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Home My WebLink About0154.093March 4., 1993 HONORABLE CIT, COUNCIL Palo Alto, California Attention: Finance Committee YSR 07 THE AS 7~~ CREDIT Members of the council: Report in Brief In July 1992, the: council referred to the Finance committee. consideration of various options for ~he use ot the AS 702 Public Employees Retirement System (PERS) credit. Litigation related to the AB 702 credit was settled in Oecember 1992. The purpose of this report is to provide background for the Finance committee discussion. p,&c:kgroun4 AS 702 was passed by the California state legislature as part of the 1991-92 State budget. The bill served to eliminate two ac.counts within PERS. The accounts had been establis~ed in 1982 to provide non-vested supplemental year-to-year cost-of-living adjustments for PERS retirees, £unded by employer contributions. The premise of the State action was that the two accounts had been substantially oveo.r-funded, and \liould be r-Qplaced with ac::ounts funded from interest on employee contributions. The accumulated funds in the original accounts ~ere disbursed to PERS members by reaucin9 employer contributions in 1991-92 and subsequent fiscal Y9:ars. Language of the original 'till stipulated that the rebate monies be used first to retain or rehire PERS members subject to layoff or reduction. As the major employer member of PERS, th~ State ~as able to supplement its 1991-92 budget by the $727 million credit fron PERS. CMR:154:93 -~"·£I!I.c""!i,·.·"'''C'''-'---'''~--'''''''''''''-'-'~'. !. I Palo Alto's AB 702 credit amounted to $6.1 ~illicn. As directed by law, tl1e City's employer share of retirement contributions L, 1991- 92 were eliminated, and the savings .... ere recorded in the appropri ate funds~ Due to challenges of the bill's legality, however, 3- reserve was 'E!stablished in each of the funds to house these savings. "Xhe legal chal1er.ges have n~w been resolvlI:::d, and the AB 702 reserve$ are available for appropriation. Because the allocation of the city's credit to th~ various funds is based on current year payroll~, a fairly accur&te prcjectiou of the AB 702 reserve balances at March 31, 1993, 'When the credit 'Will be completely dra~, can be made~ Gener a I FLl nd E.,terprise Fund Utility Administration Water Electric Gas Refuse Water Quality Control Plant Wastewater Collection Storm Drainage Sub~otal -Enterprise Funds Internal service F· .. .mds Total AE 702 PERS credit 176,000 98,600 387,400 142,900 1114,200 256,800 68,900 26.100 $4,762,900 1,261,300 $6,096,700 Unless stated othenlise, the discussion 'Which follo .... 's pertains to the use of the Ceneral Fund AS 702 monies only. Potential Upes of the AS 7D2 ___ Cret1J. __ ~ The AB 702 monies may be seen as a one-time "'Windfall" for the City. Use of ~hese monies to create or augment on-going programs leaves the question of ho' ... · the support for sLlch programs will be maintained once these monies are ~xnausted, especially in the current uncertain economic en~ironm~nt. Consequently, this report focuses on one-time funding of reserves, capital projects or other vehicles 'Which reflect the non-co:-.ti:-.:.:ir;g nz.t-":.:.:::--e of the resources involved. CMR:154:93 2 j " .--.' '--,.-. j~:~if'<' , ~dg.t ptabililation Raserv. q.eqardletis of the origin of savings to the Genc!'al Fund .. a case cat); always be made for placement of exce.ss funds in a. reserve for future contingencies. This is especially true in time of econo~ic uTlcertainty, ..... hen events may threaten to deplete a City's long range reserves in a short period of time. Althouqh the city's eudqet stabilization Reserve may be relatively stronq at $10 million at Dec2mber 31, 1992, the economic cliDate which will affect the City's budget in the llE"{t f2W years does contain uncertainties of su:Cstantial con5equence~ With the passing of the 1992-93 state budget, tl"l_e City experienced a drop in property tax revenue of approximately $8SE, 0:>00 ~ The governor's most recent state b~dqet proposal for fiscal y~~r 1993-94, though far from being finalized, ~ould result in an estimated 22 percent further loss in total property tax dollars for cities --$1. a million for the city of Palo Alto. The city has also been informed that its estimated liability for the Aerospace sales tax-decision is over $1 million. Also of concern is the recently proposed Local Government Fiscal Reform Act, ...... hich in its approac";} to r~organi 2.e state and local finance, would have a severe and on-going negative impact on the city~s reserves. The proposal calls for a new methodology for allocation of property taxes between counties, cities, special districts, school districts, and other agencies, to implement the San Diego decision ~hich outlawed the current AS 8 property tax allocation methodology. capital (property) ReplacfiI!.mBnt Reserve As is typical with most cities, Palo Alto has a tremendous amount of its wealth invested in physical assets such as buildings and equipment. Major maintenance and/or replacement of these assets is budgeted on a pay-as-you-go basis. Deferral of capital replacement is a pai-nless 'IoI'ay to dea 1 ~ith budget str:!lins, but continued deferral will even-:'..l.ally lead to serious problems, including safety hazards and increased liability costs; loss of efficiency; increase in the eventual cost o~ replacement because of the deterioration which occurred during the delay; and the potential for a huge ~aintenance and replacement backlog. The city has recently had a comprehensive building inventory completed for insurance purposes. That inventory showed that tile replacem~nt value of non-utility properties totaled $96 million. Due to the lack of a fixed asset system~ there is no accurate valuation on eqUipment so it is difficult to estimate the potential costs of things such as heating and ventilation systems, boilers, or other major pieces of iO!quiprnent. However, the potential liability is considerable. CHR:154:93 3 -" ..... -~,TL-~ .. -'~ .'~~·l;'~ .. ~~' '.-, ," - -', A nUlhber of cities~ includ.ing Monterey, are acting to set up capital plant replacement reserves, which are funded by on-going depreciation charges for-b'.Jildings and major equipment. Using a portion of the AB 702 monies as seed capital for such a reserve would be another option for the funds. ADIurance an4 Benetit. Reserves Certain liabilities in the city's Int.ernal service Fu!"ld (ISF) for GeneraJ, Benefits and Insurance are long-term liabilities which are not fully funded. since the establishment of the ISF in 1990, the General Fund portj on of the liabilities recorded for the City's workers' Compensation program and employees' compensated absences have been amortized, so th~t they 'Would be fully funded in ten years. The unamortized balances of tbese reserves at June 3D, 1993, will be as follows: compensated Absences Workers Compensation $ 751,910 1,485 J 03S Most municipalities fund these benefits on a pay-as-you-go basis. While it is not mandatory from a municipal accounting standpoint to fully fund these liabilities, these expenses can b2 considered to have been incurred as a result cf the City's obligations to it_s employees, and so m~y be considered an appropriate use for the AB 702 funds. Capital Proieets Council could view the AS 702 funds as an opportunity to fund one time capital pr~jects that might otherwise not get funded, or which could take years to fund4 Examples of priorities that council has d.iscussed in recent years include the following: o In the "Cubberley Conceptual Master Plan" prepared by spenser Associates on January 3D, 1991, pages 24-25 IJst fund.inq prioritie~ fo: the master plan. Only the first priority, "Code Repairs ft has been funded to date, including roof repairs. The remaining priorities are (;n order) : CMR.: 154: 93 Conditions Repairs Buildings E, F & U Renovation Building L Renovation parking and Circulation Athletic Fields & Landscaping Field Restroom and storage Gym B-Men's Locker Total Reconune!",ded in Master Plan $2.48 million .52 million 495 I:lillion 1. 09 million 1.24 !['Ijllion .07 million ~ million $6.44 million , I o Park and playground improvements --Funding this program 'Would allow Palo Alto to catch up to surrounding communl t~es in providing up-to-date playground equipment. o Durinq recent budget deliberations between departments and the Manager's Office, there has been discussion of a possible. citywide. cOJrtluter replacem~nt program. Dollars fer future replacemen-:.. of existing personal computers are not available in current departmental budgets. In addition, certain departments do not have adequate computer equipment noW', let alone the ability to fund future r~placements. o Council could increase the annual ~eneral Fund capital hudqet "target N from $3.0 million per year. Over time, the City's infrastructure would be replaced in a more timely manner, and the community ~ould benefit from more modernized facilities (parks, buildings, etc~) a Retire General FUn4_~q-~.rm pe~t Yet another option for the use of the General Fund AS is the early retirement of debt. General Fund debt as 1990 was as follows: 7D2 reserve of June 30, CoIf Course corporation General Obligation Bonds Public Improvement Corporation (Civic Center) COPs Terman School Site capital Lease Optical Imaging Equip~ent Lease $1,lS0,fJOO 7,670,000 ],556,131 __ -"6,,,4..&....970 Total $12,441,101 The effect of early retirement of debt is the same as advance fu~ding of long-term 1 iabi li ties: debt payments are reduced" making more funds available for current year appropriation. PERS Unfunded P~nsion Bene~it Obligation Since the origin of the AS 702 credit was state legislation affecting PERS contributions by the city as an employer, Council may wish to apply the rebate nov to the unfunded liability for pension obligation. Such action 'Would reduce this long-term liability by 77 percent j frem $7.a~ million (as of June 30, 1992) to $1.78 million, if the actuarial assumptions remain the same. As the PERS contribu'tion rate contains a facto~ (2 ~ 17 percent of covered payroll in 1991-92) for the amortization of the unfunded actuarial accrued liability. reducing this liability would reduce the City's annual contributions by an additional $~33~OOO per year CMR:154:93 5 I L;~:· .~-;:. :: .. ~o ........ _~-.::.".r . ,."'t ,'. '~""" '-,;~:::" .<~ ~,.::,> ,f-. ~ , ....... .- ($379,000 General Fund). In effect, the City would b~ transferring the proceeds of the "over-funded" accounts within P£RS, provided by AS 702, to the City's "under-funded,TI account within PERS. l~'t-Bmploym.n~ B.nefits The City's post-err.ployment !>enefits represent already incurred expenses. The City has not, to date, actuarial1y det.ermined the amount of this liabjlity, or recorded it on the books. The City provides certain health care benefit,s tot' retired employees, recordlng the costs as the claims are paid. The liability would represent th~ amount of these benefits ~hich resulted from prior year employment, and would be estimated through an actuarial study. Although not currently required by goverruneTital accounting principles, it is generally anticipated that liabilities far post employment benefits will soon need to be reco.rded in a manner similar to that required by private sector firms. As the City has approximately 350 retirees, and the cost of claims is $1 million per year, that liability should fall in the range of $10 to $30 million. The entire liability would then be amortized ai:"ld charge·d to future years until fully fund~d. Note that while accounting principle~ miqht dictate the recognition of a liability for these benefits, full funding of the liability ~ill not be mandated. creation ot _an Enc!owment Fund fQ_~~Jty Heed51 Council could look at the rebate funds as providing the opportunity for restoring certain services ti'l.at have been cut over-the last four-years of budget reductions. Some o~ tt,ese areas were identified in the Appropriate Level of service community outreach process durinq the fall of 1991 as high priority services. Others were contained in various staff reports to council. Council could keep the rebate in General Fund reserves and use. the interest earnings O-n the monies to fund services. At an assumed earnings rate. of 6 percent per year over tho!:: next ten years, service levels could be enhanced by a~ estimatEd $300,000 per year. Such services could include: o Augmenting the library collections budget o Restoring community facility/library hours o Increasing recr~ation facility (playing fields, tennis courts, etc.) o Increasing parks and off-street tree preventive mainte nance CMR:154:9J 6 , I I • t;;1 .rj i l, r Investments in InbovatiQ~or Future Savinga council might consider the establishment of an endo~ent to func investment& in either operating or capit~l expenditures that could save the City money over the lor.qer term. Examples include! o Fire station consolidation (CMR~170:91) o Utility savings technclogy date ~ater conservation lighting device$ investments, such as up-to irr-igaticm systems and/or o Participation in Sand Hill Road/Stanford Shopping center Expansion Conclusiop The~e are many options tor ~se of the AB 702 credit~ Because of the one-time nat~re of the credit; the discussion in this report focussed on o~e-time applications of the resources made available. staff was directed to agendize the item as soon as legal challenges were settled; however, Council may yish to make its decision on use of the monies within the context of the 1993-94 Inte::-im Budget discussion~ (J;~~:~ CAROl, FEfulELL Accounting M~naqer ,l / --(0 /J[l"-"A£) EMIt¥' HARRISON Director of Finarc~ ~.J&tr~t' JUNE FLEMING city Manager Related S~aff Reports! CMR:154:93 C~;449:91 CMR~ 122: 92 CMR:317:92 CMR:l08:93 7 .. -'{~--