36% 36% 36% 36% Group 4 39% 42% 43% 37% 41% 42% 4 No cap for Group 1. Amount shown is most expensive Non-Medicare Region 1 premium. 5 IAFF, FCA, PMA, and PAPOA. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 47 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 7 IMPLIED SUBSIDY  For PEMHCA, employer cost for allowing retirees to participate at active rates.  Kaiser 2022 Region 1 plan:  The City included the implied subsidy beginning with the June 30, 2013 valuation. 25 30 35 40 45 50 55 60 64 Premium 857 857 857 857 857 857 857 857 857 Male Cost by Age 347 368 407 469 564 702 932 1,261 1,545 Female Cost by Age 661 691 683 701 736 798 934 1,139 1,326 $- $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800 $C o s t / P r e m i u m Age Kaiser 2022 - Single Coverage June 2, 2022 8 IMPLIED SUBSIDY This page intentionally blank Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 48 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 9 PARTICIPANT STATISTICS Participant Statistics 6 Excludes all waived retirees, regardless of age, except as noted. 7 Includes 68 waived retirees over 65. 8 Excludes all waived retirees over 65; includes 38 waived under 65 retirees. 6/30/13 6/30/15 6/30/17 6/30/19 6/30/21  Actives  Count 948 955 967 930 874  Average Age 45.2 45.3 45.6 44.8 45.0  Average City Service 10.8 10.8 10.9 10.8 11.2  Average PERS Service 11.7 11.9 11.9 11.7 12.1  Average Salary $86,271 $91,714 $90,739 $110,969 $120,207  Total Salary (000’s) $81,785 $87,586 $87,745 $103,201 $105,061  Retirees:     Count6 968 1,0077 9598 974 1,009  Average Age 68.2 68.9 68.9 70.0 70.9  Average Retirement Age o Service 57.8 57.7 57.7 58.0 58.2 o Disability 45.3 45.6 45.9 46.1 46.3 June 2, 2022 10 PARTICIPANT STATISTICS Historical Active and Retiree Counts9 9 Retiree count is subscribers: retirees and surviving spouses 6/30/09 6/30/11 6/30/13 6/30/15 6/30/17 6/30/19 6/30/21 Active 955 923 948 955 967 930 874 Retired 710 860 968 1,007 959 974 1,009 43%48% 50% 51% 50%51%54% 57%52% 50% 49% 50%49%46% - 500 1,000 1,500 2,000 2,500 Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 49 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 11 PARTICIPANT STATISTICS Participant Statistics June 30, 2021 10 Actual 2020/21 PERSable compensation. 11 Excludes retirees who have waived coverage, regardless of age. Group 1 Group 2 Group 3 Group 4 Total  Actives  Count n/a n/a 69 805 874  Average Age n/a n/a 54.1 44.2 45.0  Average Entry Age n/a n/a 31.5 34.0 33.8  Average City Service n/a n/a 22.6 10.2 11.2  Average PERS Service n/a n/a 22.8 11.2 12.1  Average Salary n/a n/a $114,220 $120,720 $120,207  Total Salary (000’s)10 n/a n/a 7,881 97,180 105,061  Benefitting Retirees11:  Count 429 290 152 138 1,009  Average Age 77.8 68.8 64.0 61.4 70.9  Avg Service Ret Age 57.5 57.9 59.1 59.4 58.2  Avg Disability Ret Age 45.5 46.9 51.2 49.3 46.3 June 2, 2022 12 PARTICIPANT STATISTICS Participant Statistics June 30, 2019 12 Actual 2018/19 PERSable compensation. 13 Excludes retirees who have waived coverage, regardless of age. Group 1 Group 2 Group 3 Group 4 Total  Actives  Count n/a n/a 92 838 930  Average Age n/a n/a 54.2 43.8 44.8  Average Entry Age n/a n/a 32.7 35.9 34.5  Average City Service n/a n/a 21.4 9.7 10.8  Average PERS Service n/a n/a 21.9 10.6 11.7  Average Salary n/a n/a $108,291 $111,263 $110,969  Total Salary (000’s)12 n/a n/a $9,963 $93,238 $103,201  Benefitting Retirees13:  Count 458 292 128 96 974  Average Age 76.3 66.7 62.4 60.3 70.0  Avg Service Ret Age 57.6 57.8 58.8 59.2 58.0  Avg Disability Ret Age 45.5 47.0 51.2 47.1 46.1 Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 50 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 13 PARTICIPANT STATISTICS Data Reconciliation14 6/30/2019 to 6/30/2021 Actives Retirees Disabled Benefic. Total  June 30, 2019 930 754 151 69 1,904  New Hires/Rehires 101 (1) - - 100  Disabled (3) - 3 - -  Terminated15 (75) - - - (75)  Died with Beneficiary16 (1) (9) (3) 13 -  Died, no Beneficiary - (18) (6) (6) (30)  Retired/covered (67) 67 - - -  Retired/waived (11) - - - (11)  Waived Retiree - (10) (3) (1) (14)  Adjustment/Other - 3 2 4 9  June 30, 2021 874 786 144 79 1,883 14 Excludes retirees who have waived coverage. 15 All actives in June 30, 2019 valuation and not in June 30, 2021 valuation assumed terminated. 16 Retirees in the June 30, 2019 valuation not in the June 30, 2021 valuation assumed deceased. June 2, 2022 14 PARTICIPANT STATISTICS This page intentionally blank Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 51 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 15 ACTUARIAL ASSUMPTIONS HIGHLIGHTS June 30, 2019 Valuation June 30, 2021 Valuation  Valuation Date  June 30, 2019  ADC17 for Fiscal Years 2020/21 & 2021/22 (end of year)  1 year lag  June 30, 2021  ADC for Fiscal Years 2022/23 & 2023/24 (end of year)  1 year lag  Funding Policy  Full Pre-funding through CalPERS trust (CERBT) Strategy #1  Same  City may contribute additional amounts based on lower discount rate  Discount Rate  6.75%, net of expenses based on CERBT Strategy #1  6.25%, net of expenses based on CERBT Strategy #1  General Inflation  2.75%  2.50% 17 Actuarially Determined Contribution June 2, 2022 16 ACTUARIAL ASSUMPTIONS HIGHLIGHTS June 30, 2019 Valuation June 30, 2021 Valuation  Payroll Increases  Aggregate Increases: 3.00%  Merit Increases: CalPERS 1997- 2015 Experience Study  Aggregate Increases: 2.75%  Merit Increases: CalPERS 2000-2019 Experience Study  Increase to Group 3 Flat Dollar Caps18  ½ of Medical Trend, not less than assumed inflation (2.75%)  ½ of Medical Trend, not less than assumed inflation (2.50%)  Medical Trend  Non-Medicare: 7.5% for 2019, decreasing to an ultimate rate of 4.0% in 2076  Medicare: 6.5% for 2019, decreasing to an ultimate rate of 4.0% in 2076  Non-Medicare: 6.50% for 2023, decreasing to an ultimate rate of 3.75% in 2076  Medicare: 5.65% (non-Kaiser) and 4.60% (Kaiser) for 2023, decreasing to an ultimate rate of 3.75% in 2076  ACA Excise Tax  Remove liability for excise tax due to December 2019 repeal19  Same 18 Increase is for purposes of financial projection only and does not imply any obligation to increase the cap in the future. 19 Note for GASB 75 purpose, the Total OPEB Liability as of Measurement Date (MD) 6/30/19 will include 2% load, as legislation passed after the MD may not be taken into account. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 52 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 17 ACTUARIAL ASSUMPTIONS HIGHLIGHTS June 30, 2019 Valuation June 30, 2021 Valuation  Participation at Retirement  Group 3: 98%  Group 4: if eligible for City contribution: 95%; if not: 0%  Based on Plan experience20  Same  Retirement, Mortality, Termination, Disability  CalPERS 1997-2015 Experience Study  Society of Actuaries mortality improvement scale MP-19  CalPERS 2000-2019 Experience Study  Society of Actuaries mortality improvement scale MP-21  Age-related Claims Costs for Medicare Advantage Plans  Included  Due to age-risk adjusted federal subsidies, no age-based claims costs were included for Medicare Advantage plans 20 Actual participation percentage for Group 3 since 6/30/17 is 100% for Miscellaneous (there are no active Safety members in Group 3). Actual participation percentage for Group 4 since 6/30/17 who are eligible for a City contribution is 91%. Group 4 still has limited actual experience. We recommend continued monitoring for Group 4. June 2, 2022 18 ACTUARIAL ASSUMPTIONS HIGHLIGHTS  Basis for Assumptions (6/30/21 Valuation)  No experience study performed for this Plan  CalPERS experience study covering 2000 to 2019 experience was used  Mortality improvement is a Society of Actuaries table  Inflation based on our estimate for the Plan’s long time horizon  Capital market assumptions based on 2021 Bartel Associates stochastic analysis, taking into account capital market assumptions of investment advisory firms  Age-based claims costs are based on tables published by the Society of Actuaries and tables developed by Axene Health Partners based on demographic data for the CalPERS health plans provided by CalPERS and Axene’s proprietary AHP Cost Model  Short-term medical trend was developed in consultation with Axene Health Partners’ healthcare actuaries. Long term medical trend developed using the Society of Actuaries Getzen Model of Long- Run Medical Cost Trends  Medical coverage and participation based in part on Plan experience Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 53 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 19 ACTUARIAL ASSUMPTIONS HIGHLIGHTS CERBT Investment Options  2018 Asset Allocation Strategy 1 Strategy 2 Strategy 3 Global Equity 59% 40% 22% Fixed Income 25% 43% 49% TIPS 5% 5% 16% Commodities 3% 4% 5% REITs 8% 8% 8% Total 100% 100% 100%  2022 Asset Allocation (approved March 14, 2022) Strategy 1 Strategy 2 Strategy 3 Global Equity 49% 34% 23% Long US Fixed Income 23% 41% 51% TIPS 5% 5% 9% Commodities 3% 3% 3% Global REITs 20% 17% 14% Total 100% 100% 100% CalPERS’ projected 20-year returns21 6.0% 5.5% 5.0% 21 CalPERS assumes 2.25% price inflation. June 2, 2022 20 ACTUARIAL ASSUMPTIONS HIGHLIGHTS Discount Rate  Future expected returns  Stochastic simulations of geometric average returns over 20 years – 5,000 trials  2.50% inflation assumption  Projections based on 8 independent Investment Advisors 2021 10-year Capital Market Assumptions and where available, investment advisors long-term trends  Bartel Associates calculation of confidence levels (based on 2022 asset allocations): Strategy 1 Strategy 2 Strategy 3 50% Confidence Level 6.25% 5.75% 5.25% 55% Confidence Level 6.00% 5.50% 5.00% 60% Confidence Level 5.75% 5.25% 4.75%  Bartel Associates expected returns, 50th percentile: Strategy 1 Strategy 2 Strategy 3 Expected Real Rate of Return22 3.90% 3.39% 2.92% Inflation Assumption 2.50% 2.50% 2.50% Expenses (Admin. & Invest.) (0.05%) (0.05%) (0.05%) Nominal Rate of Return 6.35% 5.84% 5.37% Rounded to nearest 0.25% 6.25% 5.75% 5.25%  City currently in Strategy 1: Recommend 6.25% discount rate 22 Includes investment expenses Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 54 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 21 ACTUARIAL METHODS Method June 30, 2019 Valuation June 30, 2021 Valuation  Cost Method  Entry Age Normal Level % of Pay  Same  Unfunded Liability Amortization  24 years closed period  Level % of pay (3% annual escalation)  Sensitivity analysis: 22 & 20 years  22 years closed period  Level % of pay (2.75% annual escalation)  Sensitivity analysis: 20 & 18 years  Actuarial Asset Value  Market Value of Assets23  Same  Future New Entrants  Closed group – no new participants  Implied Subsidy  Implied subsidy valued  Plan Continuance  For purposes of financial projections, the plan and benefits are assumed to continue unchanged. The calculation of this obligation does not imply that there is any legal liability to provide or continue providing the benefits valued. 23 Using Market Value of Assets to determine the ADC will result in more volatile future ADCs than if a smoothed Market Value were used. For funding purposes, market value includes accrued contributions made for a previous fiscal year. June 2, 2022 22 ACTUARIAL METHODS This page intentionally blank Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 55 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 23 ASSETS Market Value of Plan Assets (MVA) Invested in CERBT Strategy 1 Fund (Amounts in 000’s) 2017/18 2018/19 2019/20 2020/21 Projected 2021/2224  MVA (Beg. of Year) $ 91,170 $107,846 $118,497 $126,520 $164,170  Contributions 9,212 5,723 3,747 2,94625 2,177  Benefit Payments26 - (1,883) - - -  Admin. Expenses (50) (53) (59) (71) (82)  Investment Return27 7,513 6,864 4,335 34,776 10,258  MVA (End of Year) 107,846 118,497 126,520 164,170 176,523  Approx. Annual Return 7.8% 6.3% 3.6% 27.5% 6.25% 24 Projected from actual 6/30/2021 CERBT balance using assumed rate of return for fiscal year 2021/22 and expected City contribution for FY22, as provided by the City. 25 Includes $1,358 paid on 1/10/2022; MVA shown is not the same as market value for financial reporting purposes. 26 Benefit Payments made outside of trust by City in years other than 2018/19. Refer to Slide 5 for fiscal year amounts. 27 Net of investment expenses. June 2, 2022 24 ASSETS Historical Returns28 28 Assumed rate of return for 2021/22 fiscal year. 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 18/19 19/20 20/21 21/22 Market Value -22.5% 15.1% 24.4% 0.1% 11.2% 18.2% -0.2% 1.1% 10.4% 7.8% 6.3% 3.6% 27.5% 6.25% Expected Return 7.75% 7.75% 7.75% 7.75% 7.75% 7.75% 7.61% 7.25% 7.25% 6.75% 6.75% 6.75% 6.75% 6.25% (25%) (20%) (15%) (10%) (5%) 0% 5% 10% 15% 20% 25% 30% Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 56 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 25 RESULTS Actuarial Obligations (Amounts in 000’s) 6/30/19 Valuation 6/30/21 Valuation 6/30/19 Proj.6/30/20 6/30/21 Proj.6/30/22  Discount Rate 6.75% 6.25%  Present Value of Benefits  Actives (future retirees) $141,423 $131,926  Retirees 159,156 169,243  Total 300,579 301,169  Actuarial Accrued Liability  Actives (future retirees) 82,313 74,954  Retirees 159,156 169,243  Total 241,469 $251,389 244,197 $252,682  Market Value of Assets 118,497 134,810 164,170 176,523  Unfunded AAL 122,972 116,579 80,027 76,159  Funded Ratio 49% 54% 67% 70%  Normal Cost29 6,978 6,316  Pay-As-You-Go Cost (Cash) 10,859 11,190  Pay-As-You-Go Cost (IS) 2,346 3,025 29 Includes Administration fees. June 2, 2022 26 RESULTS Historical Funded Status (Amounts in 000’s) 24% 27% 29% 33%37% 49% 67% $0 $50,000 $100,000 $150,000 $200,000 $250,000 $300,000 1/1/11 6/30/11 6/30/13 6/30/15 6/30/17 6/30/19 6/30/21 Retiree pay-go Retiree AAL less pay-go Active AAL AVA MVA X% Funded Ratio Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 57 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 27 RESULTS Actuarial Gain/Loss (Amounts in $000’s) AAL (Assets) UAAL  Actual 6/30/19 projected to 6/30/20 $ 251,389 $ (130,276) $ 121,113  Expected 6/30/22 271,645 (148,857) 122,788  Experience (Gains)/Losses  Medicare Advantage plan implied subsidy excluded (2,011) (2,011)  Premiums/Caps lower than expected especially Medicare plans (19,362) (19,362)  Demographic (mainly changing retiree Medicare eligibility) 752 - 752  Assumption Changes increasing/(decreasing) AAL  Medical Plan election percentages changed (723) (723)  Inflation, trend, salary growth & discount rate lowered .25% 645 645  Kaiser medical trend lowered (1,769) (1,769)  Updated demographic assumptions: CalPERS current Experience Study and current mortality improvement scale (3,639) (3,639)  Discount rate lowered to additional .25% to 6.25% 7,144 7,144  Contribution and Benefit Payment (Gain) (2,897) (2,897)  Investment (Gain) (24,769) (24,769)  Total (Gain)/Loss (18,963) (27,666) (46,629)  Projected 6/30/22 Unfunded Actuarial Accrued Liability 252,682 (176,523) 76,159 June 2, 2022 28 RESULTS Actuarially Determined Contribution (ADC) (Amounts in 000’s) 6/30/19 Valuation 6/30/21 Valuation 2020/21 2021/22 2022/23 2023/24  Discount Rate 6.75% 6.25%  ADC - $  Normal Cost $ 6,888 $ 7,099 $ 6,196 $ 6,370  Administrative Expenses30 90 98 120 126  UAAL Amortization 7,588 7,816 5,112 5,253  Total 14,566 15,013 11,428 11,749  Projected Payroll 109,486 112,771 110,919 113,969  ADC – Percent of Pay  Normal Cost 6.3% 6.3% 5.6% 5.6%  Administrative Expenses 0.1% 0.1% 0.1% 0.1%  UAAL Amortization 6.9% 6.9% 4.6% 4.6%  Total 13.3% 13.3% 10.3% 10.3% 30 Includes PEMHCA and CERBT administration fees. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 58 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 29 RESULTS Actuarially Determined Contribution (ADC) Payment to Trust (Amounts in 000’s) 6/30/21 Valuation 2022/23 2023/24  Discount Rate 6.25%  ADC - $  Normal cost $ 6,196 $ 6,370  Administrative expenses31 120 126  UAAL amortization 5,112 5,253  Total 11,428 11,749  Less: Implied subsidy benefit payments 3,025 3,073  Remaining ADC 8,403 8,676  Less: Estimated cash benefit payments 11,190 11,792  Total Trust contribution. Negative amount indicates a reimbursement for City out-of- pocket payments may be requested. (2,787) (3,116) 31 Includes PEMHCA and CERBT administration fees. June 2, 2022 30 RESULTS Historical Recommended Funding Contributions (Amounts in 000’s) Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 59 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 31 RESULTS Amortization Bases & Payments (Amounts in 000’s) 6/30/19 Valuation 6/30/21 Valuation 6/30/20 6/30/21 6/30/22 6/30/23  Discount Rate 6.75% 6.25%  Payment Escalator 3.00% 2.75%  UAAL Balance $ 116,579 $ 116,859 $ 76,159 $ 75,807  Amortization Payment 7,588 7,816 5,112 5,253  Amortization Period (years) 24 23 22 21 June 2, 2022 32 RESULTS Unfunded Actuarial Accrued Liability (UAAL) – % of Payroll (Amounts in 000’s) 6/30/13 6/30/15 6/30/17 6/30/19 6/30/21  UAAL/Payroll for year beginning on valuation date  Miscellaneous 158% 152% 149% 99% 64%  Safety 228% 276% 269% 171% 105%  Total 176% 178% 175% 116% 74% Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 60 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 33 RESULTS 10 Year Contribution Projection (Amounts in 000’s) FYE ADC32 Contribution Payroll ADC % of Pay Fund % Cash Ben Pymt Implied Subsidy BP Trust Pre- Funding Total UAAL, Beg. Of FY 202233 $15,013 $10,852 $2,619 $1,542 $15,013 $107,950 13.9% $ 80,027 67% 2023 11,428 11,190 3,025 (2,787) 11,428 110,919 10.3% 76,159 70% 2024 11,749 11,792 3,073 (3,116) 11,749 113,969 10.3% 75,807 71% 2025 12,077 12,313 3,254 (3,490) 12,077 117,103 10.3% 74,558 72% 2026 12,414 12,742 3,326 (3,654) 12,414 120,324 10.3% 73,451 73% 2027 12,759 13,163 3,413 (3,817) 12,759 123,632 10.3% 72,114 74% 2028 13,114 13,557 3,365 (3,808) 13,114 127,032 10.3% 70,531 76% 2029 13,479 14,031 3,468 (4,020) 13,479 130,526 10.3% 68,681 77% 2030 13,854 14,586 3,684 (4,416) 13,854 134,115 10.3% 66,545 78% 2031 14,240 15,037 3,700 (4,497) 14,240 137,803 10.3% 64,098 79% 2032 14,636 15,559 3,837 (4,760) 14,636 141,593 10.3% 61,315 81% 32 Actuarially Determined Contribution 33 Cash benefit payments, Trust pre-funding, Payroll, ADC %, UAAL and Funded percentage updated from 6/30/19 valuation with more current estimate or actual. June 2, 2022 34 RESULTS -$15 -$10 -$5 $0 $5 $10 $15 $20 $25 $30 $ M i l l i o n s Net Trust Payment/Reimbursement Benefit Payments Total ADC ADC, Benefit and Trust Payment/Reimbursement Projection (6.25% Discount Rate, 22 years level % of pay amortization) Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 61 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 35 RESULTS 0% 20% 40% 60% 80% 100% 120% $0 $10 $20 $30 $40 $50 $60 $70 $80 Fu n d e d R a t i o UA A L ( $ M i l l i o n s ) UAAL Funded Ratio UAAL and Funded Ratio Projection (6.25% Discount Rate, 22 years amortization) June 2, 2022 36 RESULTS % of Total Actuarial Accrued Liability for Actives and Retirees Miscellaneous 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 6/30/2009 6/30/2011 6/30/2013 6/30/2015 6/30/2017 6/30/2019 6/30/2021 Actives Retirees Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 62 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 37 RESULTS % of Total Actuarial Accrued Liability for Actives and Retirees Safety 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 6/30/2009 6/30/2011 6/30/2013 6/30/2015 6/30/2017 6/30/2019 6/30/2021 Actives Retirees June 2, 2022 38 RESULTS This chart excludes the Implied Subsidy and is provided for informational purposes only (Amounts in 000’s) Cash Benefit  Present Value of Benefits $ 247,479  Funded Status 6/30/21  Actuarial Accrued Liability 198,084  Actuarial Value of Assets 164,170  Unfunded AAL 33,914  Funded Ratio 82.9%  ADC 2022/23  Normal Cost 5,370  Administrative Expenses 120  UAAL Amortization 1,878  Total 7,368  ADC % of Payroll 6.6% Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 63 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 39 RESULTS - DETAILS Actuarial Obligations June 30, 2021 (Amounts in 000’s) Benefits Paid Before Age 65 Benefits Paid On or After Age 65 Total  Present Value of Benefits  Actives (future retirees) $ 70,063 $ 61,863 $ 131,926  Retirees 45,570 123,673 169,243  Total 115,633 185,536 301,169  Actuarial Accrued Liability  Actives (future retirees) 38,191 36,763 74,954  Retirees 45,570 123,673 169,243  Total 83,761 160,436 244,197  Normal Cost 2022/2334 3,394 2,922 6,316 34 Includes Administration fees. June 2, 2022 40 RESULTS - DETAILS Actuarial Obligations June 30, 2021 (Amounts in 000’s) Group 1 Group 2 Group 3 Group 4 Total  Present Value of Benefits  Actives (future retirees) $ - $ - $13,377 $118,549 $131,926  Retirees 47,988 55,784 33,446 32,024 169,243  Total 47,988 55,784 46,823 150,573 301,169  Actuarial Accrued Liability  Actives (future retirees) - - 11,034 63,920 74,954  Retirees 47,988 55,784 33,446 32,024 169,243  Total 47,988 55,784 44,480 95,944 244,197  Normal Cost 2022/2335 n/a n/a 437 5,879 6,316  NC as % of Payroll n/a n/a 5.7% 5.7% 5.7%  Active Count n/a n/a 69 805 874  Projected Payroll (000’s) n/a n/a 7,647 103,272 110,919 35 Includes Administration fees. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 64 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 41 RESULTS - DETAILS Cash/Implied Subsidy – Actuarial Obligations – June 30, 2021 (Amounts in 000’s) Cash Subsidy Implied Subsidy Total  Present Value of Benefits  Actives (future retirees) $112,909 $19,017 $131,926  Retirees 134,570 34,673 169,243  Total 247,479 53,690 301,169  Actuarial Accrued Liability  Actives (future retirees) 63,514 11,440 74,954  Retirees 134,570 34,673 169,243  Total 198,084 46,113 244,197  Market Value of Assets36 133,169 31,001 164,170  Unfunded AAL 64,915 15,112 80,027  Normal Cost 2022/2337 5,490 827 6,316  Pay-As-You-Go Cost 2022/23 11,190 3,025 14,215 36 Allocated in proportion to AAL for illustrative purposes. 37 Includes Administration fees. June 2, 2022 42 RESULTS - DETAILS Cash/Implied Subsidy – Actuarially Determined Contribution – 2022/23 FY (Amounts in 000’s) Cash Subsidy Implied Subsidy Total  ADC - $  Normal Cost $ 5,370 $ 827 $ 6,196  Administrative Expenses 120 - 120  UAAL Amortization 4,137 975 5,112  ADC 9,628 1,802 11,428  Projected Payroll 110,919 110,919 110,919  ADC - % of Payroll  Normal Cost 4.8% 0.7% 5.6%  Administrative Expenses 0.1% 0.0% 0.1%  UAAL Amortization 3.8% 0.9% 4.6%  ADC 8.7% 1.6% 10.3% Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 65 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 43 RESULTS - DETAILS Actuarial Obligations June 30, 2021 (Amounts in 000’s) Misc. Safety Total  Present Value of Benefits  Actives (future retirees) $ 93,601 $ 38,325 $131,926  Retirees 105,970 63,273 169,243  Total 199,571 101,598 301,169  Actuarial Accrued Liability  Actives (future retirees) 54,931 20,022 74,954  Retirees 105,970 63,273 169,243  Total 160,901 83,295 244,197  Market Value of Assets38 108,171 55,998 164,170  Unfunded AAL 52,730 27,297 80,027  Normal Cost 2022/2339 4,397 1,916 6,316  Pay-As-You-Go Cost 2022/23 9,298 4,917 14,215 38 Allocated in proportion to the Actuarial Accrued Liability. 39 Includes Administration fees. June 2, 2022 44 RESULTS - DETAILS Actuarially Determined Contribution (ADC) 2022/23 Fiscal Year (Amounts in 000’s) Misc Safety Total  ADC - $  Normal Cost $ 4,320 $ 1,876 $ 6,196  Administrative Expenses 79 41 120  UAAL Amortization40 3,378 1,734 5,112  ADC 7,777 3,651 11,428  Projected Payroll 84,095 26,824 110,919  ADC - % of Payroll  Normal Cost 5.1% 7.0% 5.6%  Administrative Expenses 0.1% 0.1% 0.1%  UAAL Amortization 4.0% 6.5% 4.6%  ADC 9.2% 13.6% 10.3% 40 Allocated in proportion to the Actuarial Accrued Liability. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 66 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 45 RESULTS - DETAILS Actuarial Obligations – By Bargaining Unit June 30, 2021 (Amounts in 000’s) FCA IAFF M/C PAPOA PMA SEIU UMPAPA Total  PVB  Actives $ 1,108 $18,332 $26,116 $16,058 $ 1,601 $60,991 $ 7,720 $131,926  Retirees 2,030 31,905 48,000 20,418 2,267 58,013 6,609 169,243  Total 3,138 50,237 74,116 36,476 3,868 119,004 14,329 301,169  AAL  Actives 747 10,040 15,313 7,327 1,156 34,725 5,645 74,954  Retirees 2,030 31,905 48,000 20,418 2,267 58,013 6,609 169,243  Total 2,777 41,945 63,313 27,745 3,423 92,738 12,254 244,197  MVA41 1,867 28,199 42,564 18,653 2,301 62,346 8,238 164,170  UAAL 910 13,746 20,749 9,092 1,122 30,392 4,016 80,027  NC 22/23 39 810 1,282 883 60 2,854 265 6,196  Pay-Go 183 2,530 3,917 1,581 156 5,192 655 14,215 41 Allocated in proportion to the Actuarial Accrued Liability. June 2, 2022 46 RESULTS - DETAILS Actuarially Determined Contribution (ADC) – By Bargaining Unit 2022/23 Fiscal Year (Amounts in 000’s) FCA IAFF M/C PAPOA PMA SEIU UMPAPA Total  ADC - $  Normal Cost $ 39 $ 810 $1,282 $ 883 $ 60 $2,854 $ 265 $ 6,196  Admin. Exp. 1 20 31 14 2 46 6 120  UAAL Amort42 57 870 1,315 583 72 1,958 257 5,112  ADC 98 1,700 2,628 1,480 134 4,858 528 11,428  Proj. Payroll 885 12,321 27,665 10,980 1,448 49,597 8,023 110,919  ADC - %  Normal Cost 4.4% 6.6% 4.6% 8.0% 4.1% 5.8% 3.3% 5.6%  Admin. Exp. 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%  UAAL Amort 6.4% 7.1% 4.8% 5.4% 5.0% 3.9% 3.2% 4.6%  ADC 11.0% 13.8% 9.5% 13.5% 9.2% 9.8% 6.6% 10.3% 42 Allocated in proportion to the Actuarial Accrued Liability. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 67 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 47 RESULTS - DETAILS Actuarially Determined Contribution (ADC) – By Bargaining Unit 2023/24 Fiscal Year (Amounts in 000’s) FCA IAFF M/C PAPOA PMA SEIU UMPAPA Total  ADC - $  Normal Cost $ 40 $ 833 $ 1,318 $ 908 $ 62 $ 2,937 $ 272 $ 6,370  Admin. Exp. 1 22 33 14 2 48 6 126  UAAL Amort43 59 894 1,351 599 74 2,012 264 5,253  ADC 100 1,749 2,702 1,522 137 4,998 542 11,749  Proj. Payroll 909 12,659 28,426 11,282 1,488 50,961 8,243 113,969  ADC - %  Normal Cost 4.4% 6.6% 4.6% 8.1% 4.1% 5.8% 3.3% 5.6%  Admin. Exp. 0.2% 0.2% 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%  UAAL Amort 6.4% 7.0% 4.8% 5.3% 5.0% 3.9% 3.2% 4.6%  ADC 11.0% 13.8% 9.5% 13.5% 9.2% 9.8% 6.6% 10.3% 43 Allocated in proportion to the Actuarial Accrued Liability. June 2, 2022 48 RESULTS - DETAILS This page intentionally blank Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 68 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 49 SENSITIVITY ANALYSIS Discount Rate Sensitivity (Amounts in 000’s) CERBT Strategy #1 (Current) #2 #3  Discount Rate 6.25% 5.75% 5.25%  Present Value of Benefits $ 301,169 $ 325,144 $ 352,410  Funded Status 6/30/21  Actuarial Accrued Liability 244,197 258,741 274,737  Assets 164,170 164,170 164,170  Unfunded AAL 80,027 94,571 110,567  Funded Ratio 67.2% 63.4% 59.8%  ADC 2022/23  Normal Cost 6,196 6,899 7,697  Administrative Expenses 120 120 120  UAAL Amortization44 5,112 5,875 6,636  Total 11,428 12,894 14,453  ADC % of Payroll 10.3% 11.6% 13.0% 44 UAAL projected using the same “Current” projected assets for all scenarios. UAAL amortized over 22 years for all scenarios. June 2, 2022 50 SENSITIVITY ANALYSIS Amortization Period Sensitivity Discount Rate – 6.25%, Level % of Pay with 2.75% Payment Escalation (Amounts in 000’s)  Amortization Period Current 22 Years 20 Years 18 Years  Funded Status Projected to 6/30/22  Actuarial Accrued Liability $ 252,682 $ 252,682 $ 252,682  Assets 176,523 176,523 176,523  Unfunded AAL 76,159 76,159 76,159  Total Projected Payroll 2022/23 110,919 110,919 110,919  ADC 2022/23  Normal Cost 6,196 6,196 6,196  Administrative Expenses 120 120 120  UAAL Amortization 5,112 5,459 5,887  Total 11,428 11,775 12,203  ADC % of Payroll 10.3% 10.6% 11.0% Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 69 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 51 SENSITIVITY ANALYSIS Amortization Period Sensitivity Discount Rate – 5.75%, Level % of Pay with 2.75% Payment Escalation (Amounts in 000’s)  Amortization Period Current 22 Years 20 Years 18 Years  Funded Status Projected to 6/30/22  Actuarial Accrued Liability $ 267,556 $ 267,556 $ 267,556  Assets 175,703 175,703 175,703  Unfunded AAL 91,853 91,853 91,853  Total Projected Payroll 2022/23 110,919 110,919 110,919  ADC 2022/23  Normal Cost 6,899 6,899 6,899  Administrative Expenses 120 120 120  UAAL Amortization 5,875 6,297 6,816  Total 12,894 13,316 13,835  ADC % of Payroll 11.6% 12.0% 12.5% June 2, 2022 52 SENSITIVITY ANALYSIS Asset Return Sensitivity – Actuarially Determined Contribution (ADC) (Amounts in 000’s) 6/30/21 Valuation 6/30/21 Valuation 2022/23 2023/24 2022/23 2023/24  Assumed Return in FY22 6.25% 0%  ADC - $  Normal Cost $ 6,196 $ 6,370 $ 6,196 $ 6,370  Administrative Expenses45 120 126 115 121  UAAL Amortization 5,112 5,253 5,801 5,960  Total 11,428 11,749 12,112 12,452  Projected Payroll 110,919 113,969 110,919 113,969  ADC - % of Payroll  Normal Cost 5.6% 5.6% 5.6% 5.6%  Administrative Expenses 0.1% 0.1% 0.1% 0.1%  UAAL Amortization 4.6% 4.6% 5.2% 5.2%  Total 10.3% 10.3% 10.9% 10.9% 45 Includes PEMHCA and CERBT administration fees. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 70 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 53 CONTRIBUTION BASIS RESULTS Contribution Basis  No statutory requirement for contributions to OPEB trust  City is considering contributing to OPEB trust on more conservative basis than the ADC calculated in this funding valuation (i.e. Baseline Valuation Results)  ADC for FYE 2021 and 2022 was based on 6.75% discount rate. City contributed more than the ADC (actual payment based on 6.25% discount rate).  Unlike pension plan, additional contributions do not go into a separate Section 115 trust, instead they remain in the plan, and are included in the assets each year in the calculation of the ADC. This means additional contributions reduce the ADC each future year.  City has asked to see what contributions would look like if these additional assets are separated and not included in the traditional asset balance when determining the ADC (show estimated “Additional Assets” separate from plan assets)  City would also like to see more conservative earnings assumptions  Projected fund earnings in 21/22 assumed to be 0% instead of 6.25%  All future earnings of fund assumed to be 5.25% or 5.75% instead of 6.25% (same discount rate as if fund were invested in CERBT #3 or CERBT #2, respectively, instead of CERBT #1)  Amortize UAL over 14 or 15 years instead of current period of 22 years June 2, 2022 54 CONTRIBUTION BASIS RESULTS Actuarial Obligations as of June 30, 2021 – Contribution Basis (Amounts in 000’s) Contribution Basis Baseline Exclude Additional Contributions  Assumed FY22 Return 6.25% 0%  Discount Rate/Future Earnings 6.25% 6.25% 5.25%  Present Value of Benefits $ 301,169 $ 301,169 $ 352,410  Funded Status  Actuarial Accrued Liability 244,197 244,197 274,737  Assets for ADC/alternate contribution calculation 164,170 162,812 162,812  Unfunded AAL 80,027 81,385 111,925  Funded Ratio – “Alternate” Assets 67.2% 66.7% 59.3%  Funded Ratio – All Assets 67.2% 67.2% 59.8%  Additional Assets46 balance 6/30/21 $ 1,358 $ 1,358 $ 1,358 46 Accumulated additional contributions made by the City as of 6/30/2021 (accrued; actual payment made January 2022). Baseline results assume all additional contributions are included in assets used in calculation of ADC. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 71 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 55 CONTRIBUTION BASIS RESULTS Contribution Basis – Alternate Contributions 22 Year Amortization (Amounts in 000’s) Baseline ADC Exclude Additional Contributions 2022/23 2023/24 2022/23 2023/24 2022/23 2023/24  Assumed FY22 Return 6.25% 0% 0%  Discount Rate 6.25% 6.25% 5.25%  Contribution - $  Normal Cost $ 6,196 $ 6,370 $ 6,196 $ 6,370 $7,697 $7,912  Admin. Expenses47 120 126 115 121 115 121  UAAL Amortization 5,112 5,253 5,991 6,168 7,332 7,544  Total 11,428 11,749 12,302 12,659 15,144 15,578  Projected Payroll 110,919 113,969 110,919 113,969 110,919 113,969  Contribution - % of Payroll  Normal Cost 5.6% 5.6% 5.6% 5.6% 6.9% 6.9%  Admin. Expenses 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%  UAAL Amortization 4.6% 4.6% 5.4% 5.4% 6.6% 6.6%  Total 10.3% 10.3% 11.1% 11.1% 13.7% 13.7% 47 Includes PEMHCA and CERBT administration fees. June 2, 2022 56 CONTRIBUTION BASIS RESULTS 10 Year Projection – Exclude Additional Contributions – 6.25% 22 Year Amortization (Amounts in 000’s) FYE Calcu- lated Contri- bution48 Contribution Payroll Contr. % of Pay Fund % (All Assets) Add’l Contrib Balance (boy) Cash Ben Pmt Implied Subsidy Ben Pmt Trust Pre- Funding Total 202249 $15,013 $10,852 $2,619 $1,542 $15,013 $107,950 13.9% 67% $1,358 2023 12,302 11,190 3,025 (1,913) 12,302 110,919 11.1% 66% 2,828 2024 12,659 11,792 3,073 (2,206) 12,659 113,969 11.1% 67% 3,004 2025 13,028 12,313 3,254 (2,539) 13,028 117,103 11.1% 68% 3,192 2026 13,408 12,742 3,326 (2,660) 13,408 120,324 11.1% 70% 3,392 2027 13,800 13,163 3,413 (2,776) 13,800 123,632 11.2% 71% 3,604 2028 14,207 13,557 3,365 (2,715) 14,207 127,032 11.2% 73% 3,829 2029 14,628 14,031 3,468 (2,871) 14,628 130,526 11.2% 74% 4,068 2030 15,067 14,586 3,684 (3,203) 15,067 134,115 11.2% 76% 4,322 2031 15,521 15,037 3,700 (3,216) 15,521 137,803 11.3% 78% 4,593 2032 15,996 15,559 3,837 (3,400) 15,996 141,593 11.3% 79% 4,880 48 Alternate contribution calculation: 0% FY22 return, 22-year amortization of UAAL, 6.25% discount rate 49 Cash benefit payments, Trust pre-funding, Payroll, Contribution % of Pay, and Funded percentage updated from 6/30/19 valuation with more current estimate or actual. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 72 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 57 CONTRIBUTION BASIS RESULTS 10 Year Projection – Exclude Additional Contributions – 5.25% 22 Year Amortization (Amounts in 000’s) FYE Calcu- lated Contri- bution50 Contribution Payroll Contr. % of Pay Fund % (All Assets) Add’l Contrib Balance (boy) Cash Ben Pmt Implied Subsidy Ben Pmt Trust Pre- Funding Total 202251 $15,013 $10,852 $2,619 $1,542 $15,013 $107,950 13.9% 67% $1,358 2023 15,144 11,190 3,025 929 15,144 110,919 13.7% 59% 2,817 2024 15,578 11,792 3,073 713 15,578 113,969 13.7% 60% 2,965 2025 16,024 12,313 3,254 457 16,024 117,103 13.7% 62% 3,121 2026 16,484 12,742 3,326 416 16,484 120,324 13.7% 64% 3,285 2027 16,958 13,163 3,413 382 16,958 123,632 13.7% 65% 3,457 2028 17,449 13,557 3,365 527 17,449 127,032 13.7% 67% 3,639 2029 17,955 14,031 3,468 456 17,955 130,526 13.8% 69% 3,830 2030 18,479 14,586 3,684 209 18,479 134,115 13.8% 71% 4,031 2031 19,022 15,037 3,700 285 19,022 137,803 13.8% 73% 4,243 2032 19,585 15,559 3,837 189 19,585 141,593 13.8% 75% 4,465 50 Alternate contribution calculation: 0% FY22 return, 22-year amortization of UAAL, 5.25% discount rate 51 Cash benefit payments, Trust pre-funding, Payroll, Contribution % of Pay, and Funded percentage updated from 6/30/19 valuation with more current estimate or actual. June 2, 2022 58 CONTRIBUTION BASIS RESULTS 10 Year Projection – Exclude Additional Contributions – 5.75% 22 Year Amortization (Amounts in 000’s) FYE Calcu- lated Contri- bution52 Contribution Payroll Contr. % of Pay Fund % (All Assets) Add’l Contrib Balance (boy) Cash Ben Pmt Implied Subsidy Ben Pmt Trust Pre- Funding Total 202253 $15,013 $10,852 $2,619 $1,542 $15,013 $107,950 13.9% 67% $1,358 2023 13,673 11,190 3,025 (542) 13,673 110,919 12.3% 62% 2,823 2024 14,067 11,792 3,073 (798) 14,067 113,969 12.3% 64% 2,985 2025 14,474 12,313 3,254 (1,093) 14,474 117,103 12.4% 65% 3,156 2026 14,892 12,742 3,326 (1,176) 14,892 120,324 12.4% 67% 3,338 2027 15,324 13,163 3,413 (1,252) 15,324 123,632 12.4% 68% 3,530 2028 15,770 13,557 3,365 (1,152) 15,770 127,032 12.4% 70% 3,733 2029 16,232 14,031 3,468 (1,267) 16,232 130,526 12.4% 72% 3,947 2030 16,712 14,586 3,684 (1,558) 16,712 134,115 12.5% 73% 4,174 2031 17,209 15,037 3,700 (1,528) 17,209 137,803 12.5% 75% 4,414 2032 17,725 15,559 3,837 (1,671) 17,725 141,593 12.5% 77% 4,668 52 Alternate contribution calculation: 0% FY22 return, 22-year amortization of UAAL, 5.75% discount rate 53 Cash benefit payments, Trust pre-funding, Payroll, Contribution % of Pay, and Funded percentage updated from 6/30/19 valuation with more current estimate or actual. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 73 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 59 CONTRIBUTION BASIS RESULTS Contribution Basis – Alternate Contributions 14 Year Amortization (Amounts in 000’s) Baseline ADC Exclude Additional Contributions 2022/23 2023/24 2022/23 2023/24 2022/23 2023/24  Assumed FY22 Return 6.25% 0% 0%  Discount Rate 6.25% 6.25% 5.75%  Contribution - $  Normal Cost $ 6,196 $ 6,370 $ 6,196 $ 6,370 $6,899 $7,092  Admin. Expenses54 120 126 115 123 115 123  UAAL 5,112 5,253 8,344 8,600 9,419 9,702  Total 11,428 11,749 14,655 15,093 16,433 16,917  Projected Payroll 110,919 113,969 110,919 113,969 110,919 113,969  Contribution - % of Payroll  Normal Cost 5.6% 5.6% 5.6% 5.6% 6.2% 6.2%  Admin. Expenses 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%  UAAL Amortization 4.6% 4.6% 7.5% 7.5% 8.5% 8.5%  Total 10.3% 10.3% 13.2% 13.2% 14.8% 14.8% 54 Includes PEMHCA and CERBT administration fees. 55 Baseline amortized over 22 years, other scenarios over 14 years. June 2, 2022 60 CONTRIBUTION BASIS RESULTS Contribution Basis – Alternate Contributions 15 Year Amortization (Amounts in 000’s) Baseline ADC Exclude Additional Contributions 2022/23 2023/24 2022/23 2023/24 2022/23 2023/24  Assumed FY22 Return 6.25% 0% 0%  Discount Rate 6.25% 6.25% 5.75%  Contribution - $  Normal Cost $ 6,196 $ 6,370 $ 6,196 $ 6,370 $6,899 $7,092  Admin. Expenses56 120 126 115 122 115 123  UAAL 5,112 5,253 7,909 8,150 8,909 9,176  Total 11,428 11,749 14,220 14,642 15,923 16,391  Projected Payroll 110,919 113,969 110,919 113,969 110,919 113,969  Contribution - % of Payroll  Normal Cost 5.6% 5.6% 5.6% 5.6% 6.2% 6.2%  Admin. Expenses 0.1% 0.1% 0.1% 0.1% 0.1% 0.1%  UAAL Amortization 4.6% 4.6% 7.1% 7.1% 8.1% 8.1%  Total 10.3% 10.3% 12.8% 12.8% 14.4% 14.4% 56 Includes PEMHCA and CERBT administration fees. 57 Baseline amortized over 22 years, other scenarios over 15 years. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 74 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 61 CONTRIBUTION BASIS RESULTS 10 Year Projection – Exclude Additional Contributions – 5.75% 15 Year Amortization (Amounts in 000’s) FYE Calcu- lated Contri- bution58 Contribution Payroll Contr. % of Pay Fund % (All Assets) Add’l Contrib Balance (boy) Cash Ben Pmt Implied Subsidy Ben Pmt Trust Pre- Funding Total 202259 $15,013 $10,852 $2,619 $1,542 $15,013 $107,950 13.9% 67% $1,358 2023 15,923 11,190 3,025 1,708 15,923 110,919 14.4% 62% 2,823 2024 16,391 11,792 3,073 1,526 16,391 113,969 14.4% 64% 2,985 2025 16,874 12,313 3,254 1,307 16,874 117,103 14.4% 67% 3,156 2026 17,376 12,742 3,326 1,308 17,376 120,324 14.4% 69% 3,338 2027 17,897 13,163 3,413 1,321 17,897 123,632 14.5% 72% 3,530 2028 18,443 13,557 3,365 1,521 18,443 127,032 14.5% 74% 3,733 2029 19,016 14,031 3,468 1,517 19,016 130,526 14.6% 77% 3,947 2030 19,622 14,586 3,684 1,352 19,622 134,115 14.6% 80% 4,174 2031 20,268 15,037 3,700 1,531 20,268 137,803 14.7% 83% 4,414 2032 20,970 15,559 3,837 1,574 20,970 141,593 14.8% 86% 4,668 58 Alternate contribution calculation: 0% FY22 return, 15-year amortization of UAAL, 5.75% discount rate 59 Cash benefit payments, Trust pre-funding, Payroll, Contribution % of Pay, and Funded percentage updated from 6/30/19 valuation with more current estimate or actual. June 2, 2022 62 COMPARISON TO OTHER AGENCIES 50% of 90% of results results are are within within this this range range 5th Percentile 75th Percentile 50th Percentile 25th Percentile Bartel Associates OPEB Database Sample Percentile Graph 95th Percentile 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% Pe r c e n t o f P a y Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 75 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 63 COMPARISON TO OTHER AGENCIES NC ADC NC ADC 95th Percentile 11.6% 25.3%12.6% 29.9% 75th Percentile 6.1% 11.4%5.7% 13.8% 50th Percentile 3.2% 5.8%2.9% 6.8%25th Percentile 1.8% 2.9%1.7% 3.4% 5th Percentile 0.8% 0.9%0.9% 1.4% ` Percent of Pay (♦) 5.1% 9.2%7.0% 13.6% Percentile 70% 70%81% 76% Miscellaneous Safety Discount Rate = 6.25%, Average Amortization Period = 22.0 Years 0% 5% 10% 15% 20% 25% 30% 35% Pe r c e n t o f P a y Bartel Associates OPEB DatabaseNormal Cost & Actuarially Determined Contribution June 2, 2022 64 COMPARISON TO OTHER AGENCIES General Miscellaneous Safety 95th Percentile 319%428% 75th Percentile 174%217% 50th Percentile 92%97% 25th Percentile 40%47% 5th Percentile 14%16% Percent of Pay (♦) 197%319% Percentile 80%90% Discount Rate = 6.25% 0% 50% 100% 150% 200% 250% 300% 350% 400% 450% Pe r c e n t o f P a y Bartel Associates OPEB Database Actuarial Accrued Liability Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 76 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 65 ACTUARIAL CERTIFICATION This report presents the City of Palo Alto Retiree Healthcare Plan (“Plan”) June 30, 2021 actuarial valuation. The purpose of this valuation is to:  Determine the June 30, 2021 Benefit Obligations,  Determine the Plan’s June 30, 2021 Funded Status, and  Calculate the 2022/23 and 2023/24 Actuarially Determined Contributions. The report provides information intended for funding the City’s Plan, but may not be appropriate for other purposes. Future actuarial measurements may differ significantly from the current measurements presented in this report due to such factors as: plan experience differing from that anticipated by the assumptions; changes in assumptions; changes expected as part of the natural progression of the plan; and changes in plan provisions or applicable law. Actuarial models necessarily rely on the use of estimates and are sensitive to changes. Small variations in estimates may lead to significant changes in actuarial measurements. Due to the limited scope of this assignment, we did not perform an analysis of the potential range of such measurements. The valuation is based on Plan provisions, participant data, and asset information provided by the City as summarized in this report, which we relied on and did not audit. We reviewed the participant data for reasonableness. To the best of our knowledge, this report is complete and accurate and has been conducted using generally accepted actuarial principles and practices. As members of the American Academy of Actuaries meeting the Academy Qualification Standards, we certify the actuarial results and opinions herein. Respectfully submitted, Mary Elizabeth Redding, FSA, MAAA, EA Vice President Bartel Associates, LLC June 2, 2022 Deanna Van Valer, ASA, MAAA, EA, FCA Assistant Vice President Bartel Associates, LLC June 2, 2022 June 2, 2022 66 EXHIBITS Topic Page Premiums E- 1 Data Summary E- 4 Additional Actuarial Assumptions E-26 Results by Fund E-34 Results by GF Department E-36 Definitions E-38 Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 77 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-1 PREMIUMS 2021 PEMHCA Monthly Premiums Region 1 Non-Medicare Eligible Medicare Eligible Medical Plan Single 2-Party Family Single 2-Party Family Anthem Select $925.60 $1,851.20 $2,406.56 $383.37 $766.74 $1,150.11 Anthem Traditional 1,307.86 2,615.72 3,400.44 383.37 766.74 1,150.11 Blue Shield Access+ 1,170.08 2,340.16 3,042.21 n/a n/a n/a Blue Shield Trio 880.50 1,761.00 2,289.30 n/a n/a n/a Health Net SmartCare 1,120.21 2,240.42 2,912.55 n/a n/a n/a Kaiser 813.64 1,627.28 2,115.46 324.48 648.96 973.44 UnitedHealthcare Alliance 941.17 1,882.34 2,447.04 n/a n/a n/a UnitedHealthcare Group n/a n/a n/a 311.56 623.12 934.68 UnitedHealthcare Edge n/a n/a n/a n/a n/a n/a Western Health Advantage 757.02 1,514.04 1,968.25 n/a n/a n/a Anthem EPO Del Norte 935.84 1,871.68 2,433.18 n/a n/a n/a PERSCare/PERS Platinum 1,294.69 2,589.38 3,366.19 381.25 762.50 1,143.75 PERS Choice/PERS Platinum 935.84 1,871.68 2,433.18 349.97 699.94 1,049.91 PERS Select/PERS Gold 566.67 1,133.34 1,473.34 349.97 699.94 1,049.91 PORAC 799.00 1,725.00 2,199.00 513.00 1,022.00 1,635.00 June 2, 2022 E-2 PREMIUMS 2022 PEMHCA Monthly Premiums Region 1 Non-Medicare Eligible Medicare Eligible Medical Plan Single 2-Party Family Single 2-Party Family Anthem Select $1,015.81 $2,031.62 $2,641.11 $ 360.19 $ 720.38 $ 1,080.57 Anthem Traditional 1,304.00 2,608.00 3,390.40 360.19 720.38 1,080.57 Blue Shield Access+ 1,116.01 2,232.02 2,901.63 353.11 706.22 1,059.33 Blue Shield Trio 898.54 1,797.08 2,336.20 353.11 706.22 1,059.33 Health Net SmartCare 1,153.00 2,306.00 2,997.80 n/a n/a n/a Kaiser 857.06 1,714.12 2,228.36 302.53 605.06 907.59 UnitedHealthcare Alliance 1,020.28 2,040.56 2,652.73 n/a n/a n/a UnitedHealthcare Group n/a n/a n/a 294.65 589.30 883.95 UnitedHealthcare Edge n/a n/a n/a 347.21 694.42 1,041.63 Western Health Advantage 741.26 1,482.52 1,927.28 314.94 629.88 944.82 Anthem EPO Del Norte 1,057.01 2,114.02 2,748.23 n/a n/a n/a PERSCare/PERS Platinum 1,057.01 2,114.02 2,748.23 381.94 763.88 1,145.82 PERS Choice/PERS Platinum 1,057.01 2,114.02 2,748.23 381.94 763.88 1,145.82 PERS Select/PERS Gold 701.23 1,402.46 1,823.20 377.41 754.82 1,132.23 PORAC 799.00 1,725.00 2,219.00 461.00 919.00 1,471.00 Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 78 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-3 PREMIUMS PEMHCA Monthly Premium Increases/(Decreases) Bay Area/Region 1 Non-Medicare Eligible Medicare Eligible Medical Plan 2021 2022 2021 2022 Anthem Select 6.5% 9.7% (1.2%) (6.0%) Anthem Traditional 10.4% (0.3%) (1.2%) (6.0%) Blue Shield Access+ 3.8% (4.6%) n/a n/a Blue Shield Trio 5.7% 2.0% n/a n/a Health Net SmartCare 12.0% 2.9% n/a n/a Kaiser 5.9% 5.3% (4.4%) (6.8%) UnitedHealthcare Alliance 4.6% 8.4% (4.7%) n/a UnitedHealthcare Group n/a n/a n/a (5.4%) Western Health Advantage 3.4% (2.1%) n/a n/a Anthem EPO Del Norte 8.7% 12.9% n/a n/a PERSCare/PERS Platinum 8.7% (18.4%) (0.9%) 0.2% PERS Choice/PERS Platinum 8.9% 12.9% (0.4%) 9.1% PERS Select/PERS Gold 14.3% 23.7% (0.4%) 7.8% PORAC 3.2% 0.0% 0.0% (10.1%) June 2, 2022 E-4 DATA SUMMARY Participant Statistics by Bargaining Unit June 30, 2021 FCA IAFF M/C PAPOA PMA SEIU UMPAPA Total  Actives  Count 4 80 195 68 6 477 44 874  Avg Age 42.6 42.5 47.3 39.8 46.9 44.8 49.1 45.0  Avg City Svc 18.1 12.8 10.6 10.2 22.1 10.6 17.3 11.2  Avg PERS Svc 18.1 13.3 12.2 11.2 23.1 11.2 18.1 12.1  Avg Salary $209,498 $145,878 $134,380 $152,938 $228,619 $98,486 $172,711 $120,207  Total Salary60 $838 $11,670 $26,204 $10,400 $1,372 $46,978 $7,599 $105,061  Retirees61:  Count 6 148 307 89 5 430 24 1,009  Avg Age 64.7 71.0 72.0 66.9 57.5 71.6 62.2 70.9  Avg Service Ret Age 56.7 54.6 58.3 52.3 50.4 59.6 58.8 58.2  Avg Disab Ret Age 50.1 48.8 50.5 42.0 n/a 48.0 n/a 46.3 60 Amount in 000’s. Actual 2020/21 PERSable compensations. 61 Excludes retirees who have waived coverage. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 79 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-5 DATA SUMMARY Participant Statistics by Bargaining Unit June 30, 2019 FCA IAFF M/C PAPOA PMA SEIU UMPAPA Total  Actives  Count 5 85 207 69 7 508 49 930  Avg Age 43.9 42.3 47.2 40.2 44.7 44.4 50.4 44.8  Avg City Svc 17.9 12.4 10.2 9.7 17.8 10.1 18.3 10.8  Avg PERS Svc 17.9 12.9 11.7 11.0 18.6 10.7 19.2 11.7  Avg Salary $176,198 $121,901 $136,149 $143,180 $213,236 $87,088 $166,590 $110,969  Total Salary62 $881 $10,362 $28,183 $9,879 $1,493 $44,241 $8,163 $103,201  Retirees63:  Count 6 143 298 90 6 418 13 974  Avg Age 63.1 70.6 70.7 66.3 55.0 70.8 60.2 70.0  Avg Service Ret Age 56.8 54.6 58.2 52.0 50.5 59.5 57.1 58.0  Avg Disab Ret Age 50.1 48.4 50.5 41.4 n/a 48.2 n/a 46.1 62 Amount in 000’s. Actual 2018/19 PERSable compensations. 63 Excludes retirees who have waived coverage. June 2, 2022 E-6 DATA SUMMARY Participant Statistics by CalPERS Pension Category June 30, 2021 64 Actual 2020/21 PERSable compensations. 65 Excludes retirees who have waived coverage. Miscellaneous Police Fire Total  Actives  Count 711 76 87 874  Average Age 45.7 40.7 42.7 45.0  Average City Service 11.0 11.0 13.2 11.2  Average PERS Service 11.9 12.0 13.7 12.1  Average Salary $112,031 $161,950 $150,562 $120,207  Total Salary (000’s)64 $79,654 $12,308 $13,099 $105,061  Retirees65:  Count 739 105 165 1,009  Average Age 71.6 66.3 70.7 70.9  Avg Service Ret Age 59.2 52.0 54.5 58.2  Avg Disability Ret Age 48.1 42.1 48.9 46.3 Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 80 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-7 DATA SUMMARY Participant Statistics by CalPERS Pension Category June 30, 2019 66 Actual 2018/19 PERSable compensations. 67 Excludes retirees who have waived coverage. Miscellaneous Police Fire Total  Actives  Count 761 76 93 930  Average Age 45.5 41.2 42.5 44.8  Average City Service 10.6 10.8 12.8 10.8  Average PERS Service 11.5 12.1 13.3 11.7  Average Salary $104,652 $153,105 $128,224 $110,969  Total Salary (000’s)66 $79,640 $11,636 $11,925 $103,201  Retirees67:  Count 707 107 160 974  Average Age 70.7 65.8 70.1 70.0  Avg Service Ret Age 59.1 51.8 54.5 58.0  Avg Disability Ret Age 48.2 41.5 48.5 46.1 June 2, 2022 E-8 DATA SUMMARY Medical Plan Participation – June 30, 2021 All Retirees Medical Plan Actives Under 65 65 or Older Total Miscellaneous/Safety M S M S M S M S Anthem Select 6% 3% 5% 1% - - 2% - Anthem Traditional 4% 1% 9% 8% 6% 5% 6% 6% Blue Shield - - 3% 7% - - 1% 3% Health Net SmartCare 1% 1% 1% 1% - - - - Kaiser 65% 51% 40% 36% 30% 23% 32% 29% UnitedHealthcare - - 1% 2% 18% 13% 14% 8% Western Health Advantage - - 1% - - - - - PERSCare - - 4% 9% 25% 37% 20% 25% PERS Choice 22% 3% 32% 3% 21% 15% 24% 10% PERS Select 1% 1% 3% - - - 1% - PORAC - 40% 1% 32% - 8% - 19% Total 100% 100% 100% 100% 100% 100% 100% 100% Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 81 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-9 DATA SUMMARY Medical Plan Participation – June 30, 2019 All Retirees Medical Plan Actives Under 65 65 or Older Total Miscellaneous/Safety M S M S M S M S Anthem Select 6% 4% 5% 1% 1% 1% 2% 1% Anthem Traditional 9% 1% 16% 13% 3% 2% 7% 7% Blue Shield 1% 1% 3% 6% - - 1% 3% Health Net SmartCare 2% 1% 1% - - - 1% - Kaiser 62% 50% 33% 20% 29% 25% 30% 23% UnitedHealthcare - - - 2% 20% 12% 14% 7% Western Health Advantage - 1% - 0% - - 0% - PERSCare 1% 1% 7% 12% 26% 36% 21% 25% PERS Choice 17% 2% 31% 5% 19% 15% 23% 11% PERS Select 2% - 1% - - - 1% - PORAC - 40% 1% 42% 1% 8% 1% 23% Total 100% 100% 100% 100% 100% 100% 100% 100% June 2, 2022 E-10 DATA SUMMARY Medical Plan Participation – June 30, 2021 All Retirees Medical Plan Actives Under 65 65 or Older Total Miscellaneous/Safety M S M S M S M S Anthem Select 6% 1% 5% 1% - - 2% - Anthem Traditional 4% - 9% 8% 6% 5% 6% 6% Blue Shield - - 3% 7% - - 1% 3% Health Net SmartCare 1% - 1% 1% - - - - Kaiser 65% 13% 40% 36% 30% 23% 32% 29% UnitedHealthcare - - 1% 2% 18% 13% 14% 8% Western Health Advantage - - 1% - - - - - PERSCare - - 4% 9% 25% 37% 20% 25% PERS Choice 22% 1% 32% 3% 21% 15% 24% 10% PERS Select 1% - 3% - - - 1% - PORAC - 10% 1% 32% - 8% - 19% Total 100% 100% 100% 100% 100% 100% 100% 100% Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 82 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-11 DATA SUMMARY Active Medical Coverage – Miscellaneous Medical Plan Single 2-Party Family Waived Total Anthem Select 12 10 17 - 39 Anthem Traditional 14 7 5 - 26 Blue Shield 1 - - - 1 Health Net SmartCare 2 1 2 - 5 Kaiser 141 98 185 - 424 Western Health Advantage - - 1 - 1 PERSCare - 1 1 - 2 PERS Choice 36 35 71 - 142 PERS Select 4 3 2 - 9 PORAC - 1 - - 1 Waived - - - 61 61 Total 210 156 284 61 711 % as of June 30, 2021 30% 22% 40% 9% 100% % as of June 30, 2019 28% 22% 37% 13% 100% June 2, 2022 E-12 DATA SUMMARY Active Medical Coverage – Safety Medical Plan Single 2-Party Family Waived Total Anthem Select 1 1 3 - 5 Anthem Traditional - 1 - - 1 Blue Shield - - - - - Health Net SmartCare - - 2 - 2 Kaiser 20 14 48 - 82 Western Health Advantage - - - - - PERSCare - - - - - PERS Choice - 1 3 - 4 PERS Select 1 - - - 1 PORAC 11 6 47 - 64 Waived - - - 4 4 Total 33 23 103 4 163 % as of June 30, 2021 20% 14% 63% 2% 100% % as of June 30, 2019 20% 14% 60% 6% 100% Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 83 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-13 DATA SUMMARY Retiree Medical Coverage68 - Miscellaneous Medical Plan Single 2-Party Family Total <65 65+ <65 65+ <65 65+ Anthem Select 3 1 4 1 3 - 12 Anthem Traditional 10 9 6 16 1 6 48 Blue Shield 2 - 3 - 1 - 6 Health Net SmartCare - - - - 1 - 1 Kaiser 25 90 37 71 12 5 240 UnitedHealthcare - 69 1 32 - - 102 Western Health Advantage - - 1 - - - 1 PERSCare 6 74 2 61 - 2 145 PERS Choice 20 58 32 50 8 6 174 PERS Select 4 - 1 2 1 - 8 PORAC - 1 - - 1 - 2 Total 70 302 87 233 28 19 739 % as of June 30, 2021 9% 41% 12% 32% 4% 2% 100% % as of June 30, 2019 13% 39% 12% 30% 5% 2% 100% 68 Approximately 78% of retirees have coverage in a region 1 plan. The rest are in other state regions or out of state. June 2, 2022 E-14 DATA SUMMARY Retiree Medical Coverage69 - Safety Medical Plan Single 2-Party Family Total <65 65+ <65 65+ <65 65+ Anthem Select - - - - 1 - 1 Anthem Traditional 2 - 4 5 4 2 17 Blue Shield 1 - 4 - 3 - 8 Health Net SmartCare - - 1 - - - 1 Kaiser 6 13 18 21 19 1 78 UnitedHealthcare - 12 1 6 1 1 21 Western Health Advantage - - - - - - - PERSCare 5 31 2 23 4 2 67 PERS Choice 2 8 1 15 1 - 27 PERS Select - - - - - - - PORAC 7 4 13 8 18 - 50 Total 23 68 44 78 51 6 270 % as of June 30, 2021 9% 25% 16% 29% 19% 2% 100% % as of June 30, 2019 8% 25% 14% 29% 22% 1% 100% 69 Approximately 74% of retirees have coverage in a Region 1 plan. The rest are in other state regions or out of state. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 84 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-15 DATA SUMMARY Retirees Medical Coverage by Age – Miscellaneous Age Single 2-Party Family Total Under 50 - 1 1 2 50-54 3 1 3 7 55-59 20 21 15 56 60-64 47 64 9 120 65-69 66 65 13 144 70-74 80 69 3 152 75-79 70 61 3 134 80-84 55 18 - 73 85 & Over 31 20 - 51 Total 372 320 47 739 Average Age 73.3 70.8 63.1 71.6 June 2, 2022 E-16 DATA SUMMARY Retirees Medical Coverage by Age – Police Age Single 2-Party Family Total Under 50 1 2 5 8 50-54 1 - 3 4 55-59 4 3 9 16 60-64 6 8 8 22 65-69 7 9 3 19 70-74 6 10 - 16 75-79 4 4 - 8 80-84 5 2 - 7 85 & Over 3 2 - 5 Total 37 40 28 105 Average Age 70.3 68.8 57.6 66.3 Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 85 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-17 DATA SUMMARY Retirees Medical Coverage by Age – Fire Age Single 2-Party Family Total Under 50 - - 1 1 50-54 4 3 5 12 55-59 2 9 14 25 60-64 5 19 6 30 65-69 2 6 2 10 70-74 6 15 - 21 75-79 10 9 1 20 80-84 18 12 - 30 85 & Over 7 9 - 16 Total 54 82 29 165 Average Age 75.9 71.3 59.0 70.7 June 2, 2022 E-18 DATA SUMMARY Retirees Medical Coverage by Age – Total Age Single 2-Party Family Total Under 50 1 3 7 11 50-54 8 4 11 23 55-59 26 33 38 97 60-64 58 91 23 172 65-69 75 80 18 173 70-74 92 94 3 189 75-79 84 74 4 162 80-84 78 32 - 110 85 & Over 41 31 - 72 Total 463 442 104 1,009 Average Age 73.4 70.7 60.5 70.9 Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 86 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-19 DATA SUMMARY 0 20 40 60 80 100 120 140 160 180 200 <50 50-54 55-59 60-64 65-69 70-74 75-79 80-84 ≥85 Nu m b e r Age Retiree Age Distribution Total 6/30/19 Valuation 6/30/21 Valuation June 2, 2022 E-20 DATA SUMMARY Actives by Age and Service – Miscellaneous City Service Age < 1 1-4 5-9 10-14 15-19 20-24 ≥ 25 Total < 25 4 2 - - - - - 6 25-29 9 35 8 - - - - 52 30-34 6 59 30 - - - - 95 35-39 5 23 33 16 2 1 - 80 40-44 4 30 24 27 16 10 - 111 45-49 2 14 20 20 18 18 1 93 50-54 1 8 18 17 16 26 10 96 55-59 3 9 15 21 13 27 16 104 60-64 1 5 10 7 8 12 7 50 ≥ 65 - 1 4 4 3 5 7 24 Total 35 186 162 112 76 99 41 711 Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 87 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-21 DATA SUMMARY Actives by Age and Service – Police City Service Age < 1 1-4 5-9 10-14 15-19 20-24 ≥ 25 Total < 25 - 1 - - - - - 1 25-29 - 9 2 - - - - 11 30-34 - 3 3 1 - - - 7 35-39 - 5 7 4 1 - - 17 40-44 - 1 4 7 3 1 - 16 45-49 - - 2 2 3 6 1 14 50-54 - - - 1 2 - 1 4 55-59 - 2 - - 1 1 1 5 60-64 - - 1 - - - - 1 ≥ 65 - - - - - - - - Total - 21 19 15 10 8 3 76 June 2, 2022 E-22 DATA SUMMARY Actives by Age and Service – Fire City Service Age < 1 1-4 5-9 10-14 15-19 20-24 ≥ 25 Total < 25 - - - - - - - - 25-29 - 9 - - - - - 9 30-34 - 5 6 2 - - - 13 35-39 - 3 7 4 1 - - 15 40-44 - 1 2 5 3 1 - 12 45-49 - - 3 3 3 10 1 20 50-54 - - - - 3 5 1 9 55-59 - - - 1 2 4 1 8 60-64 - - - - - - - - ≥ 65 - - - - - - 1 1 Total - 18 18 15 12 20 4 87 Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 88 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-23 DATA SUMMARY Actives by Age and Service – Total City Service Age < 1 1-4 5-9 10-14 15-19 20-24 ≥ 25 Total < 25 4 3 - - - - - 7 25-29 9 53 10 - - - - 72 30-34 6 67 39 3 - - - 115 35-39 5 31 47 24 4 1 - 112 40-44 4 32 30 39 22 12 - 139 45-49 2 14 25 25 24 34 3 127 50-54 1 8 18 18 21 31 12 109 55-59 3 11 15 22 16 32 18 117 60-64 1 5 11 7 8 12 7 51 ≥ 65 - 1 4 4 3 5 8 25 Total 35 225 199 142 98 127 48 874 June 2, 2022 E-24 DATA SUMMARY 0 20 40 60 80 100 120 140 160 <25 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-65 ≥65 Nu m b e r Age Active Age Distribution Total 6/30/19 Valuation 6/30/21 Valuation Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 89 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-25 DATA SUMMARY 0 50 100 150 200 250 300 350 0-4 5-9 10-14 15-19 20-24 >25 Nu m b e r Service Active Service Distribution Total 6/30/19 Valuation 6/30/21 Valuation June 2, 2022 E-26 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2019 Valuation June 30, 2021 Valuation  Retirement  CalPERS 1997-2015 Experience Study- Expected retirement age for each tier Misc Fire & Police Tier 1 2.7%@55 3%@50 Exp. RetAge 60.3 56.4 & 55.2 Tier 2 2%@60 3%@55 Exp. RetAge 60.7 57.4 & 56.6 PEPRA 2.5%@67 2.7%@57 Exp. RetAge 62.4 57.3 & 57.0  CalPERS 2000-2019 Experience Study - Expected retirement age for each tier Misc Fire & Police Tier 1 2.7%@55 3%@50 Exp. RetAge 60.7 56.4 & 54.0 Tier 2 2%@60 3%@55 Exp. RetAge 63.0 57.7 & 56.4 PEPRA 2.5%@67 2.7%@57 Exp. RetAge 62.4 57.1 & 56.7  Spousal Coverage at Retirement  70% of covered retirees are assumed to cover spouses  Based on Plan experience  Same  Waived Retiree Re-election  0%  Same Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 90 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-27 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2019 Valuation June 30, 2021 Valuation  Medical Trend Increase from Prior Year Year Pre-Medicare Post- Medicare 2019-20 Actual Premiums/Claims 2021 7.25% 6.30% 2022 7.00% 6.10% 2023 6.75% 5.90% 2024 6.50% 5.70% 2025 6.25% 5.50% 2026 6.00% 5.30% 2027 5.80% 5.15% 2028 5.60% 5.00% 2029 5.40% 4.85% 2030 5.20% 4.70% 2031-35 5.05% 4.60% 2036-45 4.90% 4.50% 2046-55 4.75% 4.45% 2056-65 4.60% 4.40% 2066-75 4.30% 4.20% 2076+ 4.00% 4.00% Increase from Prior Year Calendar Year Pre- Medicare Post- Medicare Kaiser Post- Medicare Other 2019-20 n/a 2021 Actual 2021 Premiums/Claims 2022 Actual 2022 Premiums/Claims 2023 6.50% 5.65% 4.60% 2024 6.25% 5.45% 4.45% 2025 6.00% 5.25% 4.60% 2026 5.75% 5.05% 4.45% 2027 5.55% 4.90% 4.35% 2028 5.35% 4.75% 4.25% 2029 5.15% 4.60% 4.20% 2030 4.95% 4.45% 4.05% 2031-35 4.80% 4.35% 4.00% 2036-45 4.65% 4.25% 3.95% 2046-55 4.50% 4.20% 3.90% 2056-65 4.35% 4.15% 3.85% 2066-75 4.05% 3.95% 3.80% 2076+ 3.75% 3.75% 3.75% June 2, 2022 E-28 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2019 Valuation June 30, 2021 Valuation  Medical Plan at Retirement & Retirees Attaining age 65  Miscellaneous: <65 65+ Anthem Tradition 20% 10% Blue Shield 0% 0% Kaiser 40% 35% PERS Choice 30% 25% PERSCare 10% 15% United HC 0% 15%  Safety: <65 65+ Anthem Tradition 15% 5% Blue Shield 5% 0% Kaiser 35% 25% PERS Choice 0% 5% PERSCare 0% 45% PORAC 45% 15% United HC 0% 5%  Based on Plan experience  Miscellaneous: <65 65+ Anthem Tradition 10% 5% Blue Shield 5% 0% Kaiser 50% 30% PERS Choice 30% 20% PERSCare 5% 25% United HC 0% 20%  Safety: <65 65+ Anthem Tradition 10% 5% Blue Shield 5% 0% Kaiser 40% 25% PERS Choice 0% 15% PERSCare 10% 35% PORAC 35% 10% United HC 0% 10%  Based on Plan experience Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 91 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-29 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2019 Valuation June 30, 2021 Valuation  Family Coverage at Retirement (for future retirees)  Misc: 15% until age 65 5% age 65-75  Safety: 50% until age 65 5% age 65-80  Based on Plan experience  Same  Spouse Age  Actives – Males 3 years older than females  Retirees – Males 3 years older than females if spouse birth date not available  Same  Surviving Spouse Participation  100%  Same June 2, 2022 E-30 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2019 Valuation June 30, 2021 Valuation  Medicare Eligibility  Actives and retirees hired before 4/1/86:  Miscellaneous – 80%  Safety – 90%  Actives and retirees hired on or after 4/1/86: 100%  Retirees before 65 with unknown hire date: 90%  Everyone eligible for Medicare will elect Part B coverage  Same  Future New Participants  None – Closed Group  Same Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 92 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-31 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2019 Valuation June 30, 2021 Valuation  Retirees Missing Fund  Assumed to have the same fund as the prior valuation  Assumed to be based on active percentages: 75% GF, 15% Elec, and 10% UTL70  No retirees missing Fund information.  Retirees Missing Department  Assumed to have the same department as the prior valuation  Liability for retirees assumed to be 75% GF allocated proportionately across all Departments  Same 70 Fewer than 10% retirees have missing Fund or Department. Does not affect results, but does affect internal cost allocations used by the City. June 2, 2022 E-32 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2019 Valuation June 30, 2021 Valuation  Actuarial Models  Our valuation was performed using and relying on ProVal, an actuarial model leased from Wintech. Our use of ProVal is consistent with its intended purpose. We have reviewed and understand ProVal and its operation, sensitivities and dependencies.  Data Quality  Our valuation used census data provided by the City and CalPERS OPEB data extract. We reviewed the data for reasonableness and resolved any questions with the City. We believe the resulting data can be relied on for all purposes of this valuation without limitation.  COVID-19  No adjustments to the assumptions have been made for COVID- 19 since there is not yet enough data to evaluate the future impacts. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 93 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-33 ADDITIONAL ACTUARIAL ASSUMPTIONS June 30, 2019 Valuation June 30, 2021 Valuation  Sample Medical Claims Costs 2022  Sample estimated monthly claims costs: Region 1 – Non-Medicare Eligible Kaiser (HMO) PERS Choice (PPO) PORAC Age M F M F M F 55 $932 $934 $1,031 $1,035 $928 $929 60 1,261 1,139 1,420 1,277 1,278 1,147 65 1,615 1,375 1,829 1,547 1,647 1,391 70 1,963 1,631 2,223 1,835 2,002 1,650 75 2,330 1,905 2,639 2,143 2,377 1,926 80 2,705 2,194 3,063 2,469 2,759 2,219 85 3,266 2,640 3,699 2,970 3,331 2,670 Region 1 – Medicare Eligible Kaiser (HMO) PERS Choice (PPO) PORAC Age M F M F M F 65 n/a n/a $378 $329 $436 $377 70 n/a n/a 420 364 484 417 75 n/a n/a 452 393 521 450 80 n/a n/a 468 410 540 470 85 n/a n/a 456 405 526 464 June 2, 2022 E-34 RESULTS BY FUND Actuarial Obligations – June 30, 2021 – 6.25% Discount Rate (Amounts in 000’s) FUND AAL Assets71 UAAL  Airport $ 488 $ 328 $ 160  CIP 3,897 2,620 1,277  Elec72 29,257 19,669 9,588  Gas72 10,800 7,261 3,539  GF 157,214 105,692 51,522  ISF – Technology 4,587 3,084 1,503  ISF – Vehicle 1,704 1,146 558  ISF – Printing & Mailing 91 61 30  ISF – Workers Comp 97 65 32  PARKING 641 431 210  Refuse 4,479 3,011 1,468  Storm Drain 2,174 1,462 713  Water72 10,172 6,838 3,333  WWC72 4,114 2,766 1,348  WWT 14,482 9,736 4,746  Total 244,197 164,170 80,027 71 Assets allocated in proportion to AAL. 72 AAL for UTL employees allocated to Elec, Gas, Water, and WWC in proportion to each Fund’s AAL Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 94 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-35 RESULTS BY FUND Actuarially Determined Contribution (ADC) – 6.25% Discount Rate (Amounts in 000’s) FUND 2022/23 2023/24  Airport $ 34 $ 34  CIP 335 346  Elec72 1,227 1,261  Gas72 529 549  GF 7,134 7,332  ISF – Technology 308 313  ISF – Vehicle 111 115  ISF – Printing & Mailing 2 2  ISF – Workers Comp 13 13  PARKING 69 70  Refuse 157 162  Storm Drain 108 111  Water72 478 493  WWC72 218 224  WWT 705 724  Total 11,428 11,749 June 2, 2022 E-36 RESULTS BY GF DEPARTMENT Actuarial Obligations – June 30, 2021 – 6.25% Discount Rate (Amounts in 000’s) GF Department AAL Assets73 UAAL  ASD $ 7,191 $ 4,835 $ 2,356  ATT 2,587 1,739 848  AUD 130 87 43  CLK 625 420 205  COU 1,176 791 385  CSD 14,885 10,007 4,878  DSD 4,271 2,871 1,400  FIR 47,719 32,082 15,637  HRD 2,381 1,600 781  LIB 6,001 4,034 1,967  MGR 2,429 1,633 796  PLA 5,861 3,940 1,921  POL 45,862 30,832 15,030  PWD 16,096 10,821 5,275  Total 157,214 105,692 51,522 73 Assets allocated in proportion to AAL. Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 95 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-37 RESULTS BY GF DEPARTMENT Actuarially Determined Contribution (ADC) – 6.25% Discount Rate (Amounts in 000’s) GF Department 2022/23 2023/24  ASD $ 336 $ 345  ATT 99 102  AUD 3 3  CLK 39 40  COU 62 64  CSD 701 721  DSD 335 344  FIR 1,847 1,901  HRD 125 129  LIB 367 375  MGR 102 105  PLA 271 279  POL 2,216 2,279  PWD 631 645  Total 7,134 7,332 June 2, 2022 E-38 DEFINITIONS Present Value of Benefits Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 96 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l June 2, 2022 E-39 DEFINITIONS  Actuarially Determined Contribution (ADC)  Contribution for the current period including:  Normal Cost  Administrative expenses  Amortization of:  Initial Unfunded AAL  AAL for plan, assumption, and method changes  Experience gains/losses (difference between expected and actual)  Contribution gains/losses (difference between ADC and actual) Attachment A: OPEB June 30, 2021 Valuation 3.a Packet Pg. 97 At t a c h m e n t : A t t a c h m e n t A : O P E B J u n e 3 0 , 2 0 2 1 A c t u a r i a l V a l u a t i o n ( 1 4 1 1 2 : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B ) B i - A n n u a l A c t u a r i a l City of Palo Alto (ID # 14502) Finance Committee Staff Report Meeting Date: 6/7/2022 Report Type: Action Items City of Palo Alto Page 1 Title: Supplemental Report - Item #3 Finance Committee 6/7/2022, Accept June 30, 2021 Actuarial Valuation of Palo Alto's Retiree Healthcare and Other Post Employment Benefits, Approve Annual Actuarially Determined Contributions for Fiscal Years 2023 and 2024, and Affirm Additional Payments to Employers' Benefit Trust Fund From: City Manager Lead Department: Administrative Services Subsequent to the issuance of staff report #14112, staff recognized an error throughout the staff report that misstated the discount rate for the City’s California Employers’ Retirement Benefit Trust (CERBT Fund) at 6.75 percent for a Strategy 1 asset allocation; this is the current strategy selected by the City. CERBT and the City’s Actuarial Consultant Bartel and Associates have reduced this discount rate from 6.75 to 6.25 percent since the issuance of the last actuarial report and used for this June 30, 2021 valuation. The calculations in the attachment of the original staff report remains complete and accurate. This report is being reissued to correct for this error and has been redlined to identify areas that have been revised. These changes do not impact actuary results, however, include revisions to the staff recommended funding alternatives. Below is a complete revised recommendation for the Finance Committee’s review: Staff recommends that the Finance Committee recommend the City Council: 1. Review and accept the June 30, 2021 actuarial valuation of Palo Alto’s Retiree Healthcare Plan; 2. Approve full funding of the annual Actuarial Determined Contribution (ADC) for Fiscal Year 2023 and Fiscal Year 2024 using the staff recommended adjusted assumptions; and 3. Affirm the continued the practice of transmitting amounts at a lower discount rate, 5.75 percent, as an additional discretionary payment to the City’s California Employers’ Retiree Benefit Trust (CERBT) Fund. Packet Pg. 98 City of Palo Alto Page 2 Overall, the revised Table 1 below provides a summary of the corrected potential funding options, as reflected throughout the redlined report: Table 1: REVISED Funding for the FY 2023 OPEB Obligations FY 2023 OPEB Funding $ Change FY 2023 Proposed Budget (based on June 30, 2019 valuation) $16.9M - Recommended Funding Adjusted Assumptions • Zero percent return 2021-22 • Proactive contribution at lower discount rate of 5.75 in ADC • Shorten Amortization period (from 22 to 15 years) • Additional funding for FY 2023 Proposed staffing $16.3M ($0.6M) Alternative: Baseline • Current approved funding levels, assuming a 6.25 discount rate • No proactive contribution at lower discount rate • Assumed earnings in 2021-22 at planned levels (6.25) $11.4M ($5.5M) *Approximately 65 percent of costs are allocated to the General Fund. Attachments: • Attachment A: Corrective Redlined Staff Report #14112 Packet Pg. 99      City of Palo Alto  (ID # 14112)   Finance Committee Staff Report       Meeting Date: 6/7/2022    Report Type: Action Items    City of Palo Alto  Page 1    Title: Accept June 30, 2021 Actuarial Valuation of Palo Alto's Retiree  Healthcare and Other Post Employment Benefits, Approve Annual Actuarially  Determined Contributions for Fiscal Years 2023 and 2024, and Affirm  Additional Payments to Employers' Benefit Trust Fund  From: City Manager  Lead Department: Administrative Services    RECOMMENDATION Staff recommends that the Finance Committee recommend the City Council:  1. Review and accept the June 30, 2021 actuarial valuation of Palo Alto’s Retiree Healthcare  Plan;  2. Approve full funding of the annual Actuarial Determined Contribution (ADC) for Fiscal Year  2023 and Fiscal Year 2024 using the staff recommended adjusted assumptions; and   3. Affirm the continued the practice of transmitting amounts at a lower 5.756.25 percent  discount rate as an additional discretionary payment to the City’s California Employers’  Retiree Benefit Trust (CERBT) Fund.     EXECUTIVE SUMMARY In accordance with the Governmental Accounting Standards Board (GASB), the City Council is  required to review and approve the actuarial valuation for retiree healthcare plan on a bi‐ annual basis for the upcoming two fiscal years and approve funding of the annual Actuarial  Determined Contribution (ADC). This current study presents the fund’s status as of June 30,  2021 and will be used to inform the FY 2023 and FY 2024 annual operating budgets. This report  was finalized after the development of the FY 2023 Proposed Budget. Therefore, funding levels  in the FY 2023 Proposed Budget reflect the out years of the prior study completed on June 30,  2019 (CMR 11284). Funding levels recommended by the Finance Committee as part of this  discussion will be included as an amendment to the FY 2023 Proposed Budget and included for  City Council adoption of the budget on June 20, 2022.    The City continues to selecta Strategy 1 asset allocation, currently projected at a 6.75 6.25  percent discount rate for the California Employers’ Retirement Benefit Trust (CERBT) Fund,  managed by CalPERS. Beginning with the June 30, 2019, valuation (CMR 11284), the City  Council directed staff to calculate additional discretionary payments (“prefunding”) equivalent  to a 6.25 percent discount rate and transmit amounts above payments at a 6.75 percent  a Packet Pg. 100 At t a c h m e n t : A t t a c h m e n t A : C o r r e c t i v e R e d l i n e d S t a f f R e p o r t # 1 4 1 1 2 ( 1 4 5 0 2 : S u p p l e m e n t a l R e p o r t : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B )   City of Palo Alto  Page 2    discount rate to the CERBT Fund. The CERBT was subsequently reduced from 6.75 percent to  6.25 percent; therefore, this new target beginning with the June 30, 2021 valuation, is in‐line  with the prefunding assumptions used in the prior valuation. Through FY 2022, a total of $3.5  million in additional contributions are expected to be made to the CERBT.    The June 30, 2021, valuation includes several changes that have favorably impacted the CERBT  fund status, primarily due to healthcare and economic fluctuations resulting from the COVID‐19  pandemic and continued proactive funding contributions:   2020‐21 investment returns of 27.5 percent (6.75 6.25 percent target);     Lower than anticipated healthcare premiums; and    Accumulated contributions (full ADC payments and prefunding)      These favorable changes are advised to be taken in consideration of an uncertain environment.   Current portfolio earning is not expected to meet target return this year (FY 2022) and it is not  known whether the recent change in healthcare premiums will be ongoing or an anomaly due  to the significant governmental support of healthcare costs over the past two years.  Because  we do not know whether these favorable changes are the beginning of a trend, or merely a  temporary anomaly, this report includes several options to fund Other Post‐Employment  Benefit (OPEB) obligations for Finance Committee review and discussion beyond the typical  recommended “baseline” strategy.    Recommended Funding: consider alternative assumptions that are intended to better  align with the current economic outlook and proactive funding of long‐term liabilities.  Alternative 1 (“baseline”): reflects the ADC for current City Council approved funding  levels and actuary assumptions.  The below table provides a summary of the options and a comparison of costs to the FY 2023  Proposed Budget in all funds. A more detailed discussion of these options is included in this  report.  All options reflect expected savings when compared to assumptions currently built in  the FY 2023 Proposed Budget as reviewed by the Committee in May.  Staff recommends that  any savings remain unallocated and fall to respective funds fund balance/reserves based on  standing policies, unless otherwise directed.   Table 1: Funding for the FY 2023 OPEB Obligations         FY 2023 OPEB  Funding  $  Change  FY 2023 Proposed Budget (based on June 30, 2019 valuation) $16.9M  ‐   Recommended  Funding  Adjusted  Assumptions     Zero percent return 2021‐22    Proactive contribution at lower discount rate of  6.255.75 in ADC    Shorten Amortization period    (from 22 to 15 years)    Additional funding for FY 2023 Proposed staffing  $14.6M  $16.3M   ($2.3M)  ($0.6M)  a Packet Pg. 101 At t a c h m e n t : A t t a c h m e n t A : C o r r e c t i v e R e d l i n e d S t a f f R e p o r t # 1 4 1 1 2 ( 1 4 5 0 2 : S u p p l e m e n t a l R e p o r t : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B )   City of Palo Alto  Page 3    Alternative:  Baseline   Current approved funding levels assuming a 6.25  percent discount rate   No pProactive contribution at lower discount  rate of 6.25 in ADC   Assumed earnings in 2021‐22 at planned levels  (6.25 percent)  $12.3M  $11.4M   ($4.6M)  ($5.5M)   *Approximately 65 percent of costs are allocated to the General Fund.    BACKGROUND The City of Palo Alto offers its employees and retirees a Retiree Healthcare benefit plan which is  managed and administered by the California Public Employees’ Retirement System (CalPERS), a  State of California Retiree Healthcare Trust program. Bi‐annually staff contracts with an actuary  firm that provides an actuarial report detailing the latest status of the City of Palo Alto’s Retiree  Healthcare plans for employees and retirees. The actuarial report is used to calculate the  annual ADC to the trust. In addition, updates on the rate of return, funding status, and changes  to the trust based on various impacts are detailed in the report. Unlike the pension actuary  reports, this actuary details impacts by Fund, Department, Employee Group, and Healthcare  Plans selected.      There are four groups of benefits within the CalPERS Retiree Healthcare benefit plans. Table 1  below outlines the different benefits levels by Group. These benefit levels are negotiated and  approved as part of the employee contracts. Employees and retirees have an open enrollment  window in October each year in which they can make changes to their healthcare plans that  take effect in January of the following year.    Table 2: City of Palo Alto Retiree Healthcare Benefit Plans and Tiers    Miscellaneous  Safety: Fire  Safety: Police   Group 1   Retired before January 1, 2007;  eligibility starting at the age 50  and 5 years of service; full  premium up to family coverage  Retired before January 1, 2007;  eligibility starting at the age of 50  and 5 years of service; full  premium up to family coverage  Retired before March 1, 2009;  eligibility starting at the age of 50  and 5 years of service; full premium  up to family coverage  Group 2   Retired between January 1, 2007  and May 1, 2011; eligibility  starting at the age 50 and 5 years  of service; same as Group 1, but  premium limited to 2nd most  expensive medical plan  Retired between January 1, 2007  and December 1, 2011; eligibility  starting at the age 50 and 5 years  of service; same as   Group 1, but  premium limited to 2nd most  expensive medical plan  Retired between March 1, 2009 and  April 1, 2015 (POA), between  January 1, 2007 and June 1, 2012  (PMA) ; eligibility starting at the age  50 and 5 years of service; same as   Group 1, but premium limited to 2nd  most expensive medical plan  Group 3   (Retirees)  Retired after Group 2, did not elect into Group 4, benefit same as active employees  Group 3   (Active EEs)      Currently active, not in Group 4.  Flat Dollar Caps equal to actives  N/A  (All active Group 3 IAFF & FCA  elected into Group 4)  N/A  (All active Group 3 POA & PMA  elected into Group 4)  Group 4   Vesting Schedule: 10 years gets  50%, 20 years gets 100%,  formula amount  Vesting Schedule: 10 years gets  50%, 20 years gets 100%,  formula amount  Vesting Schedule: 10 years gets  50%, 20 years gets 100%, formula  amount  a Packet Pg. 102 At t a c h m e n t : A t t a c h m e n t A : C o r r e c t i v e R e d l i n e d S t a f f R e p o r t # 1 4 1 1 2 ( 1 4 5 0 2 : S u p p l e m e n t a l R e p o r t : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B )   City of Palo Alto  Page 4      CalPERS Projected Contribution Levels  The actuary report has two components to the annual billing of the employer portion of  retiree healthcare contributions that comprise the Actuarial Determined Contribution (ADC),  1) the Normal Cost (NC), and 2) the Unfunded Actuarial Accrued Liability (UAAL).     NC: This reflects a rate of contribution for the plan of retirement healthcare benefits  provided to current employees based on the current set of assumptions.      Employer Amortization of UAAL: This is an annual payment calculated to pay down an  agency’s unfunded accrued liability. Assuming every assumption in the actuarial valuation  was accurate, an organization would eliminate its unfunded pension liability if it made these  payments annually for 30 years. The City Council approved a closed period to amortize the  entire net pension liability over a specific timeframe, and 22 years of payments remain as of  June 30, 2021. The total liability will vary from one year to the next because of assumption  changes and actuarial experience that is different from anticipated, such as actual  investment returns that do not meet expectations.     As established by the City Council, the City’s CERBT Fund is invested in a Strategy 1 asset  allocation at a 6.75 6.25 percent discount rate. Beginning with the June 30, 2019, valuation  (CMR 11284), consistent with the City’s proactive pension funding policy, the City Council  approved the calculation of ADC at a lower 6.25 percent discount rate, transmitting the  amounts above a 6.75 percent discount rate as an additional discretionary payment  (“prefunding”) to the CERBT Fund. Other proactive measures to mitigate the increasing costs of  healthcare plans for current and future retirees include cost sharing with employees, capping  the plans covered, and establishing a flat contribution that can be adjusted with each labor  agreement for active employees.      The City’s CERBT Fund was established in May 2008 at a level of $33 million and it has grown to  $164 million as of March 31, 2022.     DISCUSSION   Summary of Actuarial Report June 30, 2021  Staff contracted with Bartel Associates, LCC (BA) for this retiree healthcare actuarial report  (Attachment A) to determine the City’s retiree healthcare liability and the ADC for Fiscal Years  2023 and 2024. The actuarial analysis is based on current employees’ accrued benefit, and  retired employees as of June 30, 2021.     This updated valuation includes several changes that have favorably impacted the CERBT fund  status, primarily due to healthcare and economic fluctuations resulting from the COVID‐19  pandemic. Most notably, investment returns for 2020‐21 reached an unprecedented level of  27.5 percent for the period. This level of return had a significant impact on the overall status of  a Packet Pg. 103 At t a c h m e n t : A t t a c h m e n t A : C o r r e c t i v e R e d l i n e d S t a f f R e p o r t # 1 4 1 1 2 ( 1 4 5 0 2 : S u p p l e m e n t a l R e p o r t : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B )   City of Palo Alto  Page 5    the fund and is not expected to continue in future periods. Healthcare premiums were lower  than anticipated likely due to government funding of pandemic‐related healthcare costs,  deferral of individual healthcare visits during the pandemic due to personal safety decisions and  public health orders and use of CalPERS reserves to keep premiums down.     The full impact on healthcare costs resulting from the pandemic is yet to be determined and is  expected to be factored into future valuation reports based on actual experience in costs.  As  an actuarial study, the calculation is based on the information at this time, which reflects this  significantly lower cost.  Staff and Bartel Associates are skeptical on the longevity of these lower  costs, versus the immediate result of the variables noted previously.    Beginning with this valuation, based on the favorable changes, baseline projections reflect  accumulated contributions to the CERBT may be used to pay a portion of the annual retiree  medical costs. This is a result of asset growth, where returns generated on higher asset levels  are sufficient to contribute toward a portion of the annual benefit payments. The ability to use  returns for this purpose is a goal of the prefunding strategy and a sign that a good practice is in  place. Achieving this status was anticipated to occur as a result of prefunding, however, has  occurred sooner than anticipated due to the favorable impacts discussed above.    Discount Rate Assumptions   The City Council has taken great interest to ensure long‐term liability assumptions and costs  for pension and OPEB are being proactively addressed, including the adoption of a Pension  Policy that assumes a 6.2 percent discount rate for pension costs compared to CalPERS rate of  7.0 percent (CMR 11722) and starting in FY 2023 a potential phased‐in reduction to 5.3  percent or alternative rate as designated by Council, to better align with market survey results  included in the most recent CalPERS Asset Liability Management (ALM) study. Additionally,  the City Council has taken actions to invest at an estimated discount rate for OPEB of 6.75  percent and transmit additional contributions to prefund OPEB obligations at the equivalent  of a 6.25 percent discount rate. The CERBT has subsequently reduced the discount rate from  6.75 to 6.25 percent; therefore, no prefunding is necessary to meet this target beginning with  the June 30, 2021 valuation. Through FY 2022, a total of $3.5 million in additional  contributions are expected to be contributed to the CERBT.    Discussed above, the ADC is impacted when actual experience differs from assumptions. One  of the more significant impacts to ADC occurs when actual investment returns do not meet  expectations. The following graph presents historical returns, looking back to 2008‐09.   a Packet Pg. 104 At t a c h m e n t : A t t a c h m e n t A : C o r r e c t i v e R e d l i n e d S t a f f R e p o r t # 1 4 1 1 2 ( 1 4 5 0 2 : S u p p l e m e n t a l R e p o r t : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B )   City of Palo Alto  Page 6    Figure 1: Historical Returns of the OPEB Trust   (Market Value of Plan Assets (MVA) and Expected Return)      Projected Unfunded Actuarial Accrued Liability  This actuarial report includes the plan’s “Funded Status.” As of June 30, 2021, the CERBT Trust  is funded at 70 percent, up 1,200 basis points from 58 percent in the June 30, 2019 actuarial  valuation.    As of June 30, 2021, the Unfunded Actuarial Accrued Liability (UAAL) was $80.0 million for all  funds and $51.5 million for the General Fund. Beginning with the June 30, 2013 valuations, the  City aligned its actuarial analysis to align with GASB’s rules regarding the “implied subsidy”. The  calculation of implied subsidy requires an agency to recognize that it pays the same medical  premiums for active employees as those that are retired. The implied subsidy identifies and  accounts for the agency paying the same blended premium for both active employees and  retirees, even though the medical cost for active employees is lower than retirees.     Palo Alto had 874 active employees and 1,009 retirees as of June 30, 2021. The calculation  increases the UAAL by $15.1 million or 18.9 percent; without the implied subsidy the UAAL for  all funds would be at $64.9 million.  Table 3: Unfunded Actuarial Accrued Liability (UAAL)     As of   June 30, 2019*   As of   June 30, 2021   Projected   June 30, 2022    Citywide – UAAL $122,972  $80,027  $76,159   General Fund – UAAL $82,624  $51,522  $49,032   Funded Ratio) 49.0%  67.2%  70.0%   Citywide UAAL % Change from prior valuation ‐35.0%  ‐38.1%   * The June 30, 2019 values are based on a 6.75 percent discount rate. Beginning June 30, 2021, the discount rate  has been reduced from 6.75 to 6.25 percent     Sensitivity Analysis: Discount Rate and Amortization Period   CalPERS recognizes the varying assumptions that may impact a plan’s unfunded actuarial  a Packet Pg. 105 At t a c h m e n t : A t t a c h m e n t A : C o r r e c t i v e R e d l i n e d S t a f f R e p o r t # 1 4 1 1 2 ( 1 4 5 0 2 : S u p p l e m e n t a l R e p o r t : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B )   City of Palo Alto  Page 7    accrued liability and therefore a retiree healthcare plan’s funding status, especially the  implications of the discount rate and amortization assumptions. Therefore, in addition to the  actuarial assumptions used to develop this annual evaluation, BA includes a sensitivity  analysis of the retiree healthcare plan. Table 4 below reflects the impact on UAAL resulting  from a reduction in the discount rate. Table 5 reflects the impact on ADC if the UAAL is  amortized over different timeframes. It should be noted that the Council has adopted a  Pension Funding Policy seeking to reach a 90 percent funded level in what remains to be  approximately 14‐15 years, a shorter period that the sensitivity scenarios below.    Table 4: Discount Rate Sensitivity    6.25% (Current)  5.75%  5.25%   Citywide – UAAL $80,027 $94,571 $110,567   General Fund – UAAL $51,522 $60,886 $71,184   Funded Ratio 67.2%  63.4%  59.8%     Table 5: Amortization Sensitivity    22 Years (Current)  20 Years  18 Years   Normal Cost $6,316 $6,316 $6,316  UAAL Amortization $5,112 $5,459 $5,887  Total ADC $11,428 $11,775 $12,203  ADC (% of payroll) 10.3%  10.6%  11.0%   * Includes administrative expenses      Funding for the FY 2023 Including Actuarial Determined Contribution (ADC)   This section outlines staff’s recommended funding level for OPEB obligations beginning in FY  2023 for Finance Committee review and discussion and an alternative. Due to the  uncertainties noted previously that are unique to this report and given the limited data on the  impacts of COVID‐19, staff recommend alternatives assumptions that are rooted in the City’s  Pension Funding Policy, may be adjusted later in a subsequent fiscal year, and position the  City to smooth potential volatility in projected liabilities. A key result of the recovery period as  the pandemic moves into an endemic is a need to foster and work towards stability as an  organization; this stability helps ensure continued focus on high priority projects, supports  recruitment and retention efforts in a competitive labor market, and ensures a readiness and  nimbleness to adapt to changes.  Acknowledging these lessons, staff recommends the Finance  Committee consider an alternative funding approach that adjusts assumptions based on  current data and the principles noted above.  Staff have also outlined an alternative, or  “baseline” scenario for consideration.  This funding level may be adjusted annually based on  City Council direction, so long as the baseline ADC is met.   Staff Recommended Funding for FY 2023 OPEB Obligations  Staff recommend adjusting funding from the typical baseline calculation to better align with the  current economic outlook, the current instability in the assumptions used to calculate the  a Packet Pg. 106 At t a c h m e n t : A t t a c h m e n t A : C o r r e c t i v e R e d l i n e d S t a f f R e p o r t # 1 4 1 1 2 ( 1 4 5 0 2 : S u p p l e m e n t a l R e p o r t : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B )   City of Palo Alto  Page 8    baseline and continue to proactively fund long‐term liabilities. Recommended revisions to  baseline assumptions include:  o Assume a zero percent investment return for the current 2021‐22 period:   The most recent March 31, 2022 quarterly report from CERBT reported year‐to‐date  investment returns of negative 1.39 percent as compared to a 6.75 6.25 percent target.  This scenario assumes investment returns of zero percent for the period ending June 30,  2022 to hedge against returns that may not be realized.  o Exclude proactive contributions at a lower discount rate towards the ADC:   Consistent with the pension proactive funding, this would treat the proactive  contributions assuming a lower discount rate of 6.25 5.75 as if in a separate “trust” or  “saving account.” ADC calculations will remain at consistent levels and these proactive  contributions remain additive to baseline calculations of liability.  o Assume a shortened amortization period from 22 to 15 years:   This change in the amortization period will more closely align OPEB with the City’s  Pension Policy goals to reach a 90 percent funded status over 15 years (by FY 2036).   The City Council previously approved a 30‐year closed amortization period of which 22  years remain as of June 30, 2021.   o Assume additional normal costs or “pay‐go” costs:   Adjust funding to include costs for the recommended additional staffing as approved or  being considered for approval in FY 2023.      This option results in an FY 2023 Proposed ADC of $14.6 $16.3 million citywide ($9.2 $9.9  million in the General Fund), a $2.3 $0.6 million reduction from the $16.9 million ADC in the FY  2023 Proposed Operating Budget.      Baseline  The baseline calculation reflects standard actuarial calculations and existing City Council  direction assuming the Strategy 1 asset allocation at a 6.75 6.25 percent discount rate., Since  this rate reflects the 6.25 percent discount rate approved by the City Council to assume and for  additional discretionary payments to the CERBT Fund at the equivalent of a 6.25 percent  discount rate, no additional prefunding payments are assumed in the baseline calculation.  Unlike the CalPERS pension plan, additional City contributions do not go into a separate Section  115 trust; instead, they remain in the plan and are included as assets in the CERBT each  subsequent year, impacting the calculation of the ADC. This treatment of prefunding  contributions included in assets and effectively reduce the ADC each future year.   At the request of staff, BA included an adjusted calculation to exclude the additional 6.25  contributions in ADC calculations to ensure consistent treatment as the Pension 115 Trust Fund.  The exclusion of this additional contribution from ADC will ensure that the City maintains  prefunding at consistent levels, similar to how contributions are made to the Pension Trust.     a Packet Pg. 107 At t a c h m e n t : A t t a c h m e n t A : C o r r e c t i v e R e d l i n e d S t a f f R e p o r t # 1 4 1 1 2 ( 1 4 5 0 2 : S u p p l e m e n t a l R e p o r t : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B )   City of Palo Alto  Page 9    Overall, this baseline reflects an FY 2023 Proposed ADC of $12.3 $11.4 million citywide ($7.7  $7.1 million in the General Fund), a $4.6 $5.5 million reduction from the $16.9 million ADC in  the FY 2023 Proposed Operating Budget.   FY 2023 Proposed Staffing Additional Normal Cost Contributions  To be factored in all calculations of funding for FY 2023 is the potential addition of nearly 60  full‐time staff since the June 30, 2021 valuation date: 20 full‐time positions during FY 2022, and  nearly 40 full‐time positions in the FY 2023 Proposed Budget (mostly in the General Fund). As  reported in this valuation, the average salary of active employees is approximately $120,000  and the variable portion of ADC, or normal cost for current employees, is 5.6 percent of payroll.  Under these assumptions, the retiree healthcare cost of the additional staffing is approximately  $400,000. Staff recommends that this associated retiree health cost be included in the final  budget for Council consideration for FY 2023 adoption in alignment with the assumptions in the  recommended option above.  Stakeholder Engagement  The transmittal of the actuarial valuation as of June 30, 2021 begins conversations regarding  the fiscal outlook for the City’s OPEB liabilities and the appropriate contribution for the FY 2023  Actuarial Determined Contribution. Public discussion will be held with the Finance Committee  on June 7, 2022, prior to City Council review and adoption of the FY 2023 Budget, currently  scheduled for June 20, 2022.    Resource Impact  The FY 2023 Proposed Budget includes an ADC of $16.9 million, an increase of $0.5 million from  FY 2022 Adopted levels of $16.4 million. Staff recommendations in this report result in funding  levels of $14.6 $16.3 million, a net savings of $2.3 $0.6 million from the FY 2023 Proposed  Budget in all funds. Funding levels recommended by the Finance Committee will be included as  an amendment to the FY 2023 Proposed Budget for City Council adoption of the budget on June  20, 2022. Staff will incorporate this direction on an ongoing basis beginning in FY 2024.     Future funding is subject to City Council approval through the annual budget process. The  recent market fluctuations and overall impact of the current pandemic are yet to be fully  realized. These reports are calculated bi‐annually and reflect market conditions at that point in  time. This Trust experienced gains in this most recent report, however, will continue to be  closely monitored.    Environmental Review  This report is not considered a project for the purposes of the California Environmental Quality  Act (CEQA). Environmental review is not required.  Attachments:    a Packet Pg. 108 At t a c h m e n t : A t t a c h m e n t A : C o r r e c t i v e R e d l i n e d S t a f f R e p o r t # 1 4 1 1 2 ( 1 4 5 0 2 : S u p p l e m e n t a l R e p o r t : O t h e r P o s t - E m p l o y m e n t B e n e f i t s ( O P E B )