Staff Report
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
COUNCIL AGENDA REPORT
MEETING DATE: 04/04/2017
ITEM NO: 8
ITEM NO: 11
DATE: MARCH 24, 2017
TO: MAYOR AND TOWN COUNCIL
FROM: LAUREL PREVETTI, TOWN MANAGER
SUBJECT: REVIEW, DISCUSS, AND CONSIDER THE RECOMMENDATIONS OF THE
COUNCIL FINANCE COMMITTEE TO BEGIN 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 PENSION TRUST.
B. AUTHORIZE AN ADDITIONAL DISCRETIONARY PAYMENT (LUMP SUM)
IN THE AMOUNT OF $1,000,000 TO BE DEPOSITED INTO THE TOWN’S
EXISTING OPEB PREFUNDING TRUST ACCOUNT.
RECOMMENDATION:
Review, discuss, and consider the recommendations of the Council Finance Committee to begin
to address the California Public Employees Retirement System (CalPERS) pension and Other
Post-Employment Benefit (OPEB) unfunded liabilities for the Town of Los Gatos:
1. Authorize the Town to issue a Request for Proposal (RFP) to begin a procedure to
establish a Section 115 IRS Pension Trust.
2. Authorize an additional discretionary payment (Lump Sum) in the amount of $1,000,000
to be deposited into the Town’s existing OPEB prefunding trust account.
BACKGROUND:
At its March 23, 2017 meeting, the Council Finance Committee reviewed and discussed the
CalPERS/OPEB Unfunded Liabilities Report (Attachment 1). The report summarizes several
potential strategies, provides pros and cons for each, and includes a staff r ecommendation.
Attachment 2 contains a Desk Item for this Council Finance Committee meeting.
PAGE 2 OF 5
SUBJECT: CalPERS/OPEB UNFUNDED LIABILITIES
DATE: APRIL 4, 2017
S:\COUNCIL REPORTS\2017\04-04-17\PERS.OPEB\Staff Report FINAL.docx 3/30/2017 3:53 PM SLL
BACKGROUND (cont’d):
Committee discussion focused on the possible strategies to meet the future unfunded pension
and OPEB liabilities. The Committee acted to move two recommendations forward to the Town
Council for consideration at the April 4, 2017 Town Council meeting. The Finance Committee
requested additional information to assist in the assessment of other potential strategies and
recognized that the Town’s work on this topic is just beginning. The next Council Finance
Committee meeting is scheduled for May 4, 2017.
DISCUSSION:
As a framework for considering the strategies, the Council Finance Committee agreed with the
principles of volatility, diversification of risk, and local control of the assets (see page 16 of
Attachment 1). In addition, the Committee discussed other principles, such as flexibility, to
guide the selection of strategies to reduce unfunded liabilities.
The following section provides a brief summary of the Council Finance Committee discussion on
the different strategies presented in Attachment 1.
Status Quo: Continue to make minimum annual contribution as determined by CalPERS Annual
Valuation Reports based upon an unfunded liability amortization schedule averaging 29 years
with a discount rate of 7.0%. The Town currently elects to prepay the unfunded amortization
amount. The FY 16/17 the amount was $640,223 saving $40,223 in interest charged by CalPERS
versus paying it monthly over the fiscal year.
The Status Quo option was not recommended by the Committee members because the
Committee would like to recommend that the Town do more than status quo.
Shorter Amortization Schedule (Fresh Start): This option would involve working with the staff
at CalPERS to establish an alternate amortization schedule. For instance, unfunded liabilities
could be amortized over a 20-year period instead of a 29- to 30-year amortization period.
While Committee members are generally in favor of decreasing the amortization period, they
are not recommending to officially commit to the Fresh Start program with CalPERS because
the Town will be obligated to higher annual payment levels and would lose flexibility.
Lump Sum “One-Time” Payments to CalPERS/OPEB: Described by CalPERS as Additional
Discretionary Payments, this option involves the Town making additional payments either once
annually or making additional discretionary payments above the amounts required by
CalPERS/OPEB on a monthly or a payroll cycle basis during the fiscal year.
PAGE 3 OF 5
SUBJECT: CalPERS/OPEB UNFUNDED LIABILITIES
DATE: APRIL 4, 2017
S:\COUNCIL REPORTS\2017\04-04-17\PERS.OPEB\Staff Report FINAL.docx 3/30/2017 3:53 PM SLL
DISCUSSION (cont’d):
Committee members are generally in favor of Lump Sum payments, if the action leads either to
a significant decrease in the CalPERS pension unfunded liability or significant saving s in the
Town’s required contribution rate by CalPERS. Unless this can be verified, the Committee is not
recommending paying Lump Sum payment to CalPERS this time. The Committee is
recommending taking immediate action by depositing a $1,000,000 payment to the OPEB
Prefunding Trust to reduce the OPEB unfunded liabilities by $1,000,000.
Section 115 Pension Trust: This option would involve prefunding the pension unfunded
obligations through an IRS-approved independent retirement plan administrator such as those
currently administered by Public Financial Manager (PFM), Keenan Associates, or Public Agency
Retirement Services (PARS).
Committee members are in favor of exploring the establishment of a Section 115 Pension Trust.
By issuing a Request for Proposals (RFP) and receiving proposals, the Town would be able to
learn more about these programs and determine the one that best meets the Town’s needs.
The RFP process is expected to bring forward information regarding investment managers,
asset allocations strategies, management fees, and other product offerings.
If this recommendation is approved by the Town Council, staff would draft the RFP and share it
with the Finance Committee for its input. The RFP would then be posted and proposals would
be due approximately four weeks later. Town staff would evaluate the proposals and bring the
results of the evaluation, including a recommendation, to the Finance Committee. Non-
proprietary elements of the vendor proposals would be public information and available to
Committee members. The Council Finance Committee would make a recommendation for
Town Council consideration of the vendor and the initial amount to be placed into the Section
115 Pension Trust.
General Fund Reserve for Pension/OPEB: Established in June 2016, per General Fund Reserve
Policy if year-end savings are available, $300,000 is placed into the General Fund reserve for
Pension/OPEB.
Committee members are in favor of continuing to set-aside $300,000 from year-end savings as
available to mitigate CalPERS and OPEB unfunded liabilities.
Pension Obligation Bonds (POB’s): Consider issuing taxable pension obligation bonds, the
proceeds of which would be used to make additional discretionary payments to CalPERS or to
the OPEB trust reducing the unfunded liability but also increasing the level of Tow n bonded
debt.
Committee members are not recommending this option.
PAGE 4 OF 5
SUBJECT: CalPERS/OPEB UNFUNDED LIABILITIES
DATE: APRIL 4, 2017
S:\COUNCIL REPORTS\2017\04-04-17\PERS.OPEB\Staff Report FINAL.docx 3/30/2017 3:53 PM SLL
DISCUSSION (cont’d):
Employee Cost Sharing: With the passage of PEPRA, local governments are allowed to agree to
cost share the employer required contributions with their employees. There may also be
options to limit future benefits and eligibility requirements for Town employees for the Town’s
OPEB plan.
Committee members are interested in exploring this option and requested staff to provide
further information at the next Finance Committee meeting scheduled in May.
Line of Credit: This idea originates from a Southern California city forum on unfunded liabilities.
Essentially it involves using “one-time” balances such as the Town’s $4.7 million in catastrophic
reserves as a funding source for additional discretionary payments for pension or OPEB
unfunded liability pay-downs. The Town would match the withdrawal with a bank line of credit
to borrow against should the need arise for the catastrophic reserve balances. The current
borrowing rate for the line of credit is likely to be less than the rate charged by CalPERS on the
unfunded balance.
Committee members are interested in exploring this option and requested staff to provide
further information at the next Finance Committee meeting.
Other Strategies Identified by the Finance Committee
Additional strategies were identified and discussed, including establishing alternative Trust
options; “weaning” out of CalPERS by offering new employees a 401K plan; and examining
alternative strategies to maximize return while managing risk in the investment portfolio and
being mindful of State regulations restricting investments as set forth in the Town’s adopted
Investment Policy. Staff will bring forward additional information regarding these alternative
strategies for the next Finance Committee meeting.
CONCLUSION:
It is recommended that Town Council approve the Council Finance Committee
recommendations to begin to address the Town’s CalPERS and OPEB unfunded liabilities.
ENVIRONMENTAL ASSESSMENT:
This is not a project defined under CEQA, and no further action is required.
PAGE 5 OF 5
SUBJECT: CalPERS/OPEB UNFUNDED LIABILITIES
DATE: APRIL 4, 2017
S:\COUNCIL REPORTS\2017\04-04-17\PERS.OPEB\Staff Report FINAL.docx 3/30/2017 3:53 PM SLL
FISCAL IMPACT:
The funding of the $1,000,000 recommended additional payment to the OPEB Prefunding Trust
is available within the Town’s General Fund CalPERS/OPEB Reserve.
Attachments:
1. CalPERS/OPEB Unfunded Liability Council Finance Committee Report
2. Staff response to questions received from a Council Finance Committee member on March
23, 2017