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Home My WebLink About0122.092I d , , I I ! j ~ I I ! ~'~ . . . , " ", . '.,'. . . :",' January 16, 1992 HONORABLE CITY COUNCIL Palo Alto, california UPIlATE Oil »70. !PERS_REBA1ll Members of the Council: Report in Brief This report is informational only and requires no Council action. Background: Last summer the legislature passed AB702 as part of the 1991-32 State budget. The major fiscal impact of the bill is to "recap tUre ft from the Public Employees Retire~ent System (PERS) nearly $2 billion, that had been previously eQrmarked for inflation protec tion for retirees, and rebate the money to participating agencies in the following amounts: State Schools Cities other public agencies Total rebate $ 760 million 353 million 511 million --D.l million $1,961 million As a PERS contracting agency, the~City will receive a portion of the total rebate. CMR!l22: 92 =~------.~ -,-, . -----_. -_._-----, Bile of Rebate to P410 Alto Based on a preliminary analysis by PERS, City staff estiNated in October (CMR:449:91) that Palo Alto's share of the one-time retate would be approximately $3 million, of .... hich $2.5 4flillion ""ould benefit the General Fund, Having completed its actuarial calculations, PERS now informs the City that its AB',D2 rebate totals $5.7 million. Of that amount, $4.7 million is attriputable to the General Fund, and $1.0 million to the enterprise funds~ The unexpectedly large size of the. rebate is apparently due to the ::ethod PERS used to allocate the $511 million among all the cities. Each city;s share of the rebate is proportional to its share of the total assets in the system. Since Palo Alto has been a member of PERS for so long, the City's share ~f total PERS assets is relatively hiqh. The $5.7 million rebate is more than the rebates for San Mateo and Sunnyvale, and tyice ~s large as ~or Mountain View and Red~ood City. Reb~te Mec~~niB. Use of the-AB702 allocation is limited by law ~o reducing the employer's share of retire~ent contributions ln 1991/92 and subsequent fiscal years. Startinq with the December 1991 payrclls, PER& will autouatically use funds in the City'S AB702 account to satisfy the em.ployer contribution obliqation incurred with each payroll, until ~he credit is exhausted. No other means of pa~ent will be allowed for the employer contributions. For Palo Alto, the AB702 credit is sufficient to cover projected payroll employer contributions of approximately 18 months. Sin~e use of the funds must be uninterrupted until exhausted, the City viII draw down the AB702 funds in the amount of $2~2 million during the remainde~ of this fiscal year, and utilize the balance of the credit ($3.5 million) in fiscal year 1992/93. The portion or these draws attributable to the General Fund ~ill be approximately $1.8 million and $2.9 million for the t~~ fiscal years, respectively. Challenges to AB702 So far, at least two challenges to AB702 have been launched. One is a ballot initiative led by a coalition of retiree and State employee groups. This initiative is aimed at provisions of AE702 that removed the actuarial functions from PERS, and placed them under the control of the State executive branch. The $2 billion rebate to employing agencies would not be affected. A leqal challenqe to AB7C2 that could overturn the rebate has been filed by another coalition of retiree, State employee, and school employee qroups. This suit, knovn as ~laypo.9J v. Wilson, argues CHR:122,92 2 i " . that the use of PERS trust funds to pay emp::'oyer ;:ontributions violates the trust provisions of the State constitution and that the replacement of the actuary is unconstitutional. The Third. District Court of Appeals accepted the suit on AU9ust 20~ Final briefs were filed November 22. PERS officials predict that in late January the c~urt ~ill decide when to hear oral arguments, and that a decision is possible in April, Mayor June --but perhaps later. As a result of the legal challenges, staft intends to reserve the amount of the rebate as it is drawn fro~ the City's account with PERS. Under this accountinq procedure, the city's regular payroll eKpenditures will not be impacted, and no benefit savings will be realized. 'ot.ntial Impact on City Budq.t A rebate this size could have a material effect on the City··s bUdget if it survives the legal challenge. The table below sho~s prelimi.nary staff estimates of total General Fund revenues and expenditures on a wworkload" or ·current services· basis. This projection assumes that current Council policy on feas, taxes, and spending is carried into future years~ In effect, this projection answers the question, "What would the budget look like it it were put on automatic pilot?" It is evident from this analysis that this rebate would only postpone dealing ~ith the General Fund's structural imbalance for-a relativel)-short period of time~ CMR.:122:92 ) GENERAL FUND: P;;·.i.LIMINAAY "'WORKLOAD-BASIS PROJECTIONS (millions of dollars) 1990-91 1991-92 1992-93 1993-94 ACtU31 Fstil!'oate Projection Proi~ Revenues (before utility users tax) $58.8 $59.4 $61.8 $64.3 Expenditures (before. utility users tax) a...2. ~ ~ ll....l Net Operating surplusf(Deficit) (.4) (.7) (2.2) (2.8) (before utility users tax) Net utility users tax (revenues over expenditures) ...2. ~ ~ ......! General Fund Surplus/(Deficit) $ C..l) 'WI $(WI $(1..:.i) PERS Rebate $= SU $~ More precise, updated figures ~il1 be pre~ented for all years in the Midyear Financial Report in February. The League of California Cities is ac, .. ising cities to be very cautious about spending the rebate money before the litigation is resolved. As is result, the City Manager has cHrectea staff to plaee the rebate funds in a special reserve --not to be recognize~ in the General Fund or the enterprise funds unless and until the litigation is favcrably deeided~ Staff will continue to monitor the lawsuit challenging AB702 and will present an update to Council as part of the Midyear Financial ~eport next month~ CMR:U2:92 4 , ~eBpect!ully submitted, 7~'i-f?-:t\ I\.VZN RIPER Assistant Finance Director ~EM12·~ WI LL AM ZANER City Ma.nager "'-. : Related Staff Reports: CMR:449:91 CJ!R.!122:92 5 • /