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Attachment 5From: Jak VanNada <jvannada@gmail.com> Sent: Friday, May 11, 2018 10:S0 AM To: Laurel Prevetti Cc: Council Subject: Submission of Questions for the 5-15-18 Council meeting regarding the Town's proposed budget Attachments: Questions for 2018-2019 LG Budget session.pdf Jak VanNada Los Gatos Community Alliance i Questions for Council Meeting of 5-15-18 From: Jak VanNada, Los Gatos Community Alliance Re: 2018-2019 Budget The Staff is proposing a FY 2019 budget which calls for a $9.7m reduction in total fund reserves (C-9) which would be the largest drawdown of total fund reserves in the history of the Town. To be clear, $3.1m of this drawdown results from the payment of previously committed fund reserves to the Town's 115 Pension Trust. This is a good thing to do. However, this still leaves $6.6m of drawdown unexplained. The previous highest drawdown in total reserve funds totaled $6.1m and occurred in 2012, in response to the recession. Before the Town Council approves this proposed budget, we believe the following questions need to be addressed. Because there is no opportunity for dialog in council meetings, I would like to get a written response to the following: • In 2019 the General Fund Balance is planned to decrease $2,058,000 (the gross decrease is $5,158,000 but it is appropriate to deduct the $3,100,000 payment to the 115 Pension Trust from this amount since this is a transfer from the General Fund Reserve to the Pension Trust) (reference C-6). o Question: Why does the Staff clai + th fidget : hticipates a $700k surplus as a budget surplus will increase the fur iolan• = fr.. •- the p P;.r year. If the fund balance is decreasing fro ear, the dget has a•'-ficit and this deficit is funded by dra .:xcs n e f bal a explain how the Town has a "$700k surplus" wh theie u' dal ce is eclining? • Pension deb `►s a lar:: p 1+t of the difficulties we and other towns are having balancing our financial stat1'•fr s'' Through Moody's reports, I have shown you that Los Gatos carries much more cash than the almost all other cities in the US, yet we only earn about 1% on that investment. o Question: Why can't we make a larger discretionary payment, reduce our cash to levels closer to the national averages and perhaps save ourselves over $700,000 per year in interest charges? This year, we're shooting for about $4 million as a payment, but if we paid down more of the pension debt (say a total of $10 million), we could still be in good financial condition and the interest saved would "pay" for itself in less than 10 years. o Question: What is the minimum amount of cash the town needs to address current commitments, including Almond Grove, OPEB, pension debt and working capital to cover a downturn in the economy that may lead to declining property and sales tax revenues? • On A-3 of the transmittal letter there is a bar chart showing historical FTE staffing levels. The 2019 budget calls for an FTE staffing level of 149, not including hourly employees (C-45). If the Town was able to operate for 5 years at a FTE level of 138. o Question: why do we now need 11 more FTE's? What increase in service levels or other benefits can the Staff point to that would justify this increase in staffing? • On C-9, the total cost of salaries and benefits for all employees in all funds can be found. In 2015 this totaled $21,972,398; however, (the budget was for $24,686,000, or mis-budgeted by nearly $2,000,000. In 2018 it is projected to be $24,700,282, even though budgeted for $27,005,000, which is $2,304,000 higher than actual. The 2019 budget calls for a significant Page 1 of 3 increase to $27,347,093. This represents a 25% increase over 2015 and an 11% increase over 2018. o Question: Why is this increase appropriate? o Question and Comment: Salaries seem to be a predictable number. Is it possible to not over budget the salary number by such a large margin? • Using the same numbers on C-9 and the FTE numbers on C-45 and C-46, we can compute a DollarCost/FTE (DC/FTE). In 2015 the total FTE (including hourly employees) was 158.6. The (DC/FTE) in 2015 was $138,537. The 2019 budget calls for a (DC/FTE) of $171,886. This computes to a 24% increase in the dollar cost/FTE since 2015. This would seem to be an unsustainable increase, especially when you consider that 2019 total fund revenues (net of fund transfers) of $54.1m is flat when comparing 2015. o Question: What strategies are being used to "flatten" or eliminate the growth in (DC/FTE)? • On page A-9 of the transmittal letter there is a schedule of General Fund Reserves. o Question: Why doesn't the June 30, 2017 numbers agree to the 2017 CAFR? The 2017 CAFR shows a $2,440,170 Compensated Absence Reserve. The schedule shows $350,329. o Question: Why is this? • Additionally, the same schedule for 2018 is fecfing a ew "other reserves" totaling $3,670,447. It also appears that th mon e,reser . of $1,801,318 and the Strategy Reserve of $2,600,000ng m ly r used in 201 ' o Que • , Fi�r�is t 2nd re t ructions being used to create the "other reserve" of ' 8,670,4 o Qu ',ion:ulsuch u'e of these reserves be consistent with Town Reserve policy rega •,mit +. use of "assigned" reserves? • On C-26 there is a schedule of fund balance activity for FY 2019. Under the Capital Projects Funds you can find the GFAR, which is the primary source for capital projects. The scheduled projects have an estimated ending balance at June 30, 2019 of $14,435,764. However, this schedule does not include the previous approved carryforward projects. These can be found on schedule B-11 in the CIP budget. The GFAR carryforward projects total $15,962,726. Subtracting these carryforward projects from the projected ending balance suggests that the GFAR is unfunded to the amount of $1,526,962. o Question: How does the Staff plan on funding this deficit? o Question: Where can this be found in the proposed budget? • On page A-9 of the CIP transmittal letter, we are informed that in 2018 there were 5 GFAR projects totaling $544,972 projects completed. We are also informed that there are $15,962,726 of GFAR carryforward projects. The single largest carryforward project is Almond Grove which is $9,053,161. Net of the Almond Grove project, there are 41 projects totaling $6,909,565. At this completion rate, there are 12.6 project -years measured in dollars and 8 project years measured in projects completed in backlog. This is seems extraordinarily high. o Question: Why wouldn't the Town Council review these carryforward projects to determine if they are still required and consistent with the needs of the Town? o Question: What is the rationale for having such a large carryforward number and has the redeployment of these reserved funds been discussed by Town Council? Page 2 of 3 o Suggestion: Perhaps the funding that has been reserved for these projects could be redeployed to better uses, such as paying down the net pension liability or other liabilities of the Town; thus significantly reducing the interest costs and our pension debt. Page 3 of 3 From: Jak VanNada <jvannada@gmail.com> Sent: Friday, May 11, 2018 3:12 PM To: Laurel Prevetti Cc: Council Subject: RE: Submission of Questions for the 5-15-18 Council meeting regarding the Town's proposed budget Attachments: Questions for 2018-2019 LG Budget session.pdf Sorry for the "DRAFT" word written across the document. I can't seem to eliminate it, but this copy is clean and without "DRAFT" written on it. From: Jak VanNada <jvannada@gmail.com> Sent: Friday, May 11, 2018 10:50 AM To: Laurel Prevetti <LPrevetti@losgatosca.gov> Cc: council@losgatosca.gov Subject: Submission of Questions for the 5-15-18 Council meeting regarding the Town's proposed budget Jak VanNada Los Gatos Community Alliance 1 Questions for Council Meeting of 5-15-18 From: Jak VanNada, Los Gatos Community Alliance Re: 2018-2019 Budget The Staff is proposing a FY 2019 budget which calls for a $9.7m reduction in total fund reserves (C-9) which would be the largest drawdown of total fund reserves in the history of the Town. To be clear, $3.1m of this drawdown results from the payment of previously committed fund reserves to the Town's 115 Pension Trust. This is a good thing to do. However, this still leaves $6.6m of drawdown unexplained. The previous highest drawdown in total reserve funds totaled $6.1m and occurred in 2012, in response to the recession. Before the Town Council approves this proposed budget, we believe the following questions need to be addressed. Because there is no opportunity for dialog in council meetings, I would like to get a written response to the following: • In 2019 the General Fund Balance is planned to decrease $2,058,000 (the gross decrease is $5,158,000 but it is appropriate to deduct the $3,100,000 payment to the 115 Pension Trust from this amount since this is a transfer from the General Fund Reserve to the Pension Trust) (reference C-6). o Question: Why does the Staff claim the budget anticipates a $700k surplus as a budget surplus will increase the fund balance from the prior year. If the fund balance is decreasing from prior year, then the budget has a deficit and this deficit is funded by drawing down the fund balance. Please explain how the Town has a "$700k surplus" when the General Fund balance is declining? • Pension debt is a large part of the difficulties we and other towns are having balancing our financial statements. Through Moody's reports, I have shown you that Los Gatos carries much more cash than the almost all other cities in the US, yet we only earn about 1% on that investment. o Question: Why can't we make a larger discretionary payment, reduce our cash to levels closer to the national averages and perhaps save ourselves over $700,000 per year in interest charges? This year, we're shooting for about $4 million as a payment, but if we paid down more of the pension debt (say a total of $10 million), we could still be in good financial condition and the interest saved would "pay" for itself in less than 10 years. o Question: What is the minimum amount of cash the town needs to address current commitments, including Almond Grove, OPEB, pension debt and working capital to cover a downturn in the economy that may lead to declining property and sales tax revenues? • On A-3 of the transmittal letter there is a bar chart showing historical FTE staffing levels. The 2019 budget calls for an FTE staffing level of 149, not including hourly employees (C-45). If the Town was able to operate for 5 years at a FTE level of 138. o Question: why do we now need 11 more FTE's? What increase in service levels or other benefits can the Staff point to that would justify this increase in staffing? • On C-9, the total cost of salaries and benefits for all employees in all funds can be found. In 2015 this totaled $21,972,398; however, (the budget was for $24,686,000, or mis-budgeted by nearly $2,000,000. In 2018 it is projected to be $24,700,282, even though budgeted for $27,005,000, which is $2,304,000 higher than actual. The 2019 budget calls for a significant Page 1 of 3 increase to $27,347,093. This represents a 25% increase over 2015 and an 11% increase over 2018. o Question: Why is this increase appropriate? o Question and Comment: Salaries seem to be a predictable number. Is it possible to not over budget the salary number by such a large margin? • Using the same numbers on C-9 and the FTE numbers on C-45 and C-46, we can compute a DollarCost/FTE (DC/FTE). In 2015 the total FTE (including hourly employees) was 158.6. The (DC/FTE) in 2015 was $138,537. The 2019 budget calls for a (DC/FTE) of $171,886. This computes to a 24% increase in the dollar cost/FTE since 2015. This would seem to be an unsustainable increase, especially when you consider that 2019 total fund revenues (net of fund transfers) of $54.1m is flat when comparing 2015. o Question: What strategies are being used to "flatten" or eliminate the growth in (DC/FTE)? • On page A-9 of the transmittal letter there is a schedule of General Fund Reserves. o Question: Why doesn't the June 30, 2017 numbers agree to the 2017 CAFR? The 2017 CAFR shows a $2,440,170 Compensated Absence Reserve. The schedule shows $350,329. o Question: Why is this? • Additionally, the same schedule for 2018 is projecting a new "other reserves" totaling $3,670,447. It also appears that the Almond Grove reserve of $1,801,318 and the Strategy Reserve of $2,600,000 are being materially reduced in 2018. o Question: Why is this and are these reductions being used to create the "other reserve" of $3,670,447? o Question: Would such use of these reserves be consistent with Town Reserve policy regarding the use of "assigned" reserves? • On C-26 there is a schedule of fund balance activity for FY 2019. Under the Capital Projects Funds you can find the GFAR, which is the primary source for capital projects. The scheduled projects have an estimated ending balance at June 30, 2019 of $14,435,764. However, this schedule does not include the previous approved carryforward projects. These can be found on schedule B-11 in the CIP budget. The GFAR carryforward projects total $15,962,726. Subtracting these carryforward projects from the projected ending balance suggests that the GFAR is unfunded to the amount of $1,526,962. o Question: How does the Staff plan on funding this deficit? o Question: Where can this be found in the proposed budget? • On page A-9 of the CIP transmittal letter, we are informed that in 2018 there were 5 GFAR projects totaling $544,972 projects completed. We are also informed that there are $15,962,726 of GFAR carryforward projects. The single largest carryforward project is Almond Grove which is $9,053,161. Net of the Almond Grove project, there are 41 projects totaling $6,909,565. At this completion rate, there are 12.6 project -years measured in dollars and 8 project years measured in projects completed in backlog. This is seems extraordinarily high. o Question: Why wouldn't the Town Council review these carryforward projects to determine if they are still required and consistent with the needs of the Town? o Question: What is the rationale for having such a large carryforward number and has the redeployment of these reserved funds been discussed by Town Council? Page 2 of 3 o Suggestion: Perhaps the funding that has been reserved for these projects could be redeployed to better uses, such as paying down the net pension liability or other liabilities of the Town; thus significantly reducing the interest costs and our pension debt. Page 3 of 3 From: Jak VanNada <jvannada@gmail.com> Sent: Monday, May 14, 2018 10:09 AM To: Laurel Prevetti; Arn Andrews Cc: Council Subject: Correction Attachments: Questions for 2018-2019 LG Budget session WITH CORRECTION..pdf There is one correction to make in one of my statements at the bottom of page 1. I have highlighted it in the attached, near the bottom, in red. Jak VanNada Los Gatos Community Alliance i Questions for Council Meeting of 5-15-18 From: Jak VanNada, Los Gatos Community Alliance Re: 2018-2019 Budget The Staff is proposing a FY 2019 budget which calls for a $9.7m reduction in total fund reserves (C-9) which would be the largest drawdown of total fund reserves in the history of the Town. To be clear, $3.1m of this drawdown results from the payment of previously committed fund reserves to the Town's 115 Pension Trust. This is a good thing to do. However, this still leaves $6.6m of drawdown unexplained. The previous highest drawdown in total reserve funds totaled $6.1m and occurred in 2012, in response to the recession. Before the Town Council approves this proposed budget, we believe the following questions need to be addressed. Because there is no opportunity for dialog in council meetings, I would like to get a written response to the following: • In 2019 the General Fund Balance is planned to decrease $2,058,000 (the gross decrease is $5,158,000 but it is appropriate to deduct the $3,100,000 payment to the 115 Pension Trust from this amount since this is a transfer from the General Fund Reserve to the Pension Trust) (reference C-6). o Question: Why does the Staff claim the budget anticipates a $700k surplus as a budget surplus will increase the fund balance from the prior year. If the fund balance is decreasing from prior year, then the budget has a deficit and this deficit is funded by drawing down the fund balance. Please explain how the Town has a "$700k surplus" when the General Fund balance is declining? • Pension debt is a large part of the difficulties we and other towns are having balancing our financial statements. Through Moody's reports, I have shown you that Los Gatos carries much more cash than the almost all other cities in the US, yet we only earn about 1% on that investment. o Question: Why can't we make a larger discretionary payment, reduce our cash to levels closer to the national averages and perhaps save ourselves over $700,000 per year in interest charges? This year, we're shooting for about $4 million as a payment, but if we paid down more of the pension debt (say a total of $10 million), we could still be in good financial condition and the interest saved would "pay" for itself in less than 10 years. o Question: What is the minimum amount of cash the town needs to address current commitments, including Almond Grove, OPEB, pension debt and working capital to cover a downturn in the economy that may lead to declining property and sales tax revenues? • On A-3 of the transmittal letter there is a bar chart showing historical FTE staffing levels. The 2019 budget calls for an FTE staffing level of 149, not including hourly employees (C-45). If the Town was able to operate for 5 years at a FTE level of 138. o Question: why do we now need 11 more FTE's? What increase in service levels or other benefits can the Staff point to that would justify this increase in staffing? • On C-9, the total cost of salaries and benefits for all employees in all funds can be found. In 2015 this totaled $21,972,398; however, (the budget was for $24,282,000, (previously, I said the number was $24,686,000) or mis-budgeted by over $2,000,000). In 2018 it is projected to be $24,700,282, even though budgeted for $27,005,000, which is $2,304,000 higher than actual. Page 1 of 3 Subject: Attachments: FW: Comments on the FY 2019 Budget FY 2019 - Council letter.pdf From: Phil Koen[mailto:Dkoen@monteropartners.com] Sent: Monday, May 14, 2018 7:57 AM To: Rob Rennie; BSpector; Marcia Jensen; Marico Sayoc; Steven Leonardis; Laurel Prevetti Cc: Stephen Conway Subject: Comments on the FY 2019 Budget Dear Laurel, Please include my letter to the Town Council in the council package for the upcoming meeting. Additionally, please forward my letter to the Finance Committee. This is a very important issue that requires a deliberative process and is timely given the review of the proposed FY 2019 budget. I you are Steve have any questions regarding my analysis, feel free to contact me. Phil Koen 1 Dear Town Council and Members of the Finance Committee, RE: FY 2019 Budget - $10m Pay Down of Pension Liability Summary While there are many things wrong with the FY 2019 proposed budget, the one thing that the Staff got right was the payment of $3.1m of general fund reserves into the 115 Trust. However, this doesn't go far enough. The Town has the cash resources to immediately make an additional $6.9m to CALPERS (total payment $10m). Doing so will reduce the charges to the Town for the employer portion of the CALPERS rates, specifically the UAL payment. The magnitude of the reduction in contribution rate is material, exceeding $5.0m cumulatively for the period FY 2019 through FY 2024. By capturing this reduction the General Fund cumulative net revenue shown in Five Year Financial Plan will increase from $2.1m to $7.1m. This is a 233%. This increase will be sufficient for the Town to continue to offer high service levels and negates the need for a sales tax measure which would be harmful to the Town's merchants. Background On A-3 of the Operating Budget transmittal letter the Staff states that "the increase in pension obligations was due to factors beyond the Town's control". This shows a basic misunderstanding of the roles and accountability of the Town Council, the Staff and CALPERS with regard to the pension obligations. Pension costs have increased because the annual funding by the Town has been insufficient to fund the cost of the defined benefits established by the Town. The Town Council established the pension benefits for the Town's employees and the Staff decided how much to fund these benefits. The funding of these benefits comes through a mix of employee contributions, employer contributions and investment returns. To the extent that investment returns are below expectations, it is the Staff's responsibility to fund this difference by increasing the employee or employer or both contributions. CALPERS only administers the benefits defined by the Town. With the exception of a $4.5m payment into the Safety Plan in 2014, the Town has ignored this underfunding issue and has only made the legally required minimum payments to both the Safety and Miscellaneous Plans every year. At the same time the Town hoarded cash in the General Fund while watching the UAL increase to $54.5m. As of the end of FY 2017 there was $36.0m of cash in the General Fund which represents a 93% of operating revenues. By comparison Moody's reports that the US Median is 35%. If the Town's cash balance was at the US Median, there is approximately $13m of excess cash immediately available to the Town to invest in infrastructure or pay down the UAL. FY 2019 — FY 2014 Budget implications With regard to the FY 2019 budget, the Town is now experiencing the impact of chronically underfunding the pension obligation. As shown on C-40, the contribution rates for both the Safety and Miscellaneous Plans are forecasted to drastically increase between now and 2024 as a result of the dramatic increase in the unfunded pension liability. This increase has forced CALPERS to raise the pension contribution rates charged to the Town, particularly that portion of the rate for UAL payment. In FY 2018 for both the miscellaneous and safety plans, the Town paid $2.6m toward the reduction of the unfunded pension liability as part of the determined contribution expense. Using the rates forecasted on C-40, the Town is projected to pay $6.1m in FY 2024 toward the unfunded pension liability, which is a 135% increase. On A-13 of the transmittal letter, the Staff forecasts the total benefit expense to increase from $8.6m in FY 2018 to $9.5m in FY 2019 and to $12.1m in FY 2024. This is a 41% increase over a 6 year period and in FY 2024 totals $3.5m in more benefit expense than FY 2018. All of this growth is attributable to the increase in required contribution rates for both the miscellaneous and safety plans. As a result of this increase, the five year plan shows very modest $2.1 cumulative excess of revenues over expenditures over the forecasted period. Almost all of the revenue growth is consumed by the increase in benefit expense. The Staff also states on A-4 that "additional revenue sources must be identified" to maintain and grow the high service levels the community deserves. Additionally we are told that the Town Council is expected to place a sales tax measure on the November 2018 ballot. Recommendation The drastic increase in benefits expense can be easily avoided if the Town properly deployed the capital (cash) currently available. To frame this for the Town Council, as of June 30, 2017 per the CAFR the Town has $73.6m across all funds available for operations (page 64 Footnote 2). The Town currently invests this cash in very short term, high grade investments (typically 1 to 18 months duration) achieving less than 1% yield. The Town of Los Gatos is cash rich and can rightfully be called a "cash hoarder". This large cash balance has occurred because the Town has not made sufficient payments into the pension plan and has chronically underfunded the investment in Town infrastructure. The amount of investment in infrastructure and payments to the pension plan are solely determined by the Town Council and are legally established when they approve the annual operating and capital budgets. If the Town immediately paid into the pension system an incremental $10m, using CALPERS 7% discount rate, this would generate $5.0m in interest savings between now and 2024 thereby reducing the required pension contribution rates! I project that the contribution rates through the forecast period of FY 2019 through FY 2024 for both the miscellaneous and safety plans would remain close to the FY 2018 rates which were 27.36% of the miscellaneous plan and 39.58% for the safety plan. This is the single best investment the Town can make with its plentiful cash resources. Why not get the power of compounding interest working for the Town? Keeping this excess cash invested in low yielding investments when the Town can reduce a liability that carries a 7% interest rate, is not conservative at all. Rather it reflects lack of prudent financial management of the Town's capital. If the Town took this step, the modest excess of net revenues reflected in the 5 year plan will be materially greater. The current Five Year Plan projects the cumulative net revenues over the forecast period to be $2.1m. By keeping the contribution rates level to the FY 2018 rate, cumulatively there will be an additional $4.2m available to the Town. For example, in FY 2019 the excess of net revenues will increase to $1.4m from the $.7m planned level. Based on this analysis, the Town has more than sufficient revenue to provide the high service levels the community desires. More importantly it is clear that there is no need to increase the sales tax rate, which if put in place, will only put more pressure on the downtown merchants. Since the FY 2019 budget already includes making a $3.1m payment to the 115 Pension Trust, the Town only needs to tap $6.9m of its substantial cash reserves to make the $10m payment. In a previous letter to the Town Council I have given you a detail recommendation as to where these funds can be appropriated. Unfortunately I never heard back from the Town Council or staff. Conclusion There is simply no valid argument that I can think of for not deploying the Town's excess cash resources by making a material reduction in the pension liability. A $10m payment into the pension system will allow the Town to avoid the forecasted increase in CALPERS contribution rates which in turn will result in lower benefits expense and higher levels of net revenues in each year of the 5 year forecast. This in turn will negate the need for Sales Tax increase which will hurt the downtown merchants. Before taking any action on this proposed budget, I strongly recommend that the Town Council request the Staff, working with the Finance Committee and CALPERS, to evaluate and confirm the merits of my proposal and to report back to the Council on their findings with an appropriate recommendation before approving the FY 2019 Budget. This year is an election year. I can promise you the residents of the Town will be closely watching the actions of the Town Council and amount of deliberation and consideration that is given in approving the FY 2019 budget. Too much is at stake and the residents deserve a deliberative process. Sincerely, Phil Koen