HomeMy WebLinkAboutStaff Report 438-07City of Palo Alto
City Manager’s Report
TO:
ATTENTION:
FROM:
HONORABLE CITY COUNCIL
CITY COUNCIL
6
CITY MANAGER DEPARTMENT: ADMINISTRATIVE
SERVICES
DATE:DECEMER 03, 2007 CMR: 438:07
SUBJECT:APPROVAL OF CALIFORNIA EMPLOYER’S RETIREE
BENEFIT TRUST PROGRAM (CERBT) AGREEMENT WITH
CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM
TO PREFUND RETIREE MEDICAL BENEFITS; ADOPTION OF
A RESOLUTION REGARDING DELEGATION OF AUTHORITY
TO REQUEST DISBURSEMENTS; CERTIFICATION OF
FUNDING POLICY; AND ADOPTION OF A BUDGET
AMENDMENT ORDINANCE TRANSFERRING $30,000,000 TO
CALPERS TO ESTABLISH TRUST
RECOMMENDATION
Staff recommends that the City Council: 1) authorize the Mayor’or her designee to sign the
agreement (Attachment A) between CalPERS and the City of Palo Alto to establish an
irrevocable trust fund for retiree medical benefits; 2) adopt a resolution to delegate authority to
the City Manager or his designee to request disbursements from the plan (Attachment B); 3)
certify a funding policy in the amount at least equal to 100 percent of the annual required
contribution (Attactunent C); and 4) adopt a budget amendment ordinance transferring funds in
the amount of $30 million currently set aside in the Retiree Health Benefits Internal Service
Fund to CalPERS to establish the trust.
BACKGROUND
Retiree benefits continue to be a significant expense. To reduce this expense, staff has
negotiated changes to medical benefits in the last couple of years such as:
¯Developed a two-tiered retiree medical benefit plan, increasing vesting requirements
from five to twenty years
¯Negotiated a cap limiting medical benefits to the second highest plan with all labor
groups for current employees and future retirees.
Per Governmental Accounting Standards Boards (GASB) Statement No. 45, Financia! Reporting
for Retiree Medical Benefits, the City of Palo Alto will be required to recognize in its financial
statements any unfunded, earned retiree medical costs, including those for current active
employees, beginning fiscal y.ear 2007-08. In May 2007, staff was directed by the Finance
CMR: 438:07 Page 1 of 4
Committee to proceed with establishing an irrevocable trust with CalPERS and to transfer funds
to establish the trust. (Attachment D)
DISCUSSION
To address the critical need of agencies to set aside funds in a long-term investment account to
pay for future health benefit costs, CalPERS created a new investment vehicle called California
Employers’ Retiree Benefit Trust Program (CERBT). Other cities currently participating in
CER~T are: Burbank, Dublin, E1 Cajon, Huntin~on Park, Milpitas, and Thousand Oaks. Once
the trust is established, the funds are not available for use by the City for any other purpose, and
the trust cannot be dissolved except under limited circumstances. CalPERS has exclusive control
over the administration and investment of the trust. Administrative costs are typically deducted
from the investment income. The City may request disbursements from CalPERS once a month
to cover premium and other costs of postemployment healthcare benefits. Once the trust is
established with CalPERS, staff would receive annual reporting on the earned rate of return. It is
expected that this reporting would eventually move to quarterly reporting and be included in the
quarterly financial report to Council.
There are many benefits of establishing an irrevocable trust with CalPERS and prefunding retiree
medica! benefits:
1) As the largest public pension system in the United States, CalPERS has significant
experience in administering employer-sponsored plans.
2) Earnings from trust fund investments help reduce furore costs. CalPERS has a history
of outstanding investment performance, with investment returns paying 75% of CalPERS
pension benefits. It is expected that the new trust fund for medical benefits will have
similar returns and v~dl! generate significant revenues to apply to benefit costs.
3) Pre-funding agencies report lower liabilities and lower annual required contribution
(ARC) than non-pre-funding agencies. Establishing a trust allows the use of a higher rate
of return - the CalPERS expected investment rate of return is 7.75%, as opposed to the
City’s current portfolio rate of 4.45%
4) Administrative costs are lower with CalPERS than with private industry.
5) Establishing the trust will contribute to maintaining a positive credit rating, resulting in
more favorable debt issuance rates in the future.
6) Other cities currently participating in CERBT are Burbank, Dublin, El Cajon,
Huntington Park, Milpitas, and Thousand Oaks.
The actuarial study completed by Milliman, Inc. in April 2006 valued the City’s unfunded retiree
medical liability at $82.6 million, assuming the City establishes a trust with CalPERS with a zero
initial balance. If the City deposits the $26.5 million balance (as of June 2006) from its Retiree
Health Benefits Internal Service Fund into the trust, the unfunded liability would be reduced to
$56.1 million, and the annual required contribution (ARC) would be $6.9 million. The budget for
fiscal year 2007-08 and all subsequent years includes this reduced ARC. Since June 2006, the
General Fund contributed an additional $2.9 million to this ISF, and, combined with interest
earnings, this brought the fund balar~,ce to $30.7 million by June 2007. If the City deposits $30.0
million to the trust, the unfunded liability will decline to $52.6 million. A new ARC would need
to be calculated by the actuarial. One of the requirements of GASB 45 is an actuarial study every
CMR: 438:07 Page 2 of 4
two years. The second actuarial study for the City is currently underway and results are expected
in early 2008.
The following table shows the allocations of both the liability and the ARC across the City’s
funds assmning 7.75 percent rate of return, based upon actual staff demographics within each
fund for current and retired employees. The table also includes each fund’s contribution to the
Retiree Health Benefits Internal Service Fund and its percentage of the liability contributed.
Fund
General Fund
Capital Improvement Fund
Electric Fund
External Service Fund
Gas Fund
Printing - Internal Service
Fund
Refuse Fund
Storm Drain Fund
Technology Fund- Internal
Service Fund
Vehicle - Internal Service
Fund
Wastewater Collection Fund
Wastewater Treatment Fund
Water Fund
Ci~vide Total
Actuarial
Liability
$61,613,148
542,174
8,990,109
101,350
2,~97,695
166,772
1,474,589
344,492
961,295
746,362
670,244
2,685,693
1,884,974
$82,578,897
ARC
$5,141,349
67,606
660,327
24,741
203,057
15,822
138,046
25,163
110,135
70,939
152,104
65,379
220,165
$6,894,833
Contribution
To Retiree
ISF
$17,227,154
420,224
4,420,864
0
1,840,767
1:~,62:
1,163,035
246,920
671,105
552,936
569,740
2,152,986
1,206,247
$30,605,601
% of
Liability
Contributed
28%
78
49
0
77
80
79
72
70
74
85
8O
64
37%
As shown in the table, the General Fund’s share of the cit3~ide ARC totals $5.1 million. This
expenditure is partially offset by cun’ent year cost-plan allocations to other funds and a catch up
of cost plan allocations from prior years of $1.0 million for the next three years.
The following table summarizes the net increase to the General Fund (GF):
Total Cit3~=~ide ARC $6,894,833
Less all other funds ARC <1,753,484>
GF ARC 5,141,349
Less amount budgeted for current retiree medical benefits <2,200,000>
GF increase due to GASB 45 implementation 2,941,349
Less current year cost-plan allocations <400,000>
Net ARC increase for GF 2,541,349
Less prior years’ catch up of cost plan <1,012,072>
Net ARC increase for GF less prior year catch-up $1,529,277
CMR: 438:07 Page 3 of 4
RESOURCE IMPACT
As noted above, the reserve balance of the Retiree Health Benefits Internal Service Fund as of
June 2007 is $30.7 million. The transfer of $30.0 million to CERBT will reduce the reserve
balance to $0.7 million.
POLICY IMPLICATIONS
Approval of this agreement implements a funding policy to consistently contribute an amount at
least equal to 100% of the ARC.
ENVIRONMENTAL REVIEW
The action recommended is not a project for the proposes of the California Environmental
Quality Act.
PREPARED BY"
TR-’~DY EIKENBERRY’~
Accountin~ Services
LALO PEREZ
Assistant Director, Administrative Services
DEPARTMENT HEAD APPROVAL:
CARL YEA~"~TT~ ~’~~"~-
Director, Administrative Services
CITY MANAGER APPROVAL:
Assistant City Manager
ATTACHMENTS
Attachment A: California Employer’s Retiree Benefit Trust Program ("CERT") Agreement and
Election to Prefund Other Post Employment Benefits through CalPERS
Attachment B: Resolution Regarding Delegation of Authority to Request Disbursements
Attachrnent C: Certification of Funding Policy
Attachment D:
Attachment E:
CMR:195:07, May 1, 2007, Authorization to Proceed with Establishing an
Irrevocable Trust with California Public Employees Retirement System
(CalPERS) for Retiree Benefits
Budget Amendment Ordinance-CalPERS Retiree Medical Trust
CMR: 438:07 Page 4 of 4
ATTACHMENT A
CALIFORNIA ENiPLOYER’S RETIREE BENEFIT TRUST PROGRAM ("CERBT")
AGREEN ENT AND ELECT ON
OF
City of Palo Alto
(NAME OF EMPLOYER)
TO PREFUND OTHER POST EMPLOYN ENT
BENEFITS THROUGH Ca PER$
WHEREAS (1) Government Code Section 22940 establishes in the State Treasury the
Annuitants’ Health Care Coverage Fund for the prefunding of health care coverage for
annuitants (Prefunding Plan); and
WHEREAS (2) The California Public Employees’ Retirement System (CalPERS) Board
of Administration (Board) has sole and exclusive control and power over the
administration and investment of the Prefunding Plan (sometimes also referred to as
CERBT), the purposes of which include, but are not limited to (i) receiving contributions
from participating employers and establishing separate Employer Prefunding Accounts
in the Prefunding Plan for the performance of an essential governmental function (ii)
investing contributed amounts and income thereon, if any, in order to receive yield on
the funds and (iii) disbursing contributed amounts and income thereon, if any, to pay for
costs of administration of the Prefunding Plan and to pay for health care costs or other
post employment benefits in accordance with the terms of participating employers’
plans; and
WHEREAS (3)City of Palo Alto
(NAME OF EMPLOYER)
(Employer) desires to participate in the Prefunding Plan upon the terms and conditions
set by the Board and as set forth herein; and
WHEREAS (4) Employer may participate in the Prefunding Plan upon (i) approval by
the Board and (ii) filing a duly adopted and executed Agreement and Election to Prefund
Other Post Employment Benefits (Agreement) as provided in the terms and conditions
of the Agreement; and
WHEREAS (5) The Prefunding Plan is a trust fund that is intended to perform an
essential governmental function within the meaning of Section 115 of the Internal
Revenue Code as an agent multiple-employer plan as defined in Governmental
Accounting Standards Board (GASB) Statement No. 43 consisting of an aggregation of
single-employer plans, with pooled administrative and investment functions;
Rev 21712007: Rev 6!18/2007. Rev 10!’r0f2007
NOW, THEREFORE, BE IT RESOLVED THAT EMPLOYER HEREBY MAKES THE
FOLLOWING REPRESENTATION AND WARRANTY AND THAT THE BOARD AND
EMPLOYER AGREE TO THE FOLLOWING TERMS AND CONDITIONS:
A. Representation and Warranty
Employer represents and warrants that it is a political subdivision of the State of
California or an entity whose income is excluded from gross income under Section 115
(1) of the Internal Revenue Code.
B. Adoption and Approval of the Agreement; Effective Date; Amendment
(1) Employer’s governing body shall elect to participate in the Prefunding Plan by
adopting this Agreement and filing with the CalPERS Board a true and correct original
or certified copy of this Agreement as follows:
Filing by mail, send to:CalPERS
Constituent Relations Office
CERBT (OPEB)
P.O. Box 942709
Sacramento, CA 94229-2709
Filing in person, deliver to:
CalPERS Mailroom
Attn: Employer Services Division
400 Q Street
Sacramento, CA 95814
(2) Upon receipt of the executed Agreement, and after approval by the Board, the
Board shall fix an effective date and shall promptly notify Employer of the effective date
of the Agreement.
(3) The terms of this Agreement may be amended only in writing upon the agreement
of both CalPERS and Employer, except as otherwise provided herein. Any such
amendment or modification to this Agreement shall be adopted and executed in the
same manner as required for the Agreement. Upon receipt of the executed amendment
or modification, the Board shall fix the effective date of the amendment or modification.
(4) The Board shall institute such procedures and processes as it deems necessary to
administer the Prefunding Plan, to carry out the purposes of this Agreement, and to
maintain the tax exempt status of the Prefunding Plan. Employer agrees to follow such
procedures and processes.
P, ev 10/10/2097 2
C. Actuarial Valuation and Employer Contributions
(1) Employer shall provide to the Board an actuarial valuation report on the basis of the
actuarial assumptions and methods prescribed by the Board. Such report shall be for
the Board’s use in financial reporting, shall be prepared at least as often as the
minimum frequency required by GASB Statement No. 43, and shall be:
(a)prepared and signed by a Fellow or Associate of the Society of Actuaries
who is also a Member of the American Academy of Actuaries or a person
with equivalent qualifications acceptable to the Board;
(b)prepared in accordance with generally accepted actuarial practice and
GASB Statement Nos. 43 and 45; and,
(c)provided to the Board prior to the Board’s acceptance of contributions for
the valuation period or as otherwise required by the Board.
(2) The Board may reject any actuarial valuation report submitted to it, but shall not
unreasonably do so. In the event that the Board determines, in its sole discretion, that
the actuarial valuation report is not suitable for use in the Board’s financial statements or
if Employer fails to provide a required actuarial valuation, the Board may obtain, at
Employer’s expense, an actuarial valuation that meets the Board’s financial reporting
needs. The Board may recover from Employer the cost of obtaining such actuarial
valuation by billing and collecting from Employer or by deducting the amount from
Employer’s account in the Prefunding Plan.
(3) Employer shall notify the Board of the amount and time of contributions which
contributions shall be made in the manner established by the Board.
(4) Employer contributions to the Prefunding Plan may be limited to the amount
necessary to fully fund Employer’s actuarial present value of total projected benefits, as
supported by the actuarial valuation acceptable to the Board. As used throughout this
document, the meaning of the term "actuarial present value of total projected benefits"
is as defined in GASB Statement No. 45. If Employer’s contribution causes its assets in
the Prefunding Plan to exceed the amount required to fully fund the actuarial present
value of total projected benefits, the Board may refuse to accept the contribution.
(5) Any Employer contribution will be at least $5000 or be equal to Employer’s Annual
Required Contribution as that term is defined in GASB Statement No. 45. Contributions
can be made at any time following the seventh day after the effective date of the
Agreement provided that Employer has first complied with the requirements of
Paragraph C.
Rev )0/t0/2,007 q
D. Administration of Accounts, Investments, Allocation of Income
(1) The Board has established the Prefunding Plan as an agent plan consisting of an
aggregation of single-employer plans, with pooled administrative and investment
functions, under the terms of which separate accounts will be maintained for each
employer so that Employer’s assets will provide benefits only under employer’s plan.
(2) All Employer contributions and assets attributable to Employer contributions shall be
separately accounted for in the Prefunding Plan (Employer’s Prefunding Account).
(3) Employer’s Prefunding Account assets may be aggregated with prefunding account
assets of other employers and may be co-invested by the Board in any asset classes
appropriate for a Section 1 15 Trust.
(4) The Board may deduct the costs of administration of the Prefunding Plan from the
investment income or Employer’s Prefunding Account in a manner determinedby the
Board.
(5) Investment income shall be allocated among employers and posted to Employer’s
Prefunding Account as determined by the Board but no less frequently than annually.
(6) If Employer’s assets in the Prefunding Plan exceed the amount required to fully fund
the actuarial present value of total projected benefits, the Board, in compliance with
applicable accounting and legal requirements, may return such excess to Employer.
E. Reports and Statements
(1) Employer shall submit with each contribution a contribution report in the form and
containing the information prescribed by the Board.
(2) The Board shall prepare and provide a statement of Employer’s Prefunding Account
at least annually reflecting the balance in Employer’s Prefunding Account, contributions
made during the period and income allocated during the period, and such other
information as the Board determines.
F. Disbursements
(1) Employer may receive disbursements not to exceed the annual premium and other
costs of post employment healthcare benefits and other post employment benefits.
.(2) Employer shall notify CalPERS in writing in the manner specified by CalPERS of the
persons authorized to request disbursements from the Prefunding Plan on behalf of
Employer.
Rev /0/10/2007 4
(3) Employer’s request for disbursement shall be in writing signed by Employer’s
authorized representative, in accordance with procedures established by the Board.
The Board may require that Employer certify or otherwise establish that the monies will
be used for the purposes of the Prefunding Plan.
(4) Requests for disbursements that satisfy the requirements of paragraphs (2) and (3)
that are received on or after the first of a month wilt be processed by the 15lh of the
following month. (For example, a disbursement request received on or between March
1st and March 31st will be processed by April 15th; and a disbursement request
received on or between April 1st and April 30th will be processed by May 15th.)
(5) CalPERS shall not be liable for amounts disbursed in error if it has acted upon the
instruction of an individual authorized by Employer to request disbursements. In the
event of any other erroneous disbursement, the extent of CalPERS’ liability shall be the
actual dollar amount of the disbursement, plus interest at the actual earnings rate but
not less than zero.
(6) No disbursement shall be made from the Prefunding Plan which exceeds the
balance in Employer’s Prefunding Account.
G. Costs of Administration
Employer shall pay its share of the costs of administration of the Prefunding Plan, as
determined by the Board.
H. Termination of Employer Participation in Prefunding Plan
(1) The Board may terminate Employer’s participation in the Prefunding Plan if:
(a) Employer gives written notice to the Board of its election to terminate;
(b)The Board finds that Employer fails to satisfy the terms and conditions of
this Agreement or of the Board’s rules or regulations.
(2) If Employer’s participation in the Prefunding Plan terminates for any of the foregoing
reasons, all assets in Employer’s Prefunding Account shall remain in the Prefunding
Plan, except as otherwise provided below, and shall continue to be invested and accrue
income as provided in Paragraph D.
(3) After Employer’s participation in the Prefunding Plan terminates, Employer may not
make contributions to the Prefunding Plan.
Rev 10/10/2’0,07 5
(4) After Employer’s participation in the Prefunding Plan terminates, disbursements
from Employer’s Prefunding Account may continue upon Employer’s instruction or
otherwise in accordance with the terms of this Agreement.
(5) After thirty-six (36) months have elapsed from the effective date of this Agreement:
(a)Employer may request a trustee to trustee transfer of the assets in
Employer’s Prefunding Account. Upon satisfactory showing to the Board
that the transfer will satisfy applicable requirements of the Internal ¯
Revenue Code and the Board’s fiduciary duties, then the Board shall
effect the transfer within one hundred twenty (120) days. The amount to
be transferred shall be the amount in the Employer’s Prefunding Account
as of the disbursement date and shall include investment earnings up to
the investment earnings allocation date immediately preceding the
disbursement date. In no event shall the investment earnings allocation
date precede the transfer by more than 120 days.
(b)Employer may request a disbursement of the assets in Employer’s
Prefunding Account. Upon satisfactory showing to the Board that all of
Employer’s obligations for payment of post employment health care
benefits and other post employment benefits and reasonable
administrative costs of the Board have been satisfied, then the Board shall
effect the disbursement within one hundred twenty (120) days. The
amount to be disbursed shall be the amount in the Employer’s Prefunding
Account as of the disbursement date and shall include investment
earnings up to the investment earnings allocation date immediately
preceding the disbursement date. In no event shall the investment
earnings allocation date precede the disbursement by more than 120
days.
(6) After Employer’s participation in the Prefunding Plan terminates and at such time
that no assets remain in Employer’s Prefunding Account, this Agreement shall
terminate.
(7) If, for any reason, the Board terminates the Prefunding Plan, the assets in.
Employer’s Prefunding Account shall be paid to Employer after retention of (i) amounts
sufficient to pay post employment health care benefits and other post employment
benefits to annuitants for current and future annuitants, and (ii) amounts sufficient to pay
reasonable administrative costs of the Board.
(8) If Employer ceases to exist but Employer’s Prefunding Plan continues to exist and if
no provision has been made by Employer for ongoing payments to pay post
employment health care benefits and other post employment benefits to annuitants for
current and future annuitants, the Board is authorized to and shall appoint a third party
administrator to carry out Employer’s Prefunding Plan. Any and all costs associated
Rev 10/10/20:37 6
with such appointmeht shall be paid from the assets attributable to contributions
Employer.
(9) If Employer should breach the representation and warranty set forth in Paragraph
A., the Board shall take whatever action it deems necessary to preserve the tax-exempt
status of the Prefunding Plan.
I. General Provisions
(1) Books and Records.
Employer shall keep accurate books and records connected with the performance of
this Agreement. Employer shall ensure that books and records of subcontractors,
suppliers, and other providers shall also be accurately maintained. Such books and
records shall be kept in a secure location at the Employer’s office(s) and shall be
available for inspection and copying by CalPERS and its representatives at any time.
(2)Audit.
(a)
(b)
During and for three years after the term of this Agreement, Employer
shall permit the Bureau of State Audits, CalPERS, and its authorized
representatives, and such consultants and specialists as needed, at all
reasonable times during normal business hours to inspect and copy, at the
expense of CalPERS, books and records of Employer relating to its
performance of this Agreement.
Employer shall be subject to examination and audit by the Bureau of State
Audits, CalPERS, and its authorized representatives, and such
consultants and specialists as needed, during the term of this Agreement
and for three years after final payment under this Agreement. Any
examination or audit shall be confined to those matters connected with the
performance of this Agreement, including, but not limited to, the costs of
administering this Agreement. Employer shall cooperate fully with the
Bureau of State Audits, CalPERS, and its authorized representatives, and
such consultants and specialists as needed, in connection with any
examination or audit. All adjustments, payments, and/or reimbursements
determined to be necessary by any examination or audit shall be made
promptly by the appropriate party.
(3)Notice.
(a)Any notice, approval, or other communication required or permitted under
this Agreement wi!l be given in the English language and wil! be deemed
received as follows:
R.ev tO/10/2~7 7
Personal delivery. When personally delivered to the recipient.
Notice is effective on delivery.
First Class Mail. When mailed first class to the last address of the
recipient known to the party giving notice. Notice is effective three
delivery days after deposit in a United States Postal Service office
or mailbox.
Certified mail. When mailed certified mail, return receipt requested.
Notice is effective on receipt, if delivery is confirmed by a return
receipt.
Overnight Delivery. When delivered by an overnight delivery
service, charges prepaid or charged to the sender’s account, Notice
is effective on delivery, if delivery is confirmed by the delivery
service.
Telex or Facsimile Transmission. When sent by telex or fax to the
last telex or fax number of the recipient known to the party giving
notice. Notice is effective on receipt, provided that (i) a duplicate
copy of the notice is promptly given by first-class or certified mail or
by overnight delivery, or (ii) the receiving party delivers a written
confirmation of receipt. Any notice given by telex or fax shall be
deemed received on the next business day if it is received after
5:00 p.m. (recipient’s time) or on a nonbusiness day.
E-mail transmission. When sent by e-mail using software that
provides unmodifiable proof (i) that the message was sent, (ii) that
the message was delivered to the recipient’s information processing
system, and (iii) of the time and date the message was delivered to
the recipient along with a verifiable electronic record of the exact
content of the message sent.
Addresses for the purpose of giving notice are as shown in Paragraph B.(1) of this
Agreement.
(b)
(c)
Any correctly addressed notice that is refused, unclaimed, or
undeliverable because of an act or omission of the party to be notified
shall be deemed effective as of the first date that said notice was refused,
unclaimed, or deemed undeliverable by the postal authorities, messenger
or overnight delivery service.
Any party may change its address, telex, fax number, or e-mail address by
giving the other party notice of the change in any manner permitted by this
Agreement.
Rev 10/10/2~37 8
(d)All notices, requests, demands, amendments, modifications or other
communications under this Agreement shall be in writin9. Notice shall be
sufficient for all such purposes if personally delivered, sent by first class,
registered or certified mail, return receipt requested, delivery by courier
with receipt of delivery, facsimile transmission with written confirmation of
receipt by recipient, or e-mail delivery with verifiable and unmodiflable
proof of content and time and date of sendin9 by sender and delive~, to
recipient, Notice is effective on confirmed receipt by recipient or 3
business days after sending, whichever is sooner.
(4) Modification
This Agreement may be supplemented, amended, or modified only by the mutual
agreement of the parties. No supplement, amendment, or modification of this
Agreement shall be binding unless it is in writing and signed by the party to be charged.
(5) Survival
All representations, warranties, and covenants contained in this Agreement, or in any
instrument, certificate, exhibit, or other writing intended by the parties to be a part of
their Agreement shall survive the termination of this Agreement until such time as all
amounts in Employer’s Prefunding Account have been disbursed.
(6) Waiver
No waiver of a breach, failure of any condition, or any right or remedy contained in or
granted by the provisions of this Agreement shall.be effective unless it is in writing and
signed by the party waiving the breach, failure, right, or remedy. No waiver of any
breach, failure, right, or remedy shall be deemed a waiver of any other breach, failure,
right, or remedy, whether or not similar, nor shall any waiver constitute a continuing
waiver unless the writing so specifies.
(7) Necessary Acts, Further Assurances
The parties shall at their own cost and expense execute and deliver such further
documents and instruments and shall take such other actions as may be reasonably
required or appropriate to evidence or carry out the intent and purposes of this
Agreement.
Rev 10/i0/2007 9
A majority vote of Employer’s Governing Body at a public meeting held on the
day of the month of I)ecember 2007, authorized entering into this
Agreement.
Signature of the Presiding Officer:
Printed Name of the Presiding Officer:
Name of Governing Body:
Name of Employer:
Yoriko Kishimoto
City Council
City of Palo Alto
Date:
3rd
BOARD OF ADMINISTRATION
CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM
BY
KENNETH W. MARZION
ACTUARIAL AND EMPLOYER SERVICES BRANCH
CALIFORNIA PUBLIC EMPLOYEES’ RETIREMENT SYSTEM
To be completed by CalPERS
The effective date of this Agreement is:
ATTACHMENT B
***NOT YET APPROVED***
RESOLUTION NO.
R_ESOLUTION OF THE COUNCIL OF THE CITY OF PALO ALTO
REGARDING DELEGATION OF AUTHORITY
TO REQUEST DISBURSEMENTS
A. Per Governmental Accounting Standards Boards (GASB) Statement No. 45,
Financial Reporting for Retiree Medical Benefits, the City of Palo Alto is required to
recognize in its financial statements any unfunded, earned retiree medical costs, including
those for current active employees; and
B. There are significant financial benefits of establishing an irrevocable trust with
CalPERS and prefunding retiree medical benefits. CalPERS has significant experience in
administering employer-sponsored plans. Earnings from trust fund investments help
reduce future costs; it is expected that the new trust fund for medical benefits will
generate significant revenues to apply to benefit costs. Additionally, pre-funding
agencies report lower liabilities and lower annual required contribution than non-pre-
funding agencies. Further, administrative costs are lower with CalPERS than with private
industry. Finally, establishing the trust will contribute to maintaining a positive credit
rating, resulting in more favorable debt issuance rates in the future; and
C. On May 1, 2007, staff was directed by the Finance Committee to proceed with
establishing an irrevocable trust with CatPERS and to transfer funds to establish the trust.
The CiU, is in the process of entering into a trust ageement with CalPERS.
NOW, THEREFORE, the Council of the City of Palo Alto does hereby resolve, as
follows:
SECTION 1. The City Council hereby delegates to the incumbents in the
positions of City Manager and Director, Administrative Services authority to request on
behalf of the Employer disbursements from the Other Post Employment Prefunding Plan
and certify as to the purpose for which the disbursed funds will be used.
SECTION 2. The Council finds that the adoption of this resolution does not
constitute a project under the California Environmental QualiU, Act and the CEQA
//
//
//
071120jb 0130241 ]
Guidelines and, therefore, no environment assessment is required.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSENT:
ABSTENTIONS:
ATTEST:APPROVED:
City Clerk Mayor
APPROVED AS TO FORM:
City Manager
Senior Asst. City Attorney Director of Administrative Services
07]120jb 0130241 2
CalPERS
DELEGATION OF AUTHORITY
TO REQUEST DISBURSEMENTS
RESOLUTION
OF THE
City Council
(GOVERNING BODY)
OF THE
City of Palo Alto
(NAME OF EMPLOYER)
The City Council
(GOVERNING BODY)
delegates to the incumbents in
the positions of City Manager and
(TITLE)
Director, Administrative Services
(TITLE)
authority to request on behalf
of the Employer disbursements from the Other Post Employment Prefunding
Plan and to certify as to the purpose for which the disbursed funds will be used.
By
Title Mayor
Witness
Date
OPEB Delegation of Authority (2!07)
ATTACHMENT C
CalPERS
CERTIFICATION OF FUNDING POLICY
As the employer, I certify that our funding policy is to contribute consistently an
amount at least equal to 100 % of the ARC.
City of Palo Alto
Name of Employer
Yoriko Kishimoto, Mayor
Printed Name and Title of Person Signing the Form
Signature Date
TO:
ATTENTION:
FROM:
DATE:
SUBJECT:
ATTACHMENT D
of Pa!o A!to
C ty Manager’s Report
HONORABLE CITY COUNCIL
FINANCE COMMITTEE
CITY MANAGER
MAY !, 20!)7
DEPARTMENT: ADMINISTRATIVE
SERVICES
CMR: 195:07
AUTHORIZATION TO PROCEED WITH ESTABLISHING AN
IRREVOCABLE TRUST WITH CALIFORNIA PUBLIC
EMPLOYEES RETIREMENT SYSTEM (CALPERS)FOR
RETIREE BENEFITS
RECOMMENDATION
The purpose of this report is to seek Council’s approval to: (a) entering into a contract with
California Public Employees Retirement System (CalPERS) to begin process of establishing an
irrevocable trust fund for retiree medical benefits; and (b) transfering funds in the amount of
$26.5 million currently set aside in the Retiree Health Benefits Internal Service Fund to
CalPERS to establish the trust.
BACKGROUND
Per GASB 45, the City of Palo Alto will be required to recognize in its financial statements any
unfunded, earned retiree medical costs including those for current active employees beginning in
fiscal year 2007-08. In December 2006, staff presented an update on funding options for retiree
medical (Attachment A). The Finance Committee was supportive of the idea of establishing a
trust with CalPERS.
DISCUSSION:
The actuarial study completed by Milliman, Inc. in April 2006 valued the City’s unfunded retiree
medical liability at $148.7 million, assuming a 4 percent rate of return on the funds, the then-
current rate of return on the City’s investments.
Once the City takes steps to establish a trust for these funds, the assumed rate of return rises to
7.75 percent, reducing the present-value of the liability to $82.6 million. Furthermore, if the City
deposits the $26.5 million balance from its Retiree Health Benefits Internal Service Fund into the
trust, the unfunded liability is reduced to $56.1 million. Without establishing a trust, the Annual
Required Contribution (ARC - or amount the City must set aside to fully fund the liability)
would be $13.1 million per year. With the establishment of a trust, the ARC goes down to $6.9
million. The budget for fiscal year 2007-08 and all subsequent years would then include this
reduced ARC and the proposed funding plan for the entire liability.
CMR: 195:07 Page l of 4
The following table shows the allocations of both the liability and the ARC across the City’s
funds assuming 7.75 percent rate of return, based upon actual staff demographics within each
fund.
Fund
Genera! Fund
Capital Improvement Fund
Electric Fund
External Service Fund
Gas Fund
Actuarial Liabili~
$61,613,148
542,174
8,990,109
101,350
2,397,695
ARC
$5,141,349
67,606
660;327
24,741
20~,057
Printing - Internal Service Fund 166,772 15,822
Refuse Fund 1,474,589 138,046
Storm Drain Fund 344,492 25,163
Technology Fund -Internal 961,295 110,135
Service Fund
Vehicle - Internal Service Fund 746,362 70,939
Wastewater Collection Fund 670,244 152,104
Wastewater Treatment Fund 2,685,693 65,379
Water Fund 1,884,974 220,165
Ci ~t~vide Total $82,578,897 $6,894,833
As per the above table, the General Fund staff’s share of the citywide ARC totals $5.1
million. Since the General Fund budgets $2.2 million per year for current retiree medical
expenditures, an additional $2.9 million would be required to fund the increased expenditure.
General Fund staff provide services to the other funds, with the associated salary, benefit and
other costs allocated to the other funds via the Cost Plan. However, the Cost Plan allocations
have only included current retiree medical expenses and have not included the appropriate share
of General Fund staff’s armually accrued retiree medical liability. Once that liability is added to
the Cost Plan, the allocated expense to other funds increases by $0.4 million per year resulting in
a net ARC of $2.5 million. Using the final actuarial information, the net ARC for the General
Fund is $2.5 million; an increase of $0.1 million from the Long Range Financial Plan estimated
net ARC of $2.4 million.
In addition, none of the historically accrued liability has been allocated to other funds. Staff has
calculated that other funds’ unpaid share of already-accrued retiree medical liability, totals $3
million. That rather large unpaid "bill" will be charged over a period of three years to mitigate
the impact to the other funds. Therefore, for three years, the General Fund’s ARC will effectively
be reduced by an additional $1.0 million, leaving $1.5 million in required set-aside funds.
Starting in fiscal year 2010-11, when the other funds have caught up in their payments, the
General Fund net ARC would bump back up to $2.5 million. A new actuarial study, which is
required every two years, will change those numbers once again.
CMR: 195:07 Page 2 of 4
table summarizes the calculation described -bo,,e"
Total Citywide ARC
Less all other funds ARC
Equal GF ARC
Less current amount budgeted for retiree medica! benefits
GF increase due to GASB 45 implementation
Less current year cost-plan allocations
Equals net ARC increase for GF
Less prior years’ catch up of cost plan
Equals net ARC increase for GF less prior year catch-up
$6,894,833
<1,753,484>
5,141,349
<2,200,000>
2,941,349
<400,000>
2,541,349
<!,012,072>
$1,529,277
Alternatives to establishing a trust with CalPERS have been discussed with the Finance
Committee (Attachment A). These include: continuing the pay-as-you-go approach and booking
the unfunded ARC on the financial statements; issuing debt to fund the liability; participating in
a pre-funding plan by CalPERS; establishing a trust with a financial institution other than
CalPERS; and others.
Staff recommended proceeding with the CalPERS trust option for many reasons, including the
following:
Administrative costs are expected to be significantly lower with CalPERS than with a
private financial institution.
CalPERS has an outstanding record of investment performance and a seasoned team of
investment professionals. OYer the past 20 years, CalPERS has averaged a 10 percent
rate of return on their investments.
Using internal staff or a provider other than CalPt~RS would require significantly more
work, would require a trust or financial planner, legal services, establishment of an
investment policy and risk program, and the creation of a review team possibly including
members of bargaining units.
Pre-funding would require the City to issue debt at a taxable rate and it would potentially
impact other debt issuance plans.
If the City decided not to establish a trust fund and left the $26.5 million in the Retiree
Health Benefits Internal Service Fund, the expected interest rate would be 4.35 percent,
as reported for the City’s portfolio as of December 31, 2006. In addition, the $26.5
million would not be considered applicable assets - so the ARC would go back to $13.1
million.
Should Council direct staff to proceed with establishing the trust with CalPERS, staff would
initially receive annual reporting on the earned rate of return, eventually moving to quarterly
reporting. These results would be included in the quarterly financial report to Council.
ENVIRONMENTAL REVIEW
The action recommended is not a project for the purposes of the California Environmental
Quali~ Act.
CMR: 195:07 Page 3 of 4
PREPARED BY:"~"~¯"
TRUDY EIKENBERRY
Accounting Manager, Administrative Services
DEPARTMENT HEAD APPROVAL:~~.~-’~
Xgg’W-~~or, Administrative Services
CITY MANAGER APPROVAL:
EMILY HARRISON
Assistant City Manager
ATTACHMENTS
Attachment A: CMR:438:06, June 12, 2006, Informational Update on Financial Reporting
Activity, and Funding Options for Retiree Medical - Governmental Accounting
Standards Board Statements Numbers 43 & 45
CMR: 195:07 Page 4 of 4
Attachment E
ORDINANCE NO.
ORDINANCE OF THE COUNCIL OF THE CITY OF PALO ALTO AMENDING
THE BUDGET FOR FISCAL YEAR 2007-08 TO AUTHORIZE THE
TKhNSFER OF FUNDS IN THE AMOUNT OF $30,000,000 CURRENTLY
SET ASIDE IN THE RETIREE HEALTH BENEFITS INTERNAL SERVICE
FUND TO CalPERS TO ESTABLISH AN IRREVOCATBLE TRUST FOR
RETIREE BENEFITS.
The Council of the City of Palo Alto does ORDAIN as
follows:
SECTION I. The Council of the City of Palo Alto finds and
determines as fol!ows:
A. Pursuant to the provisions of Section 12 of Article III
of the Charter of the City of Palo Alto, the Council on June II,
2007 did adopt a budget for fiscal year 2007-08; and
B. Per Governmental Accounting Standards Boards (GASB)
Statement No. 45, Financial Reporting for Retiree Medical
Benefits, the City of Palo Alto is required to recognize in its
financial statements any unfunded, earned retiree medical costs,
including those for current active emp!oyees; and
C. On May I, 2007, staff was directed by the Finance
Committee to proceed with establishing an irrevocable trust with
Ca!PERS and to transfer funds to establish the trust; and
D. There are significant financia! benefits of
establishing an irrevocable trust with CalPERS and prefunding
retiree medical benefits. Ca!PERS has significant experience in
administering employer-sponsored plans. Earnings from trust
fund investments help reduce future costs; it is expected that
the new trust fund for medical benefits wil! generate
significant revenues to apply to benefit costs. Additionally,
pre-funding agencies report !ower liabilities and !ower annua!
required contribution than non-pre-funding agencies. Further,
administrative costs are lower with CalPERS than with private
industry. Finally, establishing the trust will contribute to
maintaining a positive credit rating, resulting in more
favorable debt issuance rates in the future; and
E. The City’s unfunded retiree medical liability is valued
at $82.6 million. By depositing $30.0 million into the trust,
the unfunded liability will decline to $52.6 million.
SECTION 2. The sum of Thirty Million Dollars ($30,000,000)
is hereby transferred from the Employee Health Benefits Interna!
Service Fund to CalPERS to establish an irrevocable trust for
retiree benefits.
SECTION 3. The Employee Health Benefits Internal Service
Fund is hereby reduced by the sum of Thirty Million Dollars
($30,000,000) to Seven Hundred Nineteen Thousand Three Hundred
Forty Five Dollars ($719,345).
SECTION 4. The Council of the City of Palo Alto hereby
finds that this appropriation is exempt under the California
Environmenta! Quality Act and, therefore, no environmenta!
impact assessment is necessary.
SECTION 5. As specified in Section 2.28.080(a) of the Palo
Alto Municipal Code, a two-thirds vote of the City Council is
required to adopt this ordinance.
SECTION 6. As provided in Section 2.04.330 of the Palo
Alto Municipal Code, this ordinance shall become effective upon
adoption.
INTRODUCED AND PASSED:
AYES:
NOES:
ABSTENTIONS:
ABSENT:
ATTEST:APPROVED:
City Clerk Mayor
APPROVED AS TO FORM:
City Manager
Director of Administrative
Services