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Attachment 2 PREPARED BY: STEPHEN CONWAY FINANCE DIRECTOR Reviewed by: Town Manager and Town Attorney 110 E. Main Street Los Gatos, CA 95030 ● 408-354-6832 www.losgatosca.gov TOWN OF LOS GATOS FINANCE COMMITTEE REPORT MEETING DATE: 03/23/2017 ITEM NO: 2 DESK ITEM ITEM NO: 11 DATE: MARCH 17, 2017 TO: COUNCIL FINANCE COMMITTEE FROM: LAUREL PREVETTI, TOWN MANAGER SUBJECT: REVIEW, DISCUSS, AND RECOMMEND STRATEGIES FOR TOWN COUNCIL CONSIDERATION TO ADDRESS THE CALIFORNIA PUBLIC EMPLOYEES RETIREMENT SYSTEM PENSION AND OTHER POST-EMPLOYMENT BENEFIT UNFUNDED LIABILITIES FOR THE TOWN OF LOS GATOS: A. ISSUE A REQUEST FOR PROPOSAL TO BEGIN A PROCEDURE TO ESTABLISH A SECTION 115 IRS TRUST IN THE AMOUNT OF APPROXIMATELY $1,000,000. B. AUTHORIZE AN ADDITIONAL DISCRETIONARY PAYMENT (LUMP SUM) OF $650,000 TO BE PAID TO THE CALPERS PENSION TRUST. C. AUTHORIZE AN ADDITIONAL DISCRETIONARY PAYMENT (LUMP SUM) IN THE AMOUNT OF APPROXIMATELY $650,000 TO BE DEPOSITED INTO THE TOWN’S OPEB PREFUNDING TRUST ACCOUNT. D. IMPLEMENT THROUGH THE TOWN’S BUDGET PROCESS A STRATEGY TO PHASE IN ADVANCED DISCRETIONARY PAYMENTS IN THE FORM OF PAYING A HIGHER THAN REQUIRED EMPLOYER CONTRIBUTION. E. DIRECT TOWN STAFF TO EXPLORE COST SHARING FOR PENSION/OPEB COSTS WITH TOWN EMPLOYEES AS PART OF FUTURE COLLECTIVE BARGAINING PROCESSES. REMARKS: After the staff report was distributed on March 17, 2017, staff received the following questions from a Committee Member: Question1: Why do you recommend setting aside a total of $2.3M to address the pension/OPEB obligations vs some other amount? Of the $2.3M that you recommend to be ATTACHMENT 2 PAGE 2 OF 3 SUBJECT: CalPERS/OPEB UNFUNDED LIABILITIES DATE: MARCH 23, 2017 S:\COUNCIL REPORTS\2017\04-04-17\PERS.OPEB\Attachment 2 - Staff Response to questions received from a Council Finance Committee Member on March 23, 2017.docx 3/29/2017 3:27 PM SLL authorized, how much would come out of what reserve accounts as identified in Note 8, Fund Balances, on page 71 of the 2016 CAFR? Answer: There is currently approximately $2.3 million funding set aside in the CalPERS/OPEB Reserve per Town Council direction. The balance consists $300,000 from the CalPERS/OPEB Reserve and approximately $2 million excess Budget Stabilization Reserve that Council authorized to be allocated to the CalPERS/OPEB Reserve at the February 21, 2017 Council Meeting. Question 2: What is your reasoning on the split of between the 3 accounts ($1M, $650K, $650K)? Answer: See basic principles outlined in the recommendation on page 16 of the Staff Report. Question 3: I understand the returns the Town's return on CALPERS assets is significantly below the return on the OPEB assets. Can you provide the annual return for each of the last 5 years for each of the 2 funds, up through June 30, 2016 if possible? Could you explain the differences in how the 2 funds are managed if that contributed to the differing returns? Answer: Eight years of available historical annual returns are provided on page 8 of the Staff Report. CalPERS investment decision are dictated by the CalPERS Board, the Town does not have any influence on the investment. The Town can choose among three investment risk portfolios while investing in the OPEB Trust. There is also the ability to time placement of funds into the trust for OPEB which is discussed on Page 8 in the report. Question 4: One of the issues in managing pension money is balancing returns with risk (volatility). We all want to have higher returns with lower risk. That's the beauty of Portfolio Theory. It actually shows how you can do this. Can you provide us CalPERS asset allocation? How does that compare with the asset allocation of the OPEB pension assets? Answer: CalPERS asset allocation is likely available on the CalPERS website. Staff does not have CalPERS and OPEB portfolio information readily available at this time. Question 5: How have CALPERS returns been over the last 3, 5 and 10 years compared to CALSTRS, and comparable funds in New York and Ohio (or any other state with large asset pools)? Answer: Information is not readily available to staff Question 6: You provide a recommendation to begin the process to establish a Section 115 IRS Trust in the amount of $1M. Who within Town Staff would be responsible to oversee the investment managers? How would the balance between desired return, asset allocation, and acceptable risk level be determined? What controls do you anticipate would be put in place to oversee the process? PAGE 3 OF 3 SUBJECT: CalPERS/OPEB UNFUNDED LIABILITIES DATE: MARCH 23, 2017 S:\COUNCIL REPORTS\2017\04-04-17\PERS.OPEB\Attachment 2 - Staff Response to questions received from a Council Finance Committee Member on March 23, 2017.docx 3/29/2017 3:27 PM SLL Answer: As it was mentioned on page 16 of the Staff Report, staff is recommending the issuance of a Request for Proposal (RFP) to begin the process to establish a Section 115 IRS trust. If the Finance Committee agrees with this recommendation and the Council approves it, the Town will issue the RFP. Town staff will analyze the proposals from the RFP and prepare a recommendation for the Council Finance Committee review for Town Council co nsideration. Question 7: I see the average retiree pension is $30,500 per CalPERS. Can you provide a rough estimate or an estimated range of what the average pension will be for our Safety and Misc Plan employees who have hit or will be expected to meet minimum retirement age within the next 5 years? Answer: Information is not available as this request would require data be derived by CalPERS staff at a fee. Staff is not aware if such service is provided by CalPERS.. The Committee member acknowledged the following questions for later discussion and as such staff has not prepared responses: Question 8: I believe you are now implementing new software that will give you the ability to model our actual situation. How is that going and when do you believe you will be able to use it to perform sensitivity analysis that will provide an ROI benefit for contribu tions at various assumed ROI's? For example, if we had confidence we would earn 15%, we would want to give this CAlPERS (or other fund manager) a larger contribution assuming a risk level we are comfortable with. On the other hand, if we expect CalPERS only earn 2% AND we believe we could earn a significantly higher return with comparable risk if the money managed by someone else, we would want to have it managed differently? Or we may want to "invest" the funds in the Town to meet other needs, e.g. infrastructure improvement. Question 9: Do you have any suggestions of what is a reasonable long term funding target? I think I recall reading that 80% is suggested as a reasonable target. Question 10: Do you have any sense of what other comparable, yet innovative California cities are doing to address the pension and OPEB obligations Question 11: For both the Safety and Misc Plan, what is the difference between Classic Members and Miscellaneous Tier 2 members. Question 12: Can you provide us with more detail regarding the plans, e.g. what is the vesting for both the pension plans and OPEB Question 13: I see references to CALPERS currently assuming a 7.5% discount rate. I believe Note 9 Employees' Retirement Plan on page 77 of the 2016 CAFR shows 7.65%. If the difference the management fee CALPERS earns?