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HomeMy WebLinkAboutStaff Report 6415 City of Palo Alto (ID # 6415) City Council Staff Report Report Type: Consent Calendar Meeting Date: 2/1/2016 City of Palo Alto Page 1 Summary Title: New Pension Reporting (GASB 68) Title: Finance Committee Recommendation for Council to Review and Accept Information on the New Government Accounting Standards Board Pension Reporting Standards Known as GASB 68 From: City Manager Lead Department: Administrative Services Recommendation Staff recommends that the Council review and accept the new Government Accounting Standards Board pension reporting standards known as GASB 68. Background The Finance Committee reviewed and discussed the GASB 68 staff report on October 20, 2015. Staff is forwarding the report to Council to review. In June 2012, the Government Accounting Standards Board (GASB) approved a new reporting statement, GASB Statement No. 68 (GASB 68), that improved the financial reporting of pensions by local governments. GASB 68, formally titled Accounting and Financial Reporting for Pensions, establishes new accounting and financial reporting standards for local governments that provide their employees with pensions. The new standard requires government agencies to report pension information to increase transparency about pension costs to help decision makers factor in the financial impact of total pension obligations. The City needed to implement GASB 68 by June 30, 2015 and the City of Palo Alto complied with this requirement with the FY2015 Comprehensive Annual Financial Report (CAFR). The net pension liability, when incorporated into the fund statements, does not create a negative financial position in any of the funds, except in the Airport Fund, where it contributes to an already negative position due to a long-term advance from the General Fund. The CAFR was presented to the Finance Committee on November 17, 2015. Attachments:  Attachment A: Staff Report 6144 (PDF)  Attachment B: 10-20-15 FCM Agenda Item 1 Excerpt (PDF) City of Palo Alto (ID # 6144) Finance Committee Staff Report Report Type: Action Items Meeting Date: 10/20/2015 City of Palo Alto Page 1 Council Priority: City Finances Summary Title: GASB68 Title: New Pension Reporting Standards Government Accounting Standards Board Statement Number 68 (GASB 68) From: City Manager Lead Department: Administrative Services Motion Staff recommends that the Finance Committee review and discuss the new Government Accounting Standards Board pension reporting standards known as GASB 68. Background In June 2012, the Government Accounting Standards Board (GASB) approved a new reporting statement, GASB Statement No. 68 (GASB 68), that improved the financial reporting of pensions by local governments. GASB 68, formally titled Accounting and Financial Reporting for Pensions, establishes new accounting and financial reporting standards for local governments that provide their employees with pensions. The new standard requires government agencies to report pension information to increase transparency about pension costs to help decision makers factor in the financial impact of total pension obligations. GASB 68 must be implemented by June 30, 2015 and the City of Palo Alto will comply with this requirement with the upcoming FY2015 Comprehensive Annual Financial Report (CAFR), which is scheduled to be presented to the Finance Committee in November, 2015. Discussion Local governments with pensions have a total pension liability, which is the obligation to pay deferred pension benefits in the future. When the total pension liability is greater than the pension plan’s assets there is a net pension liability, also known as unfunded pension liability. GASB 68 now requires governments to report their net pension liability on their government- wide financial statements, as well as in the proprietary fund statements, in the CAFR. Prior to GASB 68 the net pension liability was reported in the notes section of the CAFR. City of Palo Alto Page 2 Palo Alto’s pension liability is calculated as follows: FY15 CAFR Pension Liability % Funded Safety $ 102.8 M 72.01% Miscellaneous 187.1 M 71.80% Total Pension Liability $ 289.9 M The above figures are obtained from the CalPERS actuarial reports dated June 30, 2014 (Attached). As discussed above, instead of discussing the City’s pension liability in the Notes section of the CAFR, the pension liability figures will be presented for the first time in the FY2015 CAFR in the entity wide and separate proprietary fund schedules. The allocated net pension liability is presented below: General Fund Electric Fund Water Fund Gas Fund All Other Funds Total Net Pension Liability $197.2 $26.1 $11.0 $11.8 $43.8 $289.9 Percentage 68.0% 9.0% 4.0% 4.1% 14.9% 100.0% The pension liability will be allocated based on the employer contributions for FY2014 for the employees serving in each fund. The new GASB 68 reporting requirements will impact the CAFR on an annual go forward basis. As with past practice, the city will continue to pay the annual required contribution for the pension liabilities as identified in the annual CalPERS actuarial reports. The next set of reports, which inform the City of its FY 2017 pension payments and rates, are scheduled to be released late October/early November 2015. There will be a small discrepancy between the reports since the GASB 68 reports are based on actuarial analysis using employee census data that is two years in arrears while the October actuarial reports are based on current calendar year employee census data. City of Palo Alto Page 3 The City’s outside financial auditing firm, MGO, provided staff with guidance on how to conform to the GASB 68 requirements. MGO will provide a final opinion on the appropriateness of the GASB 68 allocation that will be presented in the FY2015 CAFR. Next Steps Starting with the FY2015 CAFR the GASB 68 pension liability figures will be presented in the CAFR on an annual basis. Council referred the unfunded pension liability issue to the Finance Committee to explore potential action steps to reduce it and stabilize the annual employer contribution (Report ID # 6074). Resource Impact The pension liability reported in the CAFR for GASB 68 purposes does not impact the budget. The City’s annual budget process will continue to use the pension liability figures that are provided by CalPERS in the actuarial valuation reports for the safety and miscellaneous plans in the October timeframe each year. The reports provide the employer contribution rate that is used to determine the annual pension cost for the City. Attachments:  Attachment A: GASB 68 Miscellaneous Plan Valuation Report (PDF)  Attachment B: GASB 68 Safety Plan Valuation Report (PDF) GASB 68 ACCOUNTING VALUATION REPORT (CalPERS ID: 6373437857) Rate Plan Identifier: 8 Prepared for the CITY OF PALO ALTO MISCELLANEOUS PLAN, an Agent Multiple-Employer Defined Benefit Pension Plan Measurement Date of June 30, 2014 TABLE OF CONTENTS Actuarial Certification 1 Introduction 2 Purpose of the Report 3 Summary of Significant Accounting Policies 4 General Information about the Pension Plan 4 Changes in the Net Pension Liability 7 Pension Expense and Deferred Outflows and Deferred Inflows of Resources Related to Pensions 9 Schedules of Required Supplementary Information 11 APPENDIX A – DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES RELATED TO PENSIONS Schedule of Differences between Expected and Actual Experience A-1 Deferred Outflows of Resources and Deferred Inflows of Resources for Differences between Expected and Actual Experience A-2 Schedule of Changes of Assumptions A-3 Deferred Outflows of Resources and Deferred Inflows of Resources for Changes of Assumptions A-4 Schedule of Differences between Projected and Actual Earnings on Pension Plan Investments A-5 Deferred Outflows of Resources and Deferred Inflows of Resources for Differences between Projected and Actual Earnings on Pension Plan Investments A-6 Summary of Recognized Deferred Outflows of Resources and Deferred Inflows of Resources A-7 APPENDIX B – INTEREST, TOTAL PROJECTED EARNINGS AND PENSION EXPENSE/(INCOME) Interest on Total Pension Liability and Total Projected Earnings B-1 Pension Expense/(Income) B-2 (CY) ACCTG PROC ID: 2700 (CY) REPORT PROC ID: 83743 (PY) ACCTG PROC ID: N/A (PY) REPORT PROC ID: N/A GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 1 ACTUARIAL CERTIFICATION This report provides disclosure and reporting information as required under Governmental Accounting Standards Board Statement 68 (GASB 68) for the MISCELLANEOUS PLAN of the CITY OF PALO ALTO (the “Plan”), an Agent Multiple-Employer Defined Benefit Pension Plan participating in the California Public Employees’ Retirement System (CalPERS), for the measurement period ended June 30, 2014. This information should be used for the fiscal year beginning after June 15, 2014 but ending on or before June 30, 2015. Determinations for purposes other than financial accounting requirements may be significantly different from the results in this report. Thus, the use of this report for purposes other than those expressed here may not be appropriate. This accounting valuation report relies on liabilities and related validation work performed by the CalPERS Actuarial Office as part of the June 30, 2013 annual funding valuation for the Plan. The census data and benefit provisions underlying the liabilities were prepared as of June 30, 2013 and certified as part of the annual funding valuation by the CalPERS Actuarial Office. The June 30, 2013 liabilities used for this accounting valuation are based on the actuarial assumptions recommended by the CalPERS Chief Actuary and adopted by the CalPERS Board in February 2014 as laid out in the 2014 report titled “CalPERS Experience Study and Review of Actuarial Assumptions.” These liabilities were validated as part of the June 30, 2013 funding valuation that included the estimated impact of the change in actuarial assumptions on contribution requirements. The undersigned is relying upon these prescribed assumptions and methods and is not able to render an opinion on their reasonability, as this would require a substantial amount of additional work beyond the scope of this report. This report also relies on asset information for the measurement period as supplied by the CalPERS Financial Office. The fiduciary net position as of June 30, 2014, and the changes in net position for the year then ended were audited by CalPERS’ independent auditors, Macias Gini & O’Connell LLP, as part of the audit of the Schedule of Changes in Fiduciary Net Position by Employer Rate Plan of CalPERS Agent Multiple-Employer Pension Plan. With the provided liability and asset information, the total pension liability, net pension liability and pension expense were developed for the measurement period using standard actuarial techniques. In addition, the results are based on CalPERS’ understanding of the financial accounting and reporting requirements under U.S. Generally Accepted Accounting Principles as set forth in GASB 68. The information in this report is not intended to supersede the advice and interpretations of the employer’s auditor. This report may not provide all the information necessary to complete the required disclosures under GASB 68. The employer should supplement and update the information in this report with its own financial data as necessary to complete the disclosure information required by GASB 68. The undersigned is familiar with the near-term and long-term aspects of pension valuations and meets the Qualification Standards of the American Academy of Actuaries necessary to render the actuarial opinions contained herein. The information provided in this report is dependent upon various factors as documented throughout this report, which may be subject to change. Each section of this report is considered to be an integral part of the actuarial opinions. HENRY NEEB, ASA, MAAA GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 2 Introduction This is the GASB 68 Accounting Valuation Report to be used for your fiscal year beginning after June 15, 2014 and ending on or before June 30, 2015 for your MISCELLANEOUS PLAN (Plan). GASB Statement No. 68 replaced the requirements of GASB 27 effective for fiscal years beginning after June 15, 2014. Statement 68 was issued by GASB in June 2012, requiring public employers to comply with new accounting and financial reporting standards. Statement 68 outlines a different approach to the recognition and calculation of pension obligations. Under the new GASB standards, employers that participate in a defined benefit pension plan administered as a trust or equivalent arrangement are required to record the net pension liability, pension expense, and deferred outflows/deferred inflows of resources related to pensions in their financial statements as part of their financial position. Net pension liability is the plan’s total pension liability based on entry age normal actuarial cost method less the plan’s fiduciary net position. This may be a negative liability (net pension asset). Pension expense is the change in net pension liability from the previous fiscal year to the current fiscal year less adjustments. This may be a negative expense (pension income). Deferred outflows and deferred inflows of resources related to pensions are certain changes in total pension liability and fiduciary net position that are to be recognized in future pension expense. This report may not provide all the information necessary to complete the required disclosures under GASB 68. The employer should supplement and update the information in this report with its own financial data as necessary to complete the disclosure information required by GASB 68. For example, no adjustments have been made for contributions subsequent to the measurement date. Appropriate accounting treatment of any contributions made after the measurement date is the responsibility of the employer. CalPERS recommends that the employer consult with its auditor regarding any such adjustments. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 3 Purpose of the Report The Plan participates in the CalPERS agent multiple-employer defined benefit pension plan. This GASB 68 report provides accounting and financial reporting for pensions, to be used in the employer’s financial reports. The pension expense is for the measurement period of 2013-14 and the net pension liability is measured as of June 30, 2014. Liabilities are based on the results of the actuarial calculations performed as of June 30, 2013 and were rolled forward to June 30, 2014. Fiduciary net position is based on fair value of investments as of June 30, 2014. Since GASB 68 allows a measurement date of up to 12 months before the employer’s fiscal year-end, this report can be used for fiscal years beginning after June 15, 2014 and ending on or before June 30, 2015. The following pension information is disclosed in this report:  Summary of Significant Accounting Policies  General Information about the Pension Plan ○ Plan Description, Benefits Provided and Employees Covered ○ Contribution Description ○ Actuarial Methods and Assumptions ○ Discount Rate ○ Pension Plan Fiduciary Net Position  Changes in the Net Pension Liability ○ Sensitivity of the Net Pension Liability ○ Subsequent Events ○ Recognition of Gains and Losses  Pension Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions  Schedules of Required Supplementary Information (10-Year History1): ○ Schedule of Changes in Net Pension Liability and Related Ratios ○ Schedule of Plan Contributions The use of this report for other purposes may be inappropriate. 1 Historical information is required only for measurement periods for which GASB 68 is applicable. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 4 Summary of Significant Accounting Policies For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the Plan and additions to/deductions from the Plan’s fiduciary net position have been determined on the same basis as they are reported by the CalPERS Financial Office. For this purpose, benefit payments (including refunds of employee contributions) are recognized when currently due and payable in accordance with the benefit terms. Investments are reported at fair value. GASB 68 requires that the reported results must pertain to liability and asset information within certain defined timeframes. For this report, the following timeframes are used. Valuation Date (VD) June 30, 2013 Measurement Date (MD) June 30, 2014 Measurement Period (MP) July 1, 2013 to June 30, 2014 General Information about the Pension Plan Plan Description, Benefits Provided and Employees Covered The Plan is an agent multiple-employer defined benefit pension plan administered by the California Public Employees’ Retirement System (CalPERS). A full description of the pension plan regarding number of employees covered, benefit provisions, assumptions (for funding, but not accounting purposes), and membership information are listed in the June 30, 2013 Annual Actuarial Valuation Report. Details of the benefits provided can be obtained in Appendix B of the actuarial valuation report. This report and CalPERS’ audited financial statements are publicly available reports that can be obtained at CalPERS’ website under Forms and Publications. Contribution Description Section 20814(c) of the California Public Employees’ Retirement Law (PERL) requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. The total plan contributions are determined through CalPERS’ annual actuarial valuation process. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The employer is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. For the measurement period ended June 30, 2014 (the measurement date), the average active employee contribution rate is 7.796 percent of annual pay, and the employer’s contribution rate is 25.536 percent of annual payroll. Employer contribution rates may change if plan contracts are amended. It is the responsibility of the employer to make necessary accounting adjustments to reflect the impact due to any Employer Paid Member Contributions or situations where members are paying a portion of the employer contribution. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 5 Actuarial Methods and Assumptions Used to Determine Total Pension Liability For the measurement period ended June 30, 2014 (the measurement date), the total pension liability was determined by rolling forward the June 30, 2013 total pension liability. The June 30, 2013 and the June 30, 2014 total pension liabilities were based on the following actuarial methods and assumptions: Actuarial Cost Method Entry Age Normal in accordance with the requirements of GASB Statement No. 68 Actuarial Assumptions Discount Rate 7.50% Inflation 2.75% Salary Increases Varies by Entry Age and Service Investment Rate of Return 7.50% Net of Pension Plan Investment and Administrative Expenses; includes Inflation Mortality Rate Table1 Derived using CalPERS’ Membership Data for all Funds Post Retirement Benefit Increase Contract COLA up to 2.75% until Purchasing Power Protection Allowance Floor on Purchasing Power applies, 2.75% thereafter 1 The mortality table used was developed based on CalPERS’ specific data. The table includes 20 years of mortality improvements using Society of Actuaries Scale BB. For more details on this table, please refer to the 2014 experience study report. All other actuarial assumptions used in the June 30, 2013 valuation were based on the results of an actuarial experience study for the period from 1997 to 2011, including updates to salary increase, mortality and retirement rates. The Experience Study report can be obtained at CalPERS’ website under Forms and Publications. Discount Rate The discount rate used to measure the total pension liability was 7.50 percent. To determine whether the municipal bond rate should be used in the calculation of a discount rate for each plan, CalPERS stress tested plans that would most likely result in a discount rate that would be different from the actuarially assumed discount rate. Based on the testing, none of the tested plans run out of assets. Therefore, the current 7.50 percent discount rate is adequate and the use of the municipal bond rate calculation is not necessary. The long-term expected discount rate of 7.50 percent is applied to all plans in the Public Employees Retirement Fund. The stress test results are presented in a detailed report called “GASB Crossover Testing Report” that can be obtained at CalPERS’ website under the GASB 68 section. According to Paragraph 30 of Statement 68, the long-term discount rate should be determined without reduction for pension plan administrative expense. The 7.50 percent investment return assumption used in this accounting valuation is net of administrative expenses. Administrative expenses are assumed to be 15 basis points. An investment return excluding administrative expenses would have been 7.65 percent. Using this lower discount rate has resulted in a slightly higher total pension liability and net pension liability. This difference was deemed immaterial to the agent multiple-employer plan. However, employers may determine the impact at the rate plan level for their own financial reporting purposes. Refer to page 8 of this report, which provides information on the sensitivity of the net pension liability to changes in the discount rate. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 6 CalPERS is scheduled to review all actuarial assumptions as part of its regular Asset Liability Management review cycle that is scheduled to be completed in February 2018. Any changes to the discount rate will require Board action and proper stakeholder outreach. For these reasons, CalPERS expects to continue using a discount rate net of administrative expenses for GASB 67 and 68 calculations through at least the 2017-18 fiscal year. CalPERS will continue to check the materiality of the difference in calculation until such time as we have changed our methodology. The long-term expected rate of return on pension plan investments was determined using a building- block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. In determining the long-term expected rate of return, staff took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Such cash flows were developed assuming that both members and employers will make their required contributions on time and as scheduled in all future years. Using historical returns of all the funds’ asset classes, expected compound (geometric) returns were calculated over the short-term (first 10 years) and the long-term (11-60 years) using a building-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equivalent to the single equivalent rate calculated above and rounded down to the nearest one quarter of one percent. The table below reflects long-term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. These geometric rates of return are net of administrative expenses. Asset Class New Strategic Allocation Real Return Years 1 - 101 Real Return Years 11+2 Global Equity 47.0% 5.25% 5.71% Global Fixed Income 19.0 0.99 2.43 Inflation Sensitive 6.0 0.45 3.36 Private Equity 12.0 6.83 6.95 Real Estate 11.0 4.50 5.13 Infrastructure and Forestland 3.0 4.50 5.09 Liquidity 2.0 (0.55) (1.05) 1An expected inflation of 2.5% used for this period 2An expected inflation of 3.0% used for this period Pension Plan Fiduciary Net Position The plan fiduciary net position disclosed in your GASB 68 accounting valuation report may differ from the plan assets reported in your funding actuarial valuation report due to several reasons. First, for the accounting valuations, CalPERS must keep items such as deficiency reserves, fiduciary self- insurance and OPEB expense included as assets. These amounts are excluded for rate setting purposes in your funding actuarial valuation. In addition, differences may result from early Comprehensive Annual Financial Report closing and final reconciled reserves. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 7 Changes in the Net Pension Liability The following table shows the changes in net pension liability recognized over the measurement period. Increase (Decrease) Total Pension Liability Plan Fiduciary Net Position Net Pension Liability/(Asset) (a) (b) (c) = (a) - (b) Balance at: 6/30/2013 (VD)1 $ 635,847,037 $ 413,410,472 $ 222,436,565 Changes Recognized for the Measurement Period:  Service Cost 12,441,595 12,441,595  Interest on the Total Pension Liability 46,963,318 46,963,318  Changes of Benefit Terms 0 0  Differences between Expected and Actual Experience 0 0  Changes of Assumptions 0 0  Contributions from the Employer 17,399,732 (17,399,732)  Contributions from Employees 6,344,660 (6,344,660)  Net Investment Income2 70,988,848 (70,988,848)  Benefit Payments, including Refunds of Employee Contributions (31,780,533) (31,780,533) 0 Net Changes during 2013-14 $ 27,624,380 $ 62,952,707 $ (35,328,327) Balance at: 6/30/2014 (MD)1 $ 663,471,417 $ 476,363,179 $ 187,108,238 1 The fiduciary net position includes receivables for employee service buybacks, deficiency reserves, fiduciary self-insurance and OPEB expense. As described on Page 6, this may differ from the plan assets reported in the funding actuarial valuation report. 2 Net of administrative expenses. For details, see note in Appendix B-2. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 8 Sensitivity of the Net Pension Liability to Changes in the Discount Rate The following presents the net pension liability of the Plan as of the measurement date, calculated using the discount rate of 7.50 percent, as well as what the net pension liability would be if it were calculated using a discount rate that is 1 percentage-point lower (6.50 percent) or 1 percentage-point higher (8.50 percent) than the current rate: Discount Rate - 1% (6.50%) Current Discount Rate (7.50%) Discount Rate + 1% (8.50%) Plan's Net Pension Liability/(Asset) $ 269,622,616 $ 187,108,238 $ 118,202,943 Subsequent Events There were no subsequent events that would materially affect the results presented in this disclosure. Recognition of Gains and Losses Under GASB 68, gains and losses related to changes in total pension liability and fiduciary net position are recognized in pension expense systematically over time. The first amortized amounts are recognized in pension expense for the year the gain or loss occurs. The remaining amounts are categorized as deferred outflows and deferred inflows of resources related to pensions and are to be recognized in future pension expense. The amortization period differs depending on the source of the gain or loss: Difference between projected and actual earnings 5 year straight-line amortization All other amounts Straight-line amortization over the average expected remaining service lives of all members that are provided with benefits (active, inactive, and retired) as of the beginning of the measurement period The expected average remaining service lifetime (EARSL) is calculated by dividing the total future service years by the total number of plan participants (active, inactive, and retired). The EARSL for the Plan for the 2013-14 measurement period is 3.1 years, which was obtained by dividing the total service years of 7,375 (the sum of remaining service lifetimes of the active employees) by 2,407 (the total number of participants: active, inactive, and retired). Note that inactive employees and retirees have remaining service lifetimes equal to 0. Also note that total future service is based on the members’ probability of decrementing due to an event other than receiving a cash refund. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 9 Pension Expense and Deferred Outflows and Deferred Inflows of Resources Related to Pensions Paragraph 137 of GASB 68 and Questions 267 and 268 of the GASB 68 Implementation Guide set forth guidance on implementing the standard. The employer should use this guidance for the adjusting entries concerning the net pension obligation and the initial net pension liability/(asset). As of the start of the measurement period (July 1, 2013), the net pension liability/(asset) is $222,436,565. For the measurement period ending June 30, 2014 (the measurement date), the CITY OF PALO ALTO incurred a pension expense/(income) of $14,484,819 for the Plan (see Appendix B-2 for the complete breakdown of the pension expense). Note that no adjustments have been made for contributions subsequent to the measurement date. Adequate treatment of any contributions made after the measurement date is the responsibility of the employer. As of June 30, 2014, the CITY OF PALO ALTO has deferred outflows and deferred inflows of resources related to pensions as follows: Deferred Outflows of Resources Deferred Inflows of Resources Differences between Expected and Actual Experience $ 0 $ 0 Changes of Assumptions 0 0 Net Difference between Projected and Actual Earnings on Pension Plan Investments 0 (32,413,414) Total $ 0 $ (32,413,414) The amounts above are net of outflows and inflows recognized in the 2013-14 measurement period expense. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 10 Amounts reported as deferred outflows and deferred inflows of resources related to pensions will be recognized in future pension expense as follows: Measurement Period Ended June 30: Deferred Outflows/(Inflows) of Resources 2015 $ (8,103,353) 2016 (8,103,353) 2017 (8,103,353) 2018 (8,103,355) 2019 0 Thereafter 0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 11 Schedules of Required Supplementary Information Schedule of Changes in Net Pension Liability and Related Ratios During the Measurement Period 1 Historical information is required only for measurement periods for which GASB 68 is applicable. 2 Net of administrative expenses. For details, see note in Appendix B-2. Notes to Schedule: Benefit Changes: The figures above do not include any liability impact that may have resulted from plan changes which occurred after June 30, 2013. This applies for voluntary benefit changes as well as any offers of Two Years Additional Service Credit (a.k.a. Golden Handshakes). Changes of Assumptions: There were no changes in assumptions. Measurement Period 2013-141 TOTAL PENSION LIABILITY Service Cost $ 12,441,595 Interest 46,963,318 Changes of Benefit Terms 0 Difference Between Expected and Actual Experience 0 Changes of Assumptions 0 Benefit Payments, Including Refunds of Employee Contributions (31,780,533) Net Change in Total Pension Liability 27,624,380 Total Pension Liability – Beginning 635,847,037 Total Pension Liability – Ending (a) $ 663,471,417 PLAN FIDUCIARY NET POSITION Contributions – Employer $ 17,399,732 Contributions – Employee 6,344,660 Net Investment Income2 70,988,848 Benefit Payments, Including Refunds of Employee Contributions (31,780,533) Other Changes in Fiduciary Net Position 0 Net Change in Fiduciary Net Position 62,952,707 Plan Fiduciary Net Position – Beginning 413,410,472 Plan Fiduciary Net Position – Ending (b) $ 476,363,179 Plan Net Pension Liability/(Asset) – Ending (a) - (b) $ 187,108,238 Plan Fiduciary Net Position as a Percentage of the Total Pension Liability 71.80% Covered-Employee Payroll $ 66,372,870 Plan Net Pension Liability/(Asset) as a Percentage of Covered-Employee Payroll 281.90% GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 12 Schedule of Plan Contributions1 Fiscal Year 2013-14 Actuarially Determined Contribution2 $ 17,399,732 Contributions in Relation to the Actuarially Determined Contribution2 (17,399,732) Contribution Deficiency (Excess) $ 0 Covered-Employee Payroll3, 4 $ 66,372,870 Contributions as a Percentage of Covered-Employee Payroll3 26.22% 1 Historical information is required only for measurement periods for which GASB 68 is applicable. 2 Employers are assumed to make contributions equal to the actuarially determined contributions. However, some employers may choose to make additional contributions towards their unfunded liability. Employer contributions for such plans exceed the actuarially determined contributions. 3 Covered-Employee Payroll represented above is based on pensionable earnings provided by the employer. However, GASB 68 defines covered-employee payroll as the total payroll of employees that are provided pensions through the pension plan. Accordingly, if pensionable earnings are different than total earnings for covered-employees, the employer should display in the disclosure footnotes the payroll based on total earnings for the covered group and recalculate the required payroll-related ratios. 4 Payroll from prior year $64,439,680 was assumed to increase by the 3.00 percent payroll growth assumption. Notes to Schedule: The actuarial methods and assumptions used to set the actuarially determined contributions for Fiscal Year 2013-14 were from the June 30, 2011 public agency valuations. Actuarial Cost Method Entry Age Normal Amortization Method/Period For details, see June 30, 2011 Funding Valuation Report. Asset Valuation Method Actuarial Value of Assets. For details, see June 30, 2011 Funding Valuation Report. Inflation 2.75% Salary Increases Varies by Entry Age and Service Payroll Growth 3.00% Investment Rate of Return 7.50% Net of Pension Plan Investment and Administrative Expenses; includes Inflation. Retirement Age The probabilities of Retirement are based on the 2010 CalPERS Experience Study for the period from 1997 to 2007. Mortality The probabilities of mortality are based on the 2010 CalPERS Experience Study for the period from 1997 to 2007. Pre- retirement and Post-retirement mortality rates include 5 years of projected mortality improvement using Scale AA published by the Society of Actuaries. APPENDICES  APPENDIX A – DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES RELATED TO PENSIONS  APPENDIX B – INTEREST, TOTAL PROJECTED EARNINGS AND PENSION EXPENSE/(INCOME) APPENDIX A DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES RELATED TO PENSIONS  SCHEDULE OF DIFFERENCES BETWEEN EXPECTED AND ACTUAL EXPERIENCE  DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES FOR DIFFERENCES BETWEEN EXPECTED AND ACTUAL EXPERIENCE  SCHEDULE OF CHANGES OF ASSUMPTIONS  DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES FOR CHANGES OF ASSUMPTIONS  SCHEDULE OF DIFFERENCES BETWEEN PROJECTED AND ACTUAL EARNINGS ON PENSION PLAN INVESTMENTS  DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES FOR DIFFERENCES BETWEEN PROJECTED AND ACTUAL EARNINGS ON PENSION PLAN INVESTMENTS  SUMMARY OF RECOGNIZED DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-1 Schedule of differences between expected and actual experience Increase (Decrease) in Pension Expense Arising from the Recognition of the Effects of Differences between Expected and Actual Experience (Measurement Periods) Measurement Period Differences between Expected and Actual Experience Recognition Period (Years) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter 2013-14 $0 3.1 $0 $0 $0 $0 $0 $0 $0 Net Increase (Decrease) in Pension Expense $0 $0 $0 $0 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-2 Deferred outflows of resources and deferred inflows of resources arising from differences between expected and actual experience Balances at June 30, 2014 Measurement Period Experience Losses Experience Gains Amounts Recognized in Pension Expense through June 30, 2014 Deferred Outflows of Resources Deferred Inflows of Resources (a) (b) (c) (a) - (c) (b) - (c) 2013-14 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-3 Schedule of changes of assumptions Increase (Decrease) in Pension Expense Arising from the Recognition of the Effects of Changes of Assumptions (Measurement Periods) Measurement Period Changes of Assumptions Recognition Period (Years) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter 2013-14 $0 3.1 $0 $0 $0 $0 $0 $0 $0 Net Increase (Decrease) in Pension Expense $0 $0 $0 $0 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-4 Deferred outflows of resources and deferred inflows of resources arising from changes of assumptions Balances at June 30, 2014 Measurement Period Increase in Total Pension Liability Decrease in Total Pension Liability Amounts Recognized in Pension Expense through June 30, 2014 Deferred Outflows of Resources Deferred Inflows of Resources (a) (b) (c) (a) - (c) (b) - (c) 2013-14 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-5 Schedule of differences between projected and actual earnings on pension plan investments Increase (Decrease) in Pension Expense Arising from the Recognition of Differences between Projected and Actual Earnings on Pension Plan Investments (Measurement Periods) Measurement Period Differences between Projected and Actual Earnings on Pension Plan Investments Recognition Period (Years) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter 2013-14 $(40,516,767) 5.0 $(8,103,353) $(8,103,353) $(8,103,353) $(8,103,353) $(8,103,355) $0 $0 Net Increase (Decrease) in Pension Expense $(8,103,353) $(8,103,353) $(8,103,353) $(8,103,353) $(8,103,355) $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-6 Deferred outflows of resources and deferred inflows of resources arising from differences between projected and actual earnings on pension plan investments Balances at June 30, 2014 Measurement Period Investment Earnings less than Projected Investment Earnings greater than Projected Amounts Recognized in Pension Expense through June 30, 2014 Deferred Outflows of Resources Deferred Inflows of Resources (a) (b) (c) (a) - (c) (b) - (c) 2013-14 $(40,516,767) $(8,103,353) $(32,413,414) $0 $(32,413,414) GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-7 Summary of recognized deferred outflows of resources and deferred inflows of resources Net Increase (Decrease) in Pension Expense (Measurement Periods) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter Differences between Expected and Actual Experience $0 $0 $0 $0 $0 $0 $0 Changes of Assumptions 0 0 0 0 0 0 0 Differences between Projected and Actual Earnings on Pension Plan Investments (8,103,353) (8,103,353) (8,103,353) (8,103,353) (8,103,355) 0 0 Grand Total $(8,103,353) $(8,103,353) $(8,103,353) $(8,103,353) $(8,103,355) $0 $0 APPENDIX B INTEREST, TOTAL PROJECTED EARNINGS AND PENSION EXPENSE/(INCOME)  INTEREST ON TOTAL PENSION LIABILITY AND TOTAL PROJECTED EARNINGS  PENSION EXPENSE/(INCOME) GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 B-1 Interest on Total Pension Liability and Total Projected Earnings Interest on the Total Pension Liability Amount for Period Portion of Period Interest Rate Interest on the Total Pension Liability (a) (b) (c) (a) X (b) X (c) Beginning Total Pension Liability $ 635,847,037 100% 7.5% $ 47,688,528 Service Cost 12,441,595 50% 7.5% 466,560 Benefit Payments, including Refunds of Employee Contributions (31,780,533) 50% 7.5% (1,191,770) Total Interest on the Total Pension Liability $ 46,963,318 Projected Earnings on Pension Plan Investments Amount for Period Portion of Period Projected Rate of Return Projected Earnings (a) (b) (c) (a) X (b) X (c) Beginning Plan Fiduciary Net Position excluding Receivables1 $ 410,312,475 100% 7.5% $ 30,773,436 Employer Contributions 17,399,732 50% 7.5% 652,490 Employee Contributions 6,344,660 50% 7.5% 237,925 Benefit Payments, including Refunds of Employee Contributions (31,780,533) 50% 7.5% (1,191,770) Total Projected Earnings $ 30,472,081 1 Contributions receivable for employee service buybacks, totaling $3,097,997 as of June 30, 2013, are excluded for purposes of calculating projected earnings on pension plan investments. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – MISCELLANEOUS PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 B-2 Pension Expense/(Income) for Measurement Period Ended June 30, 2014 Description Amount Service Cost $ 12,441,595 Interest on the Total Pension Liability 46,963,318 Changes of Benefit Terms 0 Recognized Differences between Expected and Actual Experience 0 Recognized Changes of Assumptions 0 Employee Contributions (6,344,660) Projected Earnings on Pension Plan Investments (30,472,081) Recognized Differences between Projected and Actual Earnings on Plan Investments (8,103,353) Other Changes in Fiduciary Net Position 0 Total Pension Expense/(Income) $ 14,484,819 Note: Plan administrative expenses are not displayed in the above pension expense table. Since the expected investment return of 7.50 percent is net of administrative expenses, administrative expenses are excluded from the above table, but implicitly included as part of investment earnings. GASB 68 ACCOUNTING VALUATION REPORT (CalPERS ID: 6373437857) Rate Plan Identifier: 5080 Prepared for the CITY OF PALO ALTO SAFETY PLAN, an Agent Multiple-Employer Defined Benefit Pension Plan Measurement Date of June 30, 2014 TABLE OF CONTENTS Actuarial Certification 1 Introduction 2 Purpose of the Report 3 Summary of Significant Accounting Policies 4 General Information about the Pension Plan 4 Changes in the Net Pension Liability 7 Pension Expense and Deferred Outflows and Deferred Inflows of Resources Related to Pensions 9 Schedules of Required Supplementary Information 11 APPENDIX A – DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES RELATED TO PENSIONS Schedule of Differences between Expected and Actual Experience A-1 Deferred Outflows of Resources and Deferred Inflows of Resources for Differences between Expected and Actual Experience A-2 Schedule of Changes of Assumptions A-3 Deferred Outflows of Resources and Deferred Inflows of Resources for Changes of Assumptions A-4 Schedule of Differences between Projected and Actual Earnings on Pension Plan Investments A-5 Deferred Outflows of Resources and Deferred Inflows of Resources for Differences between Projected and Actual Earnings on Pension Plan Investments A-6 Summary of Recognized Deferred Outflows of Resources and Deferred Inflows of Resources A-7 APPENDIX B – INTEREST, TOTAL PROJECTED EARNINGS AND PENSION EXPENSE/(INCOME) Interest on Total Pension Liability and Total Projected Earnings B-1 Pension Expense/(Income) B-2 (CY) ACCTG PROC ID: 2701 (CY) REPORT PROC ID: 83744 (PY) ACCTG PROC ID: N/A (PY) REPORT PROC ID: N/A GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 1 ACTUARIAL CERTIFICATION This report provides disclosure and reporting information as required under Governmental Accounting Standards Board Statement 68 (GASB 68) for the SAFETY PLAN of the CITY OF PALO ALTO (the “Plan”), an Agent Multiple-Employer Defined Benefit Pension Plan participating in the California Public Employees’ Retirement System (CalPERS), for the measurement period ended June 30, 2014. This information should be used for the fiscal year beginning after June 15, 2014 but ending on or before June 30, 2015. Determinations for purposes other than financial accounting requirements may be significantly different from the results in this report. Thus, the use of this report for purposes other than those expressed here may not be appropriate. This accounting valuation report relies on liabilities and related validation work performed by the CalPERS Actuarial Office as part of the June 30, 2013 annual funding valuation for the Plan. The census data and benefit provisions underlying the liabilities were prepared as of June 30, 2013 and certified as part of the annual funding valuation by the CalPERS Actuarial Office. The June 30, 2013 liabilities used for this accounting valuation are based on the actuarial assumptions recommended by the CalPERS Chief Actuary and adopted by the CalPERS Board in February 2014 as laid out in the 2014 report titled “CalPERS Experience Study and Review of Actuarial Assumptions.” These liabilities were validated as part of the June 30, 2013 funding valuation that included the estimated impact of the change in actuarial assumptions on contribution requirements. The undersigned is relying upon these prescribed assumptions and methods and is not able to render an opinion on their reasonability, as this would require a substantial amount of additional work beyond the scope of this report. This report also relies on asset information for the measurement period as supplied by the CalPERS Financial Office. The fiduciary net position as of June 30, 2014, and the changes in net position for the year then ended were audited by CalPERS’ independent auditors, Macias Gini & O’Connell LLP, as part of the audit of the Schedule of Changes in Fiduciary Net Position by Employer Rate Plan of CalPERS Agent Multiple-Employer Pension Plan. With the provided liability and asset information, the total pension liability, net pension liability and pension expense were developed for the measurement period using standard actuarial techniques. In addition, the results are based on CalPERS’ understanding of the financial accounting and reporting requirements under U.S. Generally Accepted Accounting Principles as set forth in GASB 68. The information in this report is not intended to supersede the advice and interpretations of the employer’s auditor. This report may not provide all the information necessary to complete the required disclosures under GASB 68. The employer should supplement and update the information in this report with its own financial data as necessary to complete the disclosure information required by GASB 68. The undersigned is familiar with the near-term and long-term aspects of pension valuations and meets the Qualification Standards of the American Academy of Actuaries necessary to render the actuarial opinions contained herein. The information provided in this report is dependent upon various factors as documented throughout this report, which may be subject to change. Each section of this report is considered to be an integral part of the actuarial opinions. DAVID CLEMENT, ASA, MAAA, EA Senior Pension Actuary, CalPERS GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 2 Introduction This is the GASB 68 Accounting Valuation Report to be used for your fiscal year beginning after June 15, 2014 and ending on or before June 30, 2015 for your SAFETY PLAN (Plan). GASB Statement No. 68 replaced the requirements of GASB 27 effective for fiscal years beginning after June 15, 2014. Statement 68 was issued by GASB in June 2012, requiring public employers to comply with new accounting and financial reporting standards. Statement 68 outlines a different approach to the recognition and calculation of pension obligations. Under the new GASB standards, employers that participate in a defined benefit pension plan administered as a trust or equivalent arrangement are required to record the net pension liability, pension expense, and deferred outflows/deferred inflows of resources related to pensions in their financial statements as part of their financial position. Net pension liability is the plan’s total pension liability based on entry age normal actuarial cost method less the plan’s fiduciary net position. This may be a negative liability (net pension asset). Pension expense is the change in net pension liability from the previous fiscal year to the current fiscal year less adjustments. This may be a negative expense (pension income). Deferred outflows and deferred inflows of resources related to pensions are certain changes in total pension liability and fiduciary net position that are to be recognized in future pension expense. This report may not provide all the information necessary to complete the required disclosures under GASB 68. The employer should supplement and update the information in this report with its own financial data as necessary to complete the disclosure information required by GASB 68. For example, no adjustments have been made for contributions subsequent to the measurement date. Appropriate accounting treatment of any contributions made after the measurement date is the responsibility of the employer. CalPERS recommends that the employer consult with its auditor regarding any such adjustments. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 3 Purpose of the Report The Plan participates in the CalPERS agent multiple-employer defined benefit pension plan. This GASB 68 report provides accounting and financial reporting for pensions, to be used in the employer’s financial reports. The pension expense is for the measurement period of 2013-14 and the net pension liability is measured as of June 30, 2014. Liabilities are based on the results of the actuarial calculations performed as of June 30, 2013 and were rolled forward to June 30, 2014. Fiduciary net position is based on fair value of investments as of June 30, 2014. Since GASB 68 allows a measurement date of up to 12 months before the employer’s fiscal year-end, this report can be used for fiscal years beginning after June 15, 2014 and ending on or before June 30, 2015. The following pension information is disclosed in this report:  Summary of Significant Accounting Policies  General Information about the Pension Plan ○ Plan Description, Benefits Provided and Employees Covered ○ Contribution Description ○ Actuarial Methods and Assumptions ○ Discount Rate ○ Pension Plan Fiduciary Net Position  Changes in the Net Pension Liability ○ Sensitivity of the Net Pension Liability ○ Subsequent Events ○ Recognition of Gains and Losses  Pension Expense and Deferred Outflows of Resources and Deferred Inflows of Resources Related to Pensions  Schedules of Required Supplementary Information (10-Year History1): ○ Schedule of Changes in Net Pension Liability and Related Ratios ○ Schedule of Plan Contributions The use of this report for other purposes may be inappropriate. 1 Historical information is required only for measurement periods for which GASB 68 is applicable. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 4 Summary of Significant Accounting Policies For purposes of measuring the net pension liability, deferred outflows of resources and deferred inflows of resources related to pensions, and pension expense, information about the fiduciary net position of the Plan and additions to/deductions from the Plan’s fiduciary net position have been determined on the same basis as they are reported by the CalPERS Financial Office. For this purpose, benefit payments (including refunds of employee contributions) are recognized when currently due and payable in accordance with the benefit terms. Investments are reported at fair value. GASB 68 requires that the reported results must pertain to liability and asset information within certain defined timeframes. For this report, the following timeframes are used. Valuation Date (VD) June 30, 2013 Measurement Date (MD) June 30, 2014 Measurement Period (MP) July 1, 2013 to June 30, 2014 General Information about the Pension Plan Plan Description, Benefits Provided and Employees Covered The Plan is an agent multiple-employer defined benefit pension plan administered by the California Public Employees’ Retirement System (CalPERS). A full description of the pension plan regarding number of employees covered, benefit provisions, assumptions (for funding, but not accounting purposes), and membership information are listed in the June 30, 2013 Annual Actuarial Valuation Report. Details of the benefits provided can be obtained in Appendix B of the actuarial valuation report. This report and CalPERS’ audited financial statements are publicly available reports that can be obtained at CalPERS’ website under Forms and Publications. Contribution Description Section 20814(c) of the California Public Employees’ Retirement Law (PERL) requires that the employer contribution rates for all public employers be determined on an annual basis by the actuary and shall be effective on the July 1 following notice of a change in the rate. The total plan contributions are determined through CalPERS’ annual actuarial valuation process. The actuarially determined rate is the estimated amount necessary to finance the costs of benefits earned by employees during the year, with an additional amount to finance any unfunded accrued liability. The employer is required to contribute the difference between the actuarially determined rate and the contribution rate of employees. For the measurement period ended June 30, 2014 (the measurement date), the average active employee contribution rate is 9.029 percent of annual pay, and the employer’s contribution rate is 34.716 percent of annual payroll. Employer contribution rates may change if plan contracts are amended. It is the responsibility of the employer to make necessary accounting adjustments to reflect the impact due to any Employer Paid Member Contributions or situations where members are paying a portion of the employer contribution. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 5 Actuarial Methods and Assumptions Used to Determine Total Pension Liability For the measurement period ended June 30, 2014 (the measurement date), the total pension liability was determined by rolling forward the June 30, 2013 total pension liability. The June 30, 2013 and the June 30, 2014 total pension liabilities were based on the following actuarial methods and assumptions: Actuarial Cost Method Entry Age Normal in accordance with the requirements of GASB Statement No. 68 Actuarial Assumptions Discount Rate 7.50% Inflation 2.75% Salary Increases Varies by Entry Age and Service Investment Rate of Return 7.50% Net of Pension Plan Investment and Administrative Expenses; includes Inflation Mortality Rate Table1 Derived using CalPERS’ Membership Data for all Funds Post Retirement Benefit Increase Contract COLA up to 2.75% until Purchasing Power Protection Allowance Floor on Purchasing Power applies, 2.75% thereafter 1 The mortality table used was developed based on CalPERS’ specific data. The table includes 20 years of mortality improvements using Society of Actuaries Scale BB. For more details on this table, please refer to the 2014 experience study report. All other actuarial assumptions used in the June 30, 2013 valuation were based on the results of an actuarial experience study for the period from 1997 to 2011, including updates to salary increase, mortality and retirement rates. The Experience Study report can be obtained at CalPERS’ website under Forms and Publications. Discount Rate The discount rate used to measure the total pension liability was 7.50 percent. To determine whether the municipal bond rate should be used in the calculation of a discount rate for each plan, CalPERS stress tested plans that would most likely result in a discount rate that would be different from the actuarially assumed discount rate. Based on the testing, none of the tested plans run out of assets. Therefore, the current 7.50 percent discount rate is adequate and the use of the municipal bond rate calculation is not necessary. The long-term expected discount rate of 7.50 percent is applied to all plans in the Public Employees Retirement Fund. The stress test results are presented in a detailed report called “GASB Crossover Testing Report” that can be obtained at CalPERS’ website under the GASB 68 section. According to Paragraph 30 of Statement 68, the long-term discount rate should be determined without reduction for pension plan administrative expense. The 7.50 percent investment return assumption used in this accounting valuation is net of administrative expenses. Administrative expenses are assumed to be 15 basis points. An investment return excluding administrative expenses would have been 7.65 percent. Using this lower discount rate has resulted in a slightly higher total pension liability and net pension liability. This difference was deemed immaterial to the agent multiple-employer plan. However, employers may determine the impact at the rate plan level for their own financial reporting purposes. Refer to page 8 of this report, which provides information on the sensitivity of the net pension liability to changes in the discount rate. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 6 CalPERS is scheduled to review all actuarial assumptions as part of its regular Asset Liability Management review cycle that is scheduled to be completed in February 2018. Any changes to the discount rate will require Board action and proper stakeholder outreach. For these reasons, CalPERS expects to continue using a discount rate net of administrative expenses for GASB 67 and 68 calculations through at least the 2017-18 fiscal year. CalPERS will continue to check the materiality of the difference in calculation until such time as we have changed our methodology. The long-term expected rate of return on pension plan investments was determined using a building- block method in which best-estimate ranges of expected future real rates of return (expected returns, net of pension plan investment expense and inflation) are developed for each major asset class. In determining the long-term expected rate of return, staff took into account both short-term and long-term market return expectations as well as the expected pension fund cash flows. Such cash flows were developed assuming that both members and employers will make their required contributions on time and as scheduled in all future years. Using historical returns of all the funds’ asset classes, expected compound (geometric) returns were calculated over the short-term (first 10 years) and the long-term (11-60 years) using a building-block approach. Using the expected nominal returns for both short-term and long-term, the present value of benefits was calculated for each fund. The expected rate of return was set by calculating the single equivalent expected return that arrived at the same present value of benefits for cash flows as the one calculated using both short-term and long-term returns. The expected rate of return was then set equivalent to the single equivalent rate calculated above and rounded down to the nearest one quarter of one percent. The table below reflects long-term expected real rate of return by asset class. The rate of return was calculated using the capital market assumptions applied to determine the discount rate and asset allocation. These geometric rates of return are net of administrative expenses. Asset Class New Strategic Allocation Real Return Years 1 - 101 Real Return Years 11+2 Global Equity 47.0% 5.25% 5.71% Global Fixed Income 19.0 0.99 2.43 Inflation Sensitive 6.0 0.45 3.36 Private Equity 12.0 6.83 6.95 Real Estate 11.0 4.50 5.13 Infrastructure and Forestland 3.0 4.50 5.09 Liquidity 2.0 (0.55) (1.05) 1An expected inflation of 2.5% used for this period 2An expected inflation of 3.0% used for this period Pension Plan Fiduciary Net Position The plan fiduciary net position disclosed in your GASB 68 accounting valuation report may differ from the plan assets reported in your funding actuarial valuation report due to several reasons. First, for the accounting valuations, CalPERS must keep items such as deficiency reserves, fiduciary self- insurance and OPEB expense included as assets. These amounts are excluded for rate setting purposes in your funding actuarial valuation. In addition, differences may result from early Comprehensive Annual Financial Report closing and final reconciled reserves. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 7 Changes in the Net Pension Liability The following table shows the changes in net pension liability recognized over the measurement period. Increase (Decrease) Total Pension Liability Plan Fiduciary Net Position Net Pension Liability/(Asset) (a) (b) (c) = (a) - (b) Balance at: 6/30/2013 (VD)1 $ 355,054,289 $ 234,152,906 $ 120,901,383 Changes Recognized for the Measurement Period:  Service Cost 6,221,042 6,221,042  Interest on the Total Pension Liability 26,112,921 26,112,921  Changes of Benefit Terms 0 0  Differences between Expected and Actual Experience 0 0  Changes of Assumptions 0 0  Contributions from the Employer 7,615,779 (7,615,779)  Contributions from Employees 2,762,215 (2,762,215)  Net Investment Income2 40,033,488 (40,033,488)  Benefit Payments, including Refunds of Employee Contributions (19,985,106) (19,985,106) 0 Net Changes during 2013-14 $ 12,348,857 $ 30,426,376 $ (18,077,519) Balance at: 6/30/2014 (MD)1 $ 367,403,146 $ 264,579,282 $ 102,823,864 1 The fiduciary net position includes receivables for employee service buybacks, deficiency reserves, fiduciary self-insurance and OPEB expense. As described on Page 6, this may differ from the plan assets reported in the funding actuarial valuation report. 2 Net of administrative expenses. For details, see note in Appendix B-2. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 8 Sensitivity of the Net Pension Liability to Changes in the Discount Rate The following presents the net pension liability of the Plan as of the measurement date, calculated using the discount rate of 7.50 percent, as well as what the net pension liability would be if it were calculated using a discount rate that is 1 percentage-point lower (6.50 percent) or 1 percentage-point higher (8.50 percent) than the current rate: Discount Rate - 1% (6.50%) Current Discount Rate (7.50%) Discount Rate + 1% (8.50%) Plan's Net Pension Liability/(Asset) $ 148,419,847 $ 102,823,864 $ 64,946,625 Subsequent Events There were no subsequent events that would materially affect the results presented in this disclosure. Recognition of Gains and Losses Under GASB 68, gains and losses related to changes in total pension liability and fiduciary net position are recognized in pension expense systematically over time. The first amortized amounts are recognized in pension expense for the year the gain or loss occurs. The remaining amounts are categorized as deferred outflows and deferred inflows of resources related to pensions and are to be recognized in future pension expense. The amortization period differs depending on the source of the gain or loss: Difference between projected and actual earnings 5 year straight-line amortization All other amounts Straight-line amortization over the average expected remaining service lives of all members that are provided with benefits (active, inactive, and retired) as of the beginning of the measurement period The expected average remaining service lifetime (EARSL) is calculated by dividing the total future service years by the total number of plan participants (active, inactive, and retired). The EARSL for the Plan for the 2013-14 measurement period is 3.3 years, which was obtained by dividing the total service years of 2,232 (the sum of remaining service lifetimes of the active employees) by 676 (the total number of participants: active, inactive, and retired). Note that inactive employees and retirees have remaining service lifetimes equal to 0. Also note that total future service is based on the members’ probability of decrementing due to an event other than receiving a cash refund. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 9 Pension Expense and Deferred Outflows and Deferred Inflows of Resources Related to Pensions Paragraph 137 of GASB 68 and Questions 267 and 268 of the GASB 68 Implementation Guide set forth guidance on implementing the standard. The employer should use this guidance for the adjusting entries concerning the net pension obligation and the initial net pension liability/(asset). As of the start of the measurement period (July 1, 2013), the net pension liability/(asset) is $120,901,383. For the measurement period ending June 30, 2014 (the measurement date), the CITY OF PALO ALTO incurred a pension expense/(income) of $7,861,040 for the Plan (see Appendix B-2 for the complete breakdown of the pension expense). Note that no adjustments have been made for contributions subsequent to the measurement date. Adequate treatment of any contributions made after the measurement date is the responsibility of the employer. As of June 30, 2014, the CITY OF PALO ALTO has deferred outflows and deferred inflows of resources related to pensions as follows: Deferred Outflows of Resources Deferred Inflows of Resources Differences between Expected and Actual Experience $ 0 $ 0 Changes of Assumptions 0 0 Net Difference between Projected and Actual Earnings on Pension Plan Investments 0 (18,322,780) Total $ 0 $ (18,322,780) The amounts above are net of outflows and inflows recognized in the 2013-14 measurement period expense. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 10 Amounts reported as deferred outflows and deferred inflows of resources related to pensions will be recognized in future pension expense as follows: Measurement Period Ended June 30: Deferred Outflows/(Inflows) of Resources 2015 $ (4,580,695) 2016 (4,580,695) 2017 (4,580,695) 2018 (4,580,695) 2019 0 Thereafter 0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 11 Schedules of Required Supplementary Information Schedule of Changes in Net Pension Liability and Related Ratios During the Measurement Period 1 Historical information is required only for measurement periods for which GASB 68 is applicable. 2 Net of administrative expenses. For details, see note in Appendix B-2. Notes to Schedule: Benefit Changes: The figures above do not include any liability impact that may have resulted from plan changes which occurred after June 30, 2013. This applies for voluntary benefit changes as well as any offers of Two Years Additional Service Credit (a.k.a. Golden Handshakes). Changes of Assumptions: There were no changes in assumptions. Measurement Period 2013-141 TOTAL PENSION LIABILITY Service Cost $ 6,221,042 Interest 26,112,921 Changes of Benefit Terms 0 Difference Between Expected and Actual Experience 0 Changes of Assumptions 0 Benefit Payments, Including Refunds of Employee Contributions (19,985,106) Net Change in Total Pension Liability 12,348,857 Total Pension Liability – Beginning 355,054,289 Total Pension Liability – Ending (a) $ 367,403,146 PLAN FIDUCIARY NET POSITION Contributions – Employer $ 7,615,779 Contributions – Employee 2,762,215 Net Investment Income2 40,033,488 Benefit Payments, Including Refunds of Employee Contributions (19,985,106) Other Changes in Fiduciary Net Position 0 Net Change in Fiduciary Net Position 30,426,376 Plan Fiduciary Net Position – Beginning 234,152,906 Plan Fiduciary Net Position – Ending (b) $ 264,579,282 Plan Net Pension Liability/(Asset) – Ending (a) - (b) $ 102,823,864 Plan Fiduciary Net Position as a Percentage of the Total Pension Liability 72.01% Covered-Employee Payroll $ 21,895,824 Plan Net Pension Liability/(Asset) as a Percentage of Covered-Employee Payroll 469.60% GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 Page 12 Schedule of Plan Contributions1 Fiscal Year 2013-14 Actuarially Determined Contribution2 $ 7,615,779 Contributions in Relation to the Actuarially Determined Contribution2 (7,615,779) Contribution Deficiency (Excess) $ 0 Covered-Employee Payroll3, 4 $ 21,895,824 Contributions as a Percentage of Covered-Employee Payroll3 34.78% 1 Historical information is required only for measurement periods for which GASB 68 is applicable. 2 Employers are assumed to make contributions equal to the actuarially determined contributions. However, some employers may choose to make additional contributions towards their unfunded liability. Employer contributions for such plans exceed the actuarially determined contributions. 3 Covered-Employee Payroll represented above is based on pensionable earnings provided by the employer. However, GASB 68 defines covered-employee payroll as the total payroll of employees that are provided pensions through the pension plan. Accordingly, if pensionable earnings are different than total earnings for covered-employees, the employer should display in the disclosure footnotes the payroll based on total earnings for the covered group and recalculate the required payroll-related ratios. 4 Payroll from prior year $21,258,082 was assumed to increase by the 3.00 percent payroll growth assumption. Notes to Schedule: The actuarial methods and assumptions used to set the actuarially determined contributions for Fiscal Year 2013-14 were from the June 30, 2011 public agency valuations. Actuarial Cost Method Entry Age Normal Amortization Method/Period For details, see June 30, 2011 Funding Valuation Report. Asset Valuation Method Actuarial Value of Assets. For details, see June 30, 2011 Funding Valuation Report. Inflation 2.75% Salary Increases Varies by Entry Age and Service Payroll Growth 3.00% Investment Rate of Return 7.50% Net of Pension Plan Investment and Administrative Expenses; includes Inflation. Retirement Age The probabilities of Retirement are based on the 2010 CalPERS Experience Study for the period from 1997 to 2007. Mortality The probabilities of mortality are based on the 2010 CalPERS Experience Study for the period from 1997 to 2007. Pre- retirement and Post-retirement mortality rates include 5 years of projected mortality improvement using Scale AA published by the Society of Actuaries. APPENDICES  APPENDIX A – DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES RELATED TO PENSIONS  APPENDIX B – INTEREST, TOTAL PROJECTED EARNINGS AND PENSION EXPENSE/(INCOME) APPENDIX A DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES RELATED TO PENSIONS  SCHEDULE OF DIFFERENCES BETWEEN EXPECTED AND ACTUAL EXPERIENCE  DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES FOR DIFFERENCES BETWEEN EXPECTED AND ACTUAL EXPERIENCE  SCHEDULE OF CHANGES OF ASSUMPTIONS  DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES FOR CHANGES OF ASSUMPTIONS  SCHEDULE OF DIFFERENCES BETWEEN PROJECTED AND ACTUAL EARNINGS ON PENSION PLAN INVESTMENTS  DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES FOR DIFFERENCES BETWEEN PROJECTED AND ACTUAL EARNINGS ON PENSION PLAN INVESTMENTS  SUMMARY OF RECOGNIZED DEFERRED OUTFLOWS OF RESOURCES AND DEFERRED INFLOWS OF RESOURCES GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-1 Schedule of differences between expected and actual experience Increase (Decrease) in Pension Expense Arising from the Recognition of the Effects of Differences between Expected and Actual Experience (Measurement Periods) Measurement Period Differences between Expected and Actual Experience Recognition Period (Years) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter 2013-14 $0 3.3 $0 $0 $0 $0 $0 $0 $0 Net Increase (Decrease) in Pension Expense $0 $0 $0 $0 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-2 Deferred outflows of resources and deferred inflows of resources arising from differences between expected and actual experience Balances at June 30, 2014 Measurement Period Experience Losses Experience Gains Amounts Recognized in Pension Expense through June 30, 2014 Deferred Outflows of Resources Deferred Inflows of Resources (a) (b) (c) (a) - (c) (b) - (c) 2013-14 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-3 Schedule of changes of assumptions Increase (Decrease) in Pension Expense Arising from the Recognition of the Effects of Changes of Assumptions (Measurement Periods) Measurement Period Changes of Assumptions Recognition Period (Years) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter 2013-14 $0 3.3 $0 $0 $0 $0 $0 $0 $0 Net Increase (Decrease) in Pension Expense $0 $0 $0 $0 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-4 Deferred outflows of resources and deferred inflows of resources arising from changes of assumptions Balances at June 30, 2014 Measurement Period Increase in Total Pension Liability Decrease in Total Pension Liability Amounts Recognized in Pension Expense through June 30, 2014 Deferred Outflows of Resources Deferred Inflows of Resources (a) (b) (c) (a) - (c) (b) - (c) 2013-14 $0 $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-5 Schedule of differences between projected and actual earnings on pension plan investments Increase (Decrease) in Pension Expense Arising from the Recognition of Differences between Projected and Actual Earnings on Pension Plan Investments (Measurement Periods) Measurement Period Differences between Projected and Actual Earnings on Pension Plan Investments Recognition Period (Years) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter 2013-14 $(22,903,475) 5.0 $(4,580,695) $(4,580,695) $(4,580,695) $(4,580,695) $(4,580,695) $0 $0 Net Increase (Decrease) in Pension Expense $(4,580,695) $(4,580,695) $(4,580,695) $(4,580,695) $(4,580,695) $0 $0 GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-6 Deferred outflows of resources and deferred inflows of resources arising from differences between projected and actual earnings on pension plan investments Balances at June 30, 2014 Measurement Period Investment Earnings less than Projected Investment Earnings greater than Projected Amounts Recognized in Pension Expense through June 30, 2014 Deferred Outflows of Resources Deferred Inflows of Resources (a) (b) (c) (a) - (c) (b) - (c) 2013-14 $(22,903,475) $(4,580,695) $(18,322,780) $0 $(18,322,780) GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 A-7 Summary of recognized deferred outflows of resources and deferred inflows of resources Net Increase (Decrease) in Pension Expense (Measurement Periods) 2013-14 2014-15 2015-16 2016-17 2017-18 2018-19 Thereafter Differences between Expected and Actual Experience $0 $0 $0 $0 $0 $0 $0 Changes of Assumptions 0 0 0 0 0 0 0 Differences between Projected and Actual Earnings on Pension Plan Investments (4,580,695) (4,580,695) (4,580,695) (4,580,695) (4,580,695) 0 0 Grand Total $(4,580,695) $(4,580,695) $(4,580,695) $(4,580,695) $(4,580,695) $0 $0 APPENDIX B INTEREST, TOTAL PROJECTED EARNINGS AND PENSION EXPENSE/(INCOME)  INTEREST ON TOTAL PENSION LIABILITY AND TOTAL PROJECTED EARNINGS  PENSION EXPENSE/(INCOME) GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 B-1 Interest on Total Pension Liability and Total Projected Earnings Interest on the Total Pension Liability Amount for Period Portion of Period Interest Rate Interest on the Total Pension Liability (a) (b) (c) (a) X (b) X (c) Beginning Total Pension Liability $ 355,054,289 100% 7.5% $ 26,629,072 Service Cost 6,221,042 50% 7.5% 233,290 Benefit Payments, including Refunds of Employee Contributions (19,985,106) 50% 7.5% (749,441) Total Interest on the Total Pension Liability $ 26,112,921 Projected Earnings on Pension Plan Investments Amount for Period Portion of Period Projected Rate of Return Projected Earnings (a) (b) (c) (a) X (b) X (c) Beginning Plan Fiduciary Net Position excluding Receivables1 $ 233,203,719 100% 7.5% $ 17,490,279 Employer Contributions 7,615,779 50% 7.5% 285,592 Employee Contributions 2,762,215 50% 7.5% 103,583 Benefit Payments, including Refunds of Employee Contributions (19,985,106) 50% 7.5% (749,441) Total Projected Earnings $ 17,130,013 1 Contributions receivable for employee service buybacks, totaling $949,187 as of June 30, 2013, are excluded for purposes of calculating projected earnings on pension plan investments. GASB 68 ACCOUNTING VALUATION REPORT Prepared for the CITY OF PALO ALTO – SAFETY PLAN CalPERS ID: 6373437857 Prepared as of the Measurement Date of June 30, 2014 B-2 Pension Expense/(Income) for Measurement Period Ended June 30, 2014 Description Amount Service Cost $ 6,221,042 Interest on the Total Pension Liability 26,112,921 Changes of Benefit Terms 0 Recognized Differences between Expected and Actual Experience 0 Recognized Changes of Assumptions 0 Employee Contributions (2,762,215) Projected Earnings on Pension Plan Investments (17,130,013) Recognized Differences between Projected and Actual Earnings on Plan Investments (4,580,695) Other Changes in Fiduciary Net Position 0 Total Pension Expense/(Income) $ 7,861,040 Note: Plan administrative expenses are not displayed in the above pension expense table. Since the expected investment return of 7.50 percent is net of administrative expenses, administrative expenses are excluded from the above table, but implicitly included as part of investment earnings. FINANCE COMMITTEE EXCERPT Page 1 of 28  Special Meeting Tuesday, October 20, 2015 Chairperson Schmid called the meeting to order at 6:04 P.M. in the Community Meeting Room, 250 Hamilton Avenue, Palo Alto, California. Present: Filseth, Kniss arrived at 6:36 P.M., Scharff, Schmid (Chair) Absent: Oral Communications Chair Schmid: First order is anyone from the public who wants to speak. I have no cards. Let's move on to the first action item. Agenda Items 1.New Pension Reporting Standards Government Accounting Standards Board Statement Number 68 (GASB 68). Chair Schmid: New Pension Reporting Standards. Lalo. David Ramberg, Assistant Director of Administrative Services: Good evening, Chair and Members of the Finance Committee. My name's David Ramberg, excuse me. I'm the Assistant Director of the Administrative Service Department. Tonight, I am presenting new pension reporting requirements that will impact the City's financial statements. This is a preview of the Government Accounting Standards Board's 68 information that will be included in more detail in the Comprehensive Annual Financial Report that you'll see in November. Tonight's just a preview of the figures to come. The reporting requirements are established by the Government Accounting Standards Board; that's also known as GASB. We refer to these new standards as GASB 68. I want to make very clear that it is a reporting change only, and there's no new financial impact to the City. I'll explain that. Let's see. The City's total pension liability is $289 million in Fiscal Year 2015 which will be reported in the CAFR that you'll see in November. A share of the liability is allocated to the Enterprise Funds and to all other funds based on employee pension expense. This slide shows you, Slide 4, what that allocation looks like. Of that 289 million, you can see that the General Fund's share is 197 million, and the Electric Fund is the next largest share at 26 million. The remaining funds represent about 55.6 million of the Attachment B TRANSCRIPT    Page 2 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  289 million. These amounts do not impact the ability of the funds to maintain positive cash flow, since these amounts are amortized over 30 years and the City already pays the annual required contribution. With that brief presentation, I'd like to say in conclusion the new pension reporting requirements from GASB will report the total pension liability at the entity and fund levels in the upcoming CAFR, but will have no impact on existing expenses. I want to make that very clear. These will not be new expenses in the Budget document; these will simply be in the Comprehensive Annual Financial Report which you'll see in November. I'd like to continue the presentation by turning it over to our external auditor from MGO. David Bullock is here, and they've provided the City with guidance as we've incorporated these new GASB requirements. He'll explain that. David Bullock, MGO Partner: Thank you, David. When David and Lalo asked me to come, I wasn't sure exactly what I wanted to present. I don't want to over-complicate things. I think the key to the implementation is that it's a reporting matter. It's getting the information out to the users so they understand it and its impact, your pension impact, to the organization. You've always reported the information in your CAFR; it's been there. The schedule of funding progress would kind of give you an idea of where you're at in terms of funding your pension. It was always a year or two behind schedule, because it takes a while for the actuaries to come up with the information to present. As GASB changed the requirements, trying to improve transparency, bringing that liability onto the financial statements; and also improving the disclosures and some of the trend information, requiring ten years of trend information versus just three; trying to improve the information available to users, so they understand the impacts of it. The other thing it does is it makes you much more comparable to other organizations. Under the old method, you get to choose from six different attribution methods. The actuary could use different methods to calculate the obligation. A lot of the assumptions were more policy decisions; they were decisions made that would affect the liability on how you are funding it, but not really economically how the plan was actually—where your position was. With these improvements, it's very simple. The actuary takes the liability and calculates that out with their estimates and discounts that back to the measurement date, and then they look at what you set aside in your pension trust fund and compare the two. That's your net pension liability. There isn't all of the actuarial involvement in coming up with smoothing of investments and so forth in those assets. It's a very simple calculation. The other kind of complexity, if you will, is that the measurement date is different than your reporting date. You don't often find that in financial statements. You like to either get the fair market value or some historical measurement, but we're actually using a period of time that's a year previous to the fiscal year. When you get your June 30th CAFR next month, TRANSCRIPT    Page 3 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  it's going to be reporting your pension liability as of June 30, 2014. Unfortunately, that's just the earliest that information is available to you as the employer, because CalPERS has to go through their process of giving you the information, and it just takes a lot of time. We're the auditors of CalPERS, our firm is, so I kind of have a little bit of inside information. My understanding is they're going to try and improve the timeline, because the City didn't even get this information until July, actually after year end. We worked pretty closely with the City to pull the information together timely. Next year, it's supposed to come in the spring or maybe earlier. Maybe this February or March or something, you'll have that information, and you'll have more time to absorb it and get it reported into your financial statements. This year, it all happened after year end, just because of the timing and implementation. With that, I'll turn it over to any questions you may have. Chair Schmid: Council Members, reactions, questions? Council Member Filseth: Want me to go first? Chair Schmid: Sure. Council Member Filseth: Thank you very much for doing this. If I understand what you said, this is basically a reporting change. There's not any new action that we're taking that changes the numbers. In fact, there's not any really recalculation of the numbers or anything like that as well. It's the unfunded liability discounted back to the present, but also still assuming the baseline assumptions on CalPERS investment returns and on sort of the rate at which wages increase in the City of Palo Alto. Is that right? Mr. Bullock: Yeah. They take into account those under the assumptions. I'm not an actuary, so I'm not going to be able to give you a real good description on that. Just to take one step back, CalPERS, it didn't change the way you contribute to the plan. You're going to still continue to contribute normal costs and making up for some of that unfunded liability. It did drive some policy changes at CalPERS, so there could be operational impacts down the road if investments don't perform well and they have to raise those contribution rates. They did make policy changes, because what they didn't want to have happen was crossover date; a date at which point the assets in the trust wouldn't be sufficient to pay those benefits. They made some policy changes to avoid having a crossover date. There could potentially be impacts down the road on how they develop the contributions. In terms of what really changed, the substance of how you make the contributions and how you fund the plan didn't really change. What changed is the reporting of that information in your financial statements. TRANSCRIPT    Page 4 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Council Member Filseth: Now we'll see this broken out by fund, excuse me, as opposed to in a footnote somewhere, I think is where it used to be or something like that. Mr. Bullock: Just a little bit of a clarification. It says General Fund up there. I think what you'll end up seeing—it's not going to be reported in your General Fund per se. You're still going to have fund accounting. You're still going to report your fund balance, which is going to line up with your Budget. What's going to happen is when you convert that General Fund to the government-wide financial statements, the entity-wide financial statements, under governmental activities is where you're going to see the impact to your governmental funds, the Public Safety, Public Works and all the personnel that are in those governmental activities, versus the Enterprise Funds. You will actually see them in your individual Enterprise Funds, because the liability is following payroll. Wherever you're reporting payroll, that's where that net pension liability is going to. Mr. Ramberg: It'll show up specifically in the statement of net position. We'll show that when we bring the CAFR back in November. We'll show you where these new lines line up. We've gone into quite a bit of explanation in the management discussion and analysis, which is the lead-in to the CAFR. If you read that, we'll have some new language in there that calls out the GASB 68 reporting and specifically where that's added to the Comprehensive Annual Financial Report. Chair Schmid: Could I do a follow-up? Is it going to show up in our Budget by department? Will it affect those numbers at all? Lalo Perez, Chief Financial Officer and Director of Administrative Services: No, it does not reflect that way. As David Bullock was saying, the normal annual required contribution doesn't change. That will show, but this new format does not reflect in the Budget. Chair Schmid: That is shown by department and by Enterprise Fund? Mr. Perez: Yes. The normal annual required contribution is distributed by ... Chair Schmid: It's just per employee. Mr. Perez: I'm sorry, I didn't hear the last part. Chair Schmid: That's by employee. Mr. Perez: We bill it per salary, so FTE, employee, yeah. TRANSCRIPT    Page 5 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Chair Schmid: This breakdown here will not affect the number that shows up in our Budget? Mr. Perez: Correct. Chair Schmid: Sorry. Council Member Filseth: You said something that sort of led into another question I wanted to ask. You said very briefly, you made a reference to it's good to have this kind of information at your fingertips when you're making management decisions that impact it. I think you said something like that. I think that's right. I think as we try to get a hold of this, I think that's— because we make decisions all the time that impact the size of this. This is really a question for you guys. One thing that it seems like it ought to be possible to do, but we just never have seen done, is it seems like we ought to be able to calculate this at any given point in time. I mean, we know who all the employees are, we know how long they've been with the City and sort of what their wages are, and which plan they're on and so forth. Yeah, there's 1,000 employees in the City, but we've got computers and stuff like that. It seems like it ought to be possible to sort of calculate this stuff in real time. Particularly, let's say we hire somebody. Every time we hire somebody, they're going to get a wage, and they're going to get an expected wage growth over some period of time, and they're going to work for so many years, and they're going to get a pension at some age, and then they're going to collect their pension for some number. It seems like it ought to be possible to calculate the unfunded pension liability of each individual at the time we hire them, probably also later on in their career too. At the time we hire them, it seems like it ought to be possible to do that. Do we ever do that or does any city ever do that? Mr. Perez: I'll see if David has a comment as well. I haven't heard of a city doing that from a finance perspective. I don't know from an HR perspective. Suzanne may have some experience. I guess what I can say is the assumption is that the potential unfunded liability for a third tier, that's like the last tier that was implemented, is going to be much less than the original two. Council Member Scharff: (crosstalk) follow-up to that. Council Member Filseth: Of course, but it's still not zero. Mr. Perez: There's various assumptions, so we would have to run it. It is an actuarial calculation that we would have to run. I think we would have to, one, either use the CalPERS assumptions or modify them to what we believe they may be in a scenario. We would say run it with the CalPERS TRANSCRIPT    Page 6 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  assumptions, and then let's modify them to what we believe the return should be, for example if we don't agree with the return. Then it also depends on whether that person is really going to stay with us or not, because an individual—now that we have changed the structure of the medical package for retirement, we're seeing a different type of turnover. In the days—I was telling Suzanne—before 2004 we were getting a lot of people coming in here that were very seasoned in experience, because they knew that all they had to do is if they had five years in the system, all they had to do was work one day and get fully vested benefits in Palo Alto. You saw a different type of attraction of person and a different reason that people were coming or staying. Now that there's less of that incentive, it's a different scenario. Council Member Filseth: I suppose that would sort of be sort of like your actuarial calculation is how much time an individual is likely to stay with the City. Are they going to stay 30 years or 15 or what's the average expected (inaudible)? It seems like you ought to be able to calculate all that out and make an estimate. It might not be accurate for each individual employee to some level, but over large numbers of employees it might be. Is there any precedent for people doing that? Suzanne Mason, Assistant City Manager: I think you can look at it in a number of ways. I think it's a good question. Probably not by the individual in your books, because their future is unpredictable. Most agencies have a different historical look based on their benefit packages, as Lalo said. One agency may typically have very long-term employees, and others may have a shorter-term employee. You can hire someone senior in their career, and the City's going to have a very short probably liability, a five to ten-year liability, as opposed to someone earlier in their career who may stay with you for 30 years. It's hard to predict. What you could do is model different types of employees at different salaries based on—in our actuarial report, you can see the average of our typical—in our actuarial report it shows the average number of years someone stays here, how many retirees we have, the average salary or their average retirement benefit. You can do that modeling. You can also model different types of employees coming at different stages in their career. I think the one thing that we're going to be challenged with is how the new PEPRA retirement interplays and the new millennial employee who is more apt to move more times in their career. They're not the long-term employee. When I started in 1984 ... Council Member Filseth: IBM, lives at work forever and retires at (inaudible). TRANSCRIPT    Page 7 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Ms. Mason: I think all those things are unpredictable, but we can look at our average history and look at some of the changes. We can look at the last five years and share with you what we're seeing. Council Member Filseth: I'm thinking about (inaudible). By the way, do you want to ask a question in the middle of this or come back? Council Member Scharff: I did. It was a follow-up to your ... You were talking about modeling each individual employee. I guess the question is— there's an unfunded liability that comes with each employee, the way we're currently doing it. We hire someone, and it's a different unfunded liability if they're Tier 3, Tier 2 or Tier 1. What I'm wondering a little bit about is if we start saying to ourselves every employee we hire, this is what it's really costing the City in terms of—do we then look at that and say we're going to put, I think what you talked about earlier was let's put aside some money to deal with that on an ongoing basis. We may also say to ourselves how do we compensate those employees. Do we say we compensate the Tier 3 in cash in a different way than we compensate the Tier 2 and the Tier 1? I think it's time we started thinking about how do we align our employee structure so that it works for the City. I think there's concerns about—I'm fascinated when you say the millennials will jump. They may or may not. I don't know if we have any data on this, if millennials who choose to work for government. Everything I'm reading these days actually says the millennials are no different than anyone else. It's just that they have different opportunities. They're actually starting to move to the suburbs and starting to buy houses. I mean, every generation thinks it's a unique generation and the world has changed and this time it's different. I'm not convinced. What I am convinced is right now we have very seasoned employees in Palo Alto who could all retire. Maybe not all of them, but I mean a large number could retire, take a different pension and go get another job with that. At some point, you do that financial calculus and it makes more sense for them to do that. The question is how do we start to align bringing people in and with a career path that then makes sense on an organization level. I think that's a challenge; I don't think any city's done that. I think it's an interesting question. I wanted to come back to the other stuff. Council Member Filseth: You're sort of going the same direction we're sort of going in here, which is we're used to working in—some of us are newbies to City government, working here. We're used to an environment—when you incur a liability, I mean you're supposed to recognize when (inaudible). When we hire somebody, to the extent there is a long-term liability that comes with that person, normally you recognize that somewhere. You put it in an account somewhere. Maybe you set aside money for it, maybe you don't. At least, you recognize at that point we're going to accrue this long- TRANSCRIPT    Page 8 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  term liability. At the time that we make decisions, it's—as we were going through the budgeting process back in May, we said the City's going to hire 14 people or something like that. One thing we didn't say there, we saw here's how much it's going to cost next year with these people. One thing we didn't see was here's the impact on the City's unfunded pension liability if we hire 14 people as opposed to 12 or 15. Ms. Mason: I do want to make one point. We get a blended rate from PERS. They're not breaking it out. They're looking at all the different employees we have and the different tiers and what their percent of payroll is, and they give us a blended rate. That's one thing. It is difficult to—a lot of the unfunded liability is from the past. It's not the go-forward. We do have an average ... Council Member Scharff: That's interesting. I had no idea. On a going forward basis, you're saying we hire someone, there's not an unfunded liability? Ms. Mason: There's the normal cost which is the go forward. If this person with no gains or losses in investments, if this person's going to retire in what the actuary projects—actually John Bartel is probably a better person to walk through this; he'll be here on November 3rd. That employee walks in with no prior liability, the unfunded liability that is coming from the past, investment losses and changes in formulas and things of that nature that were not funded. They were mostly investment losses. Council Member Scharff: That was really going to be one of my questions. When we look at the General Fund, why is it 68 percent when the Electric Fund is 9 percent? What's causing these disparities? Ms. Mason: I'll let Lalo talk to it. It's a percent of payroll. That's really what you're looking at. Council Member Filseth: Before we go there, I want to make sure I understand what you just said. If I understand what you just said, you said that the next person we hire, assuming they come in—Tier 3 is the current one, right? There is not an unfunded liability associated with that person? That's not actually—really? Ms. Mason: There is a projected cost, and I'll let Lalo talk to it. That's why your different tiers have a different cost. Council Member Filseth: To be obsessively, obsessively explicit here. If you sort of look at what that person's going to—we're going to give that person as their pension, sort of net present value of all that, and you take the net TRANSCRIPT    Page 9 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  present value of all their contributions to their pension up until that time, they're not going to add up to—the City's still going to have to cover some of it. That's the unfunded liability. Mr. Perez: Right. That's why I was caveating at the beginning. John Bartel will tell you that it's zero for Tier 3. That is because we would assume that we agree with the CalPERS ... Council Member Filseth: CalPERS 7 1/2 percent investment return. Mr. Perez: And all the other assumptions. That's why ... Council Member Filseth: Whatever the assumption on wage growth is, the actuary would say that actually it's covered for that person. Mr. Perez: Correct. That's why I was saying you may have a different opinion, so we would run it that way. We would run it what if there was a 6 return and whatever other variables you wanted to change. From a starting standpoint, the assumption is that the fund is going to pay 67 percent of the pension via returns on investments. The other portion—what is it? 6 1/4 is paid by the employee, and then the rest is paid by the employer. Chair Schmid: Let me ask a follow-up on that. Suppose someone comes in his 20th year of employment with CalPERS. He's somewhere else; he comes here. We assume the future. At some point in the future, the CalPERS said, "We made a mistake about longevity. People are living two years longer than we thought, which creates an unfunded liability." Who's responsible for covering that? Mr. Perez: That's spread over the period of service years. Let's say that they had 20 somewhere else, and we get five. It's proportionally split among those years. Chair Schmid: Someone can leave Palo Alto, but we might get hit with an unfunded liability 30 years later if he's somewhere else. Mr. Perez: Yes. The way it would work; let's say that—I'm making up an example—they've worked 20 years here. They left making 120,000. They went and worked five years somewhere else, and they close out either a three-year or single year highest at 200,000, then our 20 is at the 200. Not at the number that they left us. Chair Schmid: Do we pay more if people come here later in their career or if they leave here and go elsewhere late in their career? Which is the greater liability for us? TRANSCRIPT    Page 10 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Ms. Mason: You're going to have a shorter time—it's all based on the time they're with your agency. I was 25 years in Long Beach when I retired. Long Beach will pick up 25 years, and they paid in for the years I was there based on my projected retirement. Chair Schmid: The years they're here, their salaries are much higher, and their pension payments are based on their final salaries. Ms. Mason: Let's say I stay ten years here, and I'm at 2 percent at 60. You're only paying for the years I was here. Long Beach is still going to pay for the 25 years that I was there. Council Member Scharff: What were you in Long Beach? Ms. Mason: I was many things. Council Member Scharff: No, no, no. I mean what percentage. Ms. Mason: I was 2-7. Council Member Scharff: I thought you were probably 2-7. If we end up raising your salary to, say, 200,000 at some point, and you're here ten years. Long Beach then picks up 2.7 percent of 200,000. Right? Mr. Perez: Yeah, (inaudible) years. Council Member Filseth: (inaudible) Long Beach (inaudible). Mr. Perez: I'm not trying to ... Ms. Mason: I'm just saying that you're paying proportionally for the years that someone's with you. If they leave, the agency they're going to is paying proportionally for those years. Mr. Perez: I'm not trying to stop you from asking the questions, but I think these would be excellent for John Barthel. Being an expert actuary, he can give you his insights on that perspective. We're giving you our best professional (inaudible), but he's truly the expert in the field. I think those would be good questions. We can note them, and give him a heads up that they're coming. Ms. Mason: We can ask him to look at this part of that percentage. Council Member Scharff: Just tell me a little bit about the liability. I'll tell you what's not adding up. Roughly the General Fund is 200—what are we at these days? Two hundred? TRANSCRIPT    Page 11 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Council Member Filseth: One hundred eighty million. Council Member Scharff: One eighty million, 184 million. Then Utilities is what? Roughly 200 million? Council Member Filseth: More than that. Three hundred fifty or so. Council Member Scharff: Three fifty. Council Member Filseth: Why is it so much higher in the General Fund? Council Member Scharff: Why is it all in the General Fund and not all in Utilities? I thought it would be equal, frankly. I didn't focus ... Mr. Perez: That's total budget. Keep in mind that the capital and commodities make up a vast majority of the Enterprise (crosstalk). Council Member Filseth: It is a fair question, isn't it? Isn't the City headcount between the Utilities and the General Fund approximately the same? Isn't it about 500 in each? Mr. Perez: No. We're looking at salary too, not the headcount. It's based on the salary proportion. It's a debate that we had internally. When this was originally set up many, many years ago, I think we set up somewhere in the '50s if I recall correctly. I can't recall exactly. Council Member Scharff: It's Fire and Police, isn't it? That's what's driving it. Mr. Perez: We have a higher obligation there. We never really split anything when we send the records to CalPERS, so to them it doesn't matter what fund it is. That's why we have to use today's current split of payroll, because we don't have the exact allocation of people. Ms. Mason: I don't think it's 50/50. I think it's maybe 1/3-2/3 on the staffing. Chair Schmid: Eric, anything else? Council Member Filseth: No. I think I need to send an email to John Bartel. I think I'm really curious about (inaudible) obviously that's for miscellaneous (crosstalk) it wouldn't be fully funded for Public Safety. Mr. Perez: If you want, you can send it to us. We'll send it out, and then we'll reply to everybody, so everybody has the response. TRANSCRIPT    Page 12 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Council Member Scharff: I just had a few questions. Chair Schmid: Yeah, go ahead. Council Member Scharff: I guess the first one is, we're doing this so why do we care. Mr. Perez: One, it's a requirement that we adopt it. Council Member Scharff: Right. You're going to follow the law. I'm assuming you guys follow the law. As a policymaker, what are the implications that I would care about? Are we going to look better than other cities in terms of our bond rate? Are other people going to look at this and say, "Palo Alto you're doing great. Everyone is else is (inaudible)?" Why would I care? Council Member Filseth: Yeah, that's a fair question. Mr. Perez: That's a fair question, and that's something you can do. For example, David Bullock was just telling me that in comparison to Fremont, our General Fund side was about the same, and they're much bigger. That's not surprising because we're bigger than a typical city on the General Fund because of the support that we have in the other services. I think the bottom line is to make sure that in our financials that the net position is in a positive position. That's why you care. That's the bottom line. For us, it's a good news situation. There may be agencies where they're in a negative position. This is a full disclosure. Back to your point, the bond rating agencies would look at that and say, "What are you going to do?" We have a history in Palo Alto of being proactive. The Councils now and before have been proactive in addressing any deficits that we had. I think it's a good, diligent move that we show that we are transparent with you and the community where our financial position is. Council Member Scharff: That's all I had. Chair Schmid: I guess a couple of questions. To follow-up Greg's "why are we doing this," how does this help us, let me pursue it in that regard, does this help us in any way. On page 2, I have a couple of questions on the report. Page 2 of the report, packet page 13, it says the employer should supplement and update the information in this report with its own financial data as necessary. Now, what does that mean? We're the employer. Do we update this? Mr. Bullock: You don't update the calculation, the total pension liability and the plan, that position information. Where you may update are some of the TRANSCRIPT    Page 13 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  footnote disclosures. This report is, again, a valuation as of the measurement date, June 30th, 2014. You may have a later actuarial valuation that you could disclose in your footnotes. One of the things that GASB required is a comparison of the net pension liability to covered payroll for instance, but GASB changed the definition of what covered payroll is. It's no longer just the pensionable payroll, but it's all payroll. While CalPERS doesn't have the City of Palo Alto's total payroll figure ... Council Member Filseth: (crosstalk) down there. Mr. Bullock: Palo Alto doesn't have all the information that the City would have, so the City would update its disclosures to include a total payroll versus what CalPERS would have as your pensionable payroll. Things of that nature. It's just to bring that to your attention. Chair Schmid: You raised the point about measurements. You have two definitions here, one of the valuation date and another of the measurement date. What's the difference between those? Mr. Bullock: GASB, when they went through the due process of these new standards to get the feedback, a lot of the issues that came up during that process was the timing and how they're going to get this information to the employers timely. The concept came up with the measurement date that let's give these pension plans a one-year reprieve to report this information. They also gave a timeline of just the process of information. CalPERS was considering whether or not using an actuarial valuation date of June 30th, 2014 for this implementation, but they said they wouldn't have that information available until November or December of this year. It just wasn't timely enough. Chair Schmid: Does that mean that the measurement data we have here Is not final? It will be revised? Mr. Bullock: No. What it means is they use a valuation date of June 30th, 2013 (crosstalk) ... Chair Schmid: That's the real date. Mr. Bullock: .... forward to '14 using ... Chair Schmid: Assumptions. Mr. Bullock: Using assumptions, and then presented that as your measurement date. TRANSCRIPT    Page 14 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Chair Schmid: You'll come back in a year with a valuation date of 2014 but the number might be different than what we have here. Mr. Bullock: Exactly. It will be different. Those differences are going to be kind of amortized and factored into your number over time. It's just going to be a continuous, because these numbers are always moving. I think you mentioned the fact that why can't we have this information real-time. The problem is—you probably could factor the actuarial assumptions and come up with some number. What you're not going to have are the resources set aside in the trust. That information is just not going to be timely enough to get that information from CalPERS. Chair Schmid: Why is it any different than your doing the CAFR for us? Mr. Bullock: Because those investment which is a huge part, the investment performance of the actual pension liability is very complicated. They can't even get the information from their investment managers on some of these, especially commodities. Some of these are very complex investments. Chair Schmid: They're valued every day. Mr. Bullock: Three, three or four months. Chair Schmid: How can they not get the ... Mr. Bullock: They're in (crosstalk); they're in different kinds of alternative investments that are not easy to value. Chair Schmid: That's like 18 months later. June 30th, 2014 ... Mr. Bullock: No, no. Yeah, because we're using June 30th. They have it now. I'm just saying in terms of getting real-time numbers, it takes them a long time to process that information. Chair Schmid: I guess the bottom line, where I get stuck, asking how do I use this information, is you present us with an immense dilemma. We've got to look backward. I know the CAFR you look six months backward, but here we're looking 18 months backward. You happen to be looking at a year that's had fantastic returns. You look at these numbers and say, "Great, aren't we in great shape? Growing 18 percent per year. We have a surplus more than we thought." The decisions we have to make on it are the current decisions that have future implications to them. We hire new people. We set payroll. We set benefit levels. This carries out not just this year, but five years and ten years from now. We're committing ourselves to a flow of things. We're being asked to spend time looking at 2013, because TRANSCRIPT    Page 15 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  it would help us make these future decisions. I'm baffled. Why we don't look at 1999 where CalPERS had another great year and say, "Aren't they smart." I know they haven't picked this year just because it's great. Mr. Bullock: That's a problem, I think, with the CAFR in general and (inaudible) reporting, especially when we're talking about audited financial statements because there is going to be a time lag of when that information starts losing its usefulness. The measurement that we're getting from CalPERS—go ahead. Chair Schmid: You use the term "might lose its credibility." Mr. Bullock: I think you're on a good track talking about looking at projections and maybe getting an actuary to help come up with a number and using the assumptions that Lalo talked about. Chair Schmid: I guess I'm concerned that CalPERS without the actuaries and stuff is looking at the current numbers, and they're changing their mind. My understanding is they are currently saying, "We've got to change the way we set our discount rate. Put it in our favor." They might announce that to us at some point. How can CalPERS ignore this report that says, "We're doing fantastic. Plan your future on this," meanwhile saying, "We're going to change the rules of the game." What's going on and what are we supposed to do? Who do we believe? The CalPERS that has been audited two years before or what they're doing now? Mr. Perez: Those are the challenges that we have. A couple of things really quick to address some of your points that are good. We are dissatisfied with CalPERS' lag of reporting, all agencies. Every time we go to the—they have what they call an annual educational forum. It's next week, and I plan to be there and say the same thing again, "When are you going to catch up? With technology, you should be able to have more recent numbers." We're onboard with you there. I think if you look at page 19 of your packet, or page 8 of the report, I'm looking at the valuation for the Miscellaneous group. I'll give you a second to get there. Mr. Bullock: What page? Mr. Perez: Page 19 of the packet or 8 of the actuary. To answer your point or give you a potential scenario for your point. If you look at the plan's net pension liability, if you use the 7 1/2 discount, it's the 187 million. Let's say that we assume that that's too aggressive and it's going to be more in the 6 1/2, then we have our number, 269. We would have to then make decisions, which is what we're starting to do next November 3rd, to talk about how do we supplement or address our unfunded liabilities. That could TRANSCRIPT    Page 16 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  be a number that you could use from this or the actuarial number that we get next week, which is the actual required payment calculation. Then we start setting aside additional funding because you may not believe the 7 1/2 is the right number. This can help guide us towards a number. That's what the purpose of this tool is, to give us that information. What happens if it goes higher? You may not agree with that, but they also give you that. Chair Schmid: I read an article—I don't know how credible it is—in the last week that says they are thinking about setting a new rule. When they have a surplus rate of return, they will take that and drop their future rate of return by 1/4 point, by 1/10 point, by some amount. Thus, that would allow them to have a more conservative portfolio and maybe a more credible portfolio in the future. That seems to imply that they want to reduce their risk and increase our risk by raising our payment rate so they can be in a more secure position. That is deeply disturbing. Mr. Perez: I guess you could look at it two ways. The other way that you could look at it is if you believe that 7 1/2 is not realistic, then maybe they're coming closer to reality, if you're in that camp. Chair Schmid: That's different, taking that assumption and operating on what you think, from them saying, "We are going to lay off more of the risk on those who have already committed. Mr. Perez: My understanding is that what they're going to do is change their philosophy in terms of the risk that they take and take less risk; therefore, they're going to assume a lesser rate of return. In a way, it gets to the point that I was making. It does translate into a higher payment to the agencies. The dilemma that the Board has is that there are agencies in both camps. Some of us are saying, "Let's get to a more realistic risk tolerance and, therefore, a lower rate of return. We realize that it's going to increase our annual required contribution, but it's more realistic." There's other agencies that say, "We can't afford a higher increase in contributions. It will deplete our budgets and force us to start drawing on reserves to the point where we're not going to be able to make it unless we make significant cuts to services." That's where they're getting the tug and pull. They're asking for our comments as a Board, as a Council, as management, for what are our opinions as to what should they do. This is the period that I introduced the last time we were talking, that they were asking for feedback. Right now, they started with three options and now they're down to two, and it's a hybrid of those two because there's so many opinions on where should they go. TRANSCRIPT    Page 17 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Chair Schmid: When does the Council get a chance to weigh in on the options? Ms. Mason: I'm not sure they're still—are they still asking? They met yesterday actually. Council Member Filseth: I read an article like that too. I thought I read that they had made a decision. Ms. Mason: I thought they made—they met yesterday. I think they're recommending a decision. I'm not sure if they adopted it. Chair Schmid: What decision? Ms. Mason: I think what they're recommending is what Lalo just shared. As they have earnings, that ... Council Member Filseth: I think what Lalo (crosstalk). The article I read said that they considered going to 6 1/2 percent decided not to do that. Ms. Mason: They're projecting that. This is what I had read. There's an article yesterday after you and I spoke that as the earnings exceed expected, that they will start using that as the buffer to start lowering the discount rate to try and get to the 6.5 ... Chair Schmid: As they earn more, they will charge more. That doesn't make sense. Ms. Mason: I think their alternative was we just reduce now and increase rates to make up the difference. They're trying to have a more conservative smoothing approach that they'll use earnings beyond what was expected to start gradually bringing down the rate. They're projecting based on—this is what I read. It would take 30 years probably to get to the 6.5 percent rate using that methodology. That's what I read. Chair Schmid: When do we get such information? Ms. Mason: I just read it in the newspaper. Chair Schmid: Right. We pay them how much per year? Why don't they tell us what they're doing? Mr. Perez: We subscribe to their mail-outs, and it's not always consistent. Some of it—we met with them last week at the County of Santa Clara building, the County and the school, Mountain View and ourselves. We were pushing on this issue. What they are saying is "We're working with the TRANSCRIPT    Page 18 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  League." I guess we have to get word through the League in order to—I was saying, "We're not getting this timely information to make these decisions." Ms. Mason: There is a webinar online about it, I saw yesterday. There is information that they're putting out, but they're not mailing it directly to us. It's being put out more as public information. Chair Schmid: Could you send at least base information that we have? What's the connection to 68? How will 68 help us with any of these issues? Council Member Filseth: It doesn't. Mr. Perez: No. I think really what we need to look at is our regular actuarial report, the assumptions and the rate of returns and the fluctuations and having a policy discussion on how we should contribute funds to what I would consider an annual required contribution stabilization reserve. That way it can help us navigate through those difficult times when there are downturns. Chair Schmid: I guess I don't like it that all the risk is being put on the City. Council Member Filseth: Let me see if I can take a shot at this, and see if this is accurate. Whether it's $187 million or $269 million or whatever it is, really it has nothing to do with CalPERS. I mean, that's actually not true, because it's on the investment return side and what's their strategy for investment returns and so forth. That aside, it is what it is. CalPERS can say, "We're going to estimate 7 1/2 percent or 7 1/4 percent or 7 3/4 percent or 6 1/2 percent," but actually that doesn't change this. This is whatever it is. What CalPERS' investment return projection changes is how fast we have to pay it off. Sooner or later, we're going to have to pay it off. The cities that you described, the ones that are saying "No, you can't change your assumption," they're not going to get away from this either. They're still going to have pay it off, but they may end up paying it off over 40 years instead of 30 or something like that. In my mind, it is what it is, and we're going to have pay it. I think the lesson from all of this is—I think this is where you're going with your stabilization funds and so forth that makes sense—that we can't rely on CalPERS for this. What their number—their projected numbers are subject to all kinds of influences (inaudible), political. We should just take those numbers and—I don't know—wrap fish in them or something like that. I think we need to have control of this. We need to have our own numbers, and we need to understand what this is. It's sort of the kind of thinking behind what if we did it by employee or something like that. We're just trying to get our hands around this. I think the answer to that question is going to come up in the discussion in a couple of weeks here TRANSCRIPT    Page 19 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  as we really start to get—whether CalPERS changes their rate from 7 1/2 to 7 1/4 or 7 percent, it almost doesn't matter because we're going to have to pay for it, whatever it really is. Chair Schmid: I guess what the distinction between us and CalPERS is they set a rate that we have to pay. If they lower their rate of return, we'll have to pay more. Council Member Filseth: We're going to have to pay that anyway. Chair Schmid: The risk that they are taking with that money is something we don't control. Council Member Filseth: That is an issue ... Chair Schmid: We are putting our confidence in their risk assessment. Council Member Filseth: Do you mean the risk assessment or the risk that they invest their portfolio in? I mean, the risk here is they've got a huge moral hazard problem. If they invest in risky assets, we bear the losses, but they bear the gains, which is sort of how the first savings and loan crisis happened. If it's that, I agree that's an issue. How they report it, unless I'm really getting this wrong, it just seems almost immaterial to me. If they say, "The rate is lower, so you have to pay more this year," if they didn't say that, we would have had to pay more next year, because it is what it is. Council Member Scharff: That's where the big issue is. It could be we have to pay ten years from now. Council Member Filseth: Right, but we're going to have to pay eventually. Council Member Scharff: Right. It makes a big difference to ... Council Member Filseth: True. Whether we pay it this year or next year or ten years from now, yes, that makes a difference. Council Member Scharff: We could have a crisis ten years from now, and everyone else could have one too. Council Member Filseth: That's true. Council Member Kniss: If I can jump in to go back to what Suzanne said. I remember being at a CalPERS meeting a couple of years ago. Their goal is to smooth it out. There's no question that's been their long-term goal all along. You're right, Eric. One way or the other, you're going to pay it. But there's been huge concern throughout the cities about whether or not it's TRANSCRIPT    Page 20 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  going to drop from the 7.5 to 7.25 and so forth. That's been the concern I've heard this whole period of time. To come back to your point, what difference does it make; we will pay it in the end. Just to remind us, we can't get out of CalPERS unless we pay 800 million roughly? Mr. Perez: Yeah. Council Member Kniss: I'd say sort of what you see is what you get. You can't make a whole lot of change here. If you want to really be nervous, look at the CalPERS Board. Chair Schmid: I guess I'm concerned of just the history. This is from the presentation we got last time. In the '90s, returns were much higher than the liability, so there was an encouragement by every city to give pensions and the (inaudible) pensions as a benefit. They have made such egregious errors either back here in their estimates of how to pay or in their rate of return, gross errors that has led to this gigantic liability. The question is, is GASB 68 going to help us say, "Now they've got it. Now they understand." How much confidence can we have in their assessment of the demographics of the retirement, of the risk to take in the market? Obviously they made some grievous errors in their investments. Council Member Filseth: 68 GASB just takes the same data and puts it in a different chart basically. I mean that doesn't do anything. Ms. Mason: At least it's being put on the table and communicated. I think that was the significance of GASB, is don't just say your annual contribution is your cost of the pensions. That was, I think, the goal of GASB. David can comment. I do think it would be ... Council Member Filseth: That's a pretty low bar for progress. Ms. Mason: I do think that having John Bartel here will help have an informed discussion on some of this with an actuary. I think these are all good questions, and we'll make sure that we forward them to him. We will have a dialog about that and what the risk mitigation efforts that are underway could do or won't do that maybe we want to do on our own. Chair Schmid: I guess one key thing, as I'm sort of pushing here, is a flow of information from CalPERS to us. The flow of 68—let's look back at 2013. That was a good year. We've been given reports on that, instead of a flow of what are we thinking now? I mean, information from them on their risk and their looking at the long-term liabilities would certainly be a helpful step. Let me just ask another question. Is there something we could ask the City TRANSCRIPT    Page 21 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Attorney in terms of our rights and responsibilities and abilities to have an impact. Council Member Kniss: She's right here. Mr. Perez: She's right here. Council Member Scharff: Was that rhetorical? Mr. Perez: Let me ... Chair Schmid: I don't think tonight I want a response, but just ... Mr. Perez: Molly could give you her legal opinion. I can tell you that the Governor is putting extraordinary pressure on CalPERS to make changes, and he has not been successful. I think Council Member Kniss told you why. Look at the Board. Council Member Kniss: You all think I'm kidding. You haven't looked at the Board. Council Member Filseth: Can I ask a question? Are CalPERS and the FAA, are they really the same organization? Council Member Kniss: I don't know, Eric. I think we should find out though. Council Member Filseth: They go to one office on Tuesday and the other one on Wednesday. Council Member Scharff: Doesn't the Governor appoint the Board? Council Member Kniss: No, they're elected. Council Member Scharff: They're elected. Council Member Kniss: Half the Board. It's all—are we quiet tonight? Chair Schmid: I guess I did mention the City Attorney. Council Member Scharff: Is what? Chair Schmid: Maybe the City Attorney can ... Council Member Scharff: I can't run for the Board? TRANSCRIPT    Page 22 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Council Member Kniss: Try it. I kind of like, I think—sorry. The woman who's still the director, correct? Ms. Mason: Yeah, Anne Stausboll. Council Member Kniss: I rather liked her, though, and thought she was ... Ms. Mason: She's made a lot of changes. I mean, I would say that, and I've actually worked directly with her on changes that agencies were seeking. I think in the last five years there's been a lot of improvement on communication. It is challenging, because the Board is made up of a mix of individuals. There has been challenge to the smoothing approach. The Board is trying to change the discount rate or the investment return rate. They're trying to do it in a way they have a lot of different agencies and Board Members, and it's definitely a significant discussion that's going on. Chair Schmid: Let's see. I asked the question of the City Attorney. Molly Stump, City Attorney: Just two things to add to the conversation which has been interesting. You may recall that Governor Brown initially put together his multipart set of ideas for pension reform before PEPRA was passed. It eventually became PEPRA. Governance was on that list, and it dropped off. It was one of the items that did not make it into the final legislation. He was looking for governance reforms in terms of the membership and balancing out some of these issues. The other thing I would note is that CalPERS views the members of the system, the individuals, as their customers. They have a fiduciary duty to maximize benefits. They don't have the same approach we would like them to view as co-customers the cities that fund those systems. They do not. They do not feel that there is that same kind of duty to the cities. I think it's a continuing dialog but a challenging one. Council Member Scharff: Interesting. Council Member Filseth: I think again we're going back away from this. The discount rate or the investment return rate, we've got to estimate that ourselves. The CalPERS investment, CalPERS reported rate or projected rate, it times the cash flow, so it doesn't really make a difference. It affects the timing of the cash flow. We've got to plan for it ourselves. Then this poor guy that's got to listen to a meeting like this every day, that's (inaudible). Chair Schmid: We look forward to the CAFR. Mr. Bullock: I'll be prepared. TRANSCRIPT    Page 23 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Chair Schmid: I guess we do have another session on the pension coming up. Mr. Perez: November 3rd. Chair Schmid: November 3rd. Council Member Kniss: Is that when Bartel is coming? Mr. Perez: Yes. Council Member Filseth: He'll be here on November 3rd? Ms. Mason: Yeah. Mr. Perez: Yes, because you got a limited time with him because he had another commitment. We allowed for that night to be mostly him with one small general obligation library bond report that is more information. You'll have plenty of opportunities to ask questions. Council Member Kniss: What did you say the date was, November which? Mr. Perez: November 3rd. Council Member Kniss: That's what I thought you said. Chair Schmid: Are there any last comments that we want to leave? Council Member Kniss: Let me just say ... Council Member Filseth: Wait, I was ... Council Member Kniss: It's not a very kind comment. I know we're being recorded, but I was invited to go speak at one of their Board meetings. I was quite surprised by the—have to search for the right words ... Council Member Scharff: A CalPERS Board meeting, right? Council Member Kniss: Yes. What I thought was great variance in the ability of the Board Members and in their motivation and in sort of why they were there. I know none of that is a kind comment, but I think it sheds a lot of light on this system that we are so committed to that we can't even afford to buy our way out of it. We're in it, and we don't have a great deal of influence, and we don't like that. We much prefer to have influence. If you think differently either Suzanne or Lalo, say it out loud. That was my observation. TRANSCRIPT    Page 24 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Chair Schmid: I guess my biggest concern is on December 15th we have the Long Range Financial Forecast. In past years, our benefit side is growing twice as fast as our salary side. Any increases we have such as higher payments will reduce that salary piece even more. That is upsetting, and we will deal, I guess, with that in December. That's one of the consequences. Council Member Filseth: Can I ask one more question? This is another bashing CalPERS question, so it doesn't matter here. I've got sort of most of my personal investments in Vanguard index funds, because the management rate is like .4 percent or .25 percent or something like that. What's CalPERS' management rate? Mr. Perez: I should know it. I'll have it ready for the November 3rd meeting. Chair Schmid: They calculate a rate in here of .15. Council Member Kniss: I think that's it. Council Member Filseth: Point one five? Council Member Kniss: Point one five. Mr. Perez: Let's see if they ... Council Member Kniss: I know it's under 2. Mr. Perez: ... if that's the updated number, because they just did a change. They dropped off about 100 middle companies. I don't know if that includes that or not, but I'll double check. Council Member Kniss: Could I ask one random question, though? When, for example, Stockton went bankrupt, did they drop out of CalPERS? Is that what actually happened or did they have to hang in there? Ms. Mason: No, Stockton definitely is still part of CalPERS. Council Member Kniss: They had to continue. Even in bankruptcy, they had to continue to pay CalPERS. Ms. Mason: San Bernardino tried to stop during the bankruptcy period. A friend of mine is the attorney representing the city. That was definitely a challenging discussion with CalPERS. Chair Schmid: Molly, a comment? TRANSCRIPT    Page 25 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Ms. Stump: Yes. San Bernardino did actually stop making their payments for a period of time, but they subsequently reached an agreement with CalPERS to pay back that back liability and to continue in the system. No city has exited CalPERS in bankruptcy. In fact, no bankruptcy exit has involved any diminution of pension rights, pension benefits. Council Member Kniss: Molly, has any city paid their way out that you know of? Ms. Mason: I've never heard of it. Ms. Stump: I know there were some very small cities that actually went through the formal process of requesting a price tag on that, and they did not pursue it ... Mr. Perez: Seaside. Ms. Stump: ... because of the cost. Mr. Perez: It was Seaside, California. Ms. Stump: I'm not aware of any. We can confirm that. Chair Schmid: What is the referendum that San Jose is trying to get established? Ms. Stump: San Jose is not in the CalPERS system. Council Member Scharff: They're not in CalPERS. Ms. Stump: They run their own retirement system. Chair Schmid: Right. The ex-mayor is trying a referendum ... Ms. Stump: He's trying to qualify something for the statewide ballot, which he has made several runs at that. There's been different iterations of what's been proposed. Chair Schmid: Isn't that a base reform or PEPRA or something transformative? Ms. Stump: I'm not sure. He just made some recent changes. What tends to happen is he gets a ballot title and summary from the Attorney General, and then there's a concern about getting that qualified for the ballot based on ... TRANSCRIPT    Page 26 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Council Member Filseth: He gets to kill the widows and orphans in the title, and they have to go back. Council Member Scharff: That's always what happens, right? Council Member Filseth: That's what happens. Council Member Scharff: Talking about if we actually could exit CalPERS, but then I'm convinced you'd all come to us and say, "Now we're exiting CalPERS, we can't hire anyone because everyone wants to be in CalPERS." I just wonder—I mean, I know we all talk about that, but I know that would be an issue. I'd hear about it over and over again for the next ... We're uncompetitive in the market, because we're not in CalPERS. Ms. Stump: This was the key issue in the Stockton bankruptcy. They did not actually seek to reduce their retirement payments for this reason. The City Manager, Bob Deis, felt strongly that that would make Stockton uncompetitive as an employer, and they were particularly concerned about police officers. Council Member Kniss: That's right. Council Member Filseth: It's not obvious to me actually—I mean, I used to think CalPERS was just like these evil guys. It's not obvious to me—I mean, maybe I'm missing something huge. It's not obvious to me how being in CalPERS is actually that big a detriment to us. Again, with the exception of the issue of control, because they control the cash flows. As long as they invest wisely and, as for their investment returns, I don't think anybody in here believes it at all. As long as you assume that their investment returns are just completely bogus, we need to sort of watch this ourselves. That's that issue. The only other issue I can think of is the strictures they place on what kind of packages we can offer the employees, because we don't have any flexibility. We can't come and say, "You can take a smaller pension in exchange for a larger upfront payment so you can afford a house here." We don't get to do that. Other than that, it's not obvious to me how CalPERS is that pernicious to us, other than the control issue. Council Member Kniss: I think it's the control thing. It's frustrating that you—I don't know if San Jose does any better than we do. To be honest, I don't think so. Council Member Filseth: At least they have control. Council Member Kniss: They've got control. TRANSCRIPT    Page 27 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  Chair Schmid: The downside is not just control, it's cost. We are paying twice as much each year. The increase is twice as high on our benefit package as it is for our salaries. Ms. Mason: As it is for ... Chair Schmid: Salaries. Council Member Scharff: We'd probably do a radical restructuring. We'd probably pay, like, twice the salary as what any other city pays and have much less benefits. Council Member Filseth: Put it in a 401(k). Council Member Scharff: And put it in a 401(k). We'd be this completely different model, and you'd come work for us if you want a high salary and not have the guaranteed pension. Council Member Filseth: That's what we would do. Council Member Scharff: You'd get different people. I mean, that's what we'd do. Council Member Filseth: CalPERS stops us from (inaudible). The size of the unfunded pension liability, we did that; CalPERS didn't do that. I mean, we shouldn't have believed CalPERS. They gave us bogus numbers, and we believed them. Shame on us. Those contracts that we're going to have to pay off, we entered those contracts, not CalPERS. Council Member Kniss: Just for the fun of it. Don't I remember Willie Brown was on the Board for quite a while? I'm pretty sure. Ms. Mason: On the CalPERS Board? Council Member Kniss: Yeah. Ms. Mason: I'm not sure if he was on CalPERS. Council Member Scharff: Let's get him on the phone. Chair Schmid: I think we could go round and round, but we do have a date of November 3rd. There's no motion needed. Mr. Perez: No. We wanted to hear your comments, and we have. We've noted them, and we'll pass them on to Mr. Bartel. Any other questions you TRANSCRIPT    Page 28 of 28  Finance Committee Special Meeting  Transcript 10/20/2015  want to give us ahead of time, it would be appreciated so he can work on any particular responses. Council Member Kniss: You said last time he was limited to one hour. You're saying this time he's got time for us? Ms. Mason: Right. That's the only item on the agenda. Isn't it? Mr. Perez: We have one other small—the Library Oversight Committee report on the bond, but it's information mostly. Chair Schmid: Thank you very much. Look forward to the CAFR pension discussion. That completes Item Number 1. Council Member Scharff: Are you guys joining me on my Colleagues Memo to allow alcohol in City Hall? Council Member Filseth: To allow alcohol in City Hall? I don't think we need it, because most of us drink here anyway. NO ACTION TAKEN ADJOURNMENT: The meeting was adjourned at 7:47 P.M.