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Attachment 4Laurel Prevetti From: John Shepardson <shepardsonlaw@me.com> Sent: Saturday, May 13, 2017 5:34 PM To: Laurel Prevetti Subject: Re: LG Town Budget 5/16/2017 Attachments: LG Budget 51617.docx Laurel: Instead go with this. Added data and reads better in an attachment. JS On May 13, 2017, at 5:01 PM, Laurel Prevetti <LPrevetti@,losgatosca.gov> wrote: Thank you, John, for your comments. They will be provided to the Council in Monday's Addendum. Have a great weekend, Laurel On May 13, 2017, at 3:13 PM, John Shepardson <shepardsonlaw@ine.com> wrote: Dear Mayor and Other Council Members: 1. Introduction Enclosed is my review of the Town of Los Gatos' budgetary situation. I would not keep commenting on the budget as it stands if I did not think it was in so serious peril. I suggest tough and effective action must be taken now to avoid greater problems later. 2. Questions Presented Does the Town of Los Gatos proactively cut services and/or raise taxes? What, if any, nonPD services should be cut? Should the Town cut the parade and save $880/yr? 1 ATTACHMENT 4 Should the Town outsource the library to save an est. $500K/yr? Will citizens approve a parcel tax for the PD after rejecting one for the schools? Is a 40.8 percent PD expenditure budget financially responsible and reflect community priorities (Cupertino is approx. 11 percent, Saratoga approx. 27 percent, and both are rated safer)? Does the Town pay down the unfunded pension liability to save millions? How much will the anticipated recession affect the budget? 3. Options a. Comprehensive review of the budget by finance committee. b. Management Partners or auditor do compressive review of budget. c. Outsource PD to Sheriff (est. $5M/yr savings). d. Outsource library to County of Santa Clara (est. $500K/yr savings). e. Raise taxes, including parcel tax and/or approving large commercial developments. f. Do nothing. Let problems worsen or hope revenues increase on their own. Perhaps N. 40 is approved via court, which will bring in millions. However, residential is a net drain on Town budget. Increased PD services given projected level of commercial activity, including 2 nightlife. 4. Recommendations a. Across the board 10 percent cut in services and raise taxes equal amount. b. Parcel tax for PD. 5. Commentary on Budget First paragraph--LG budget short-term shortfall --cut services or raise taxes (financial pressure to approve big developments). Later paragraphs --long-term prob--pensions & infrastructure (est. over $54M & $22M totals so total est. over $76M). 6. Pertinent Excerpts from Town Report https://legistarweb- production.s3 .amazonaws.com/uploads/attachment/pdf/7 1 959/Attachment 1 E_- Financial Summaries Section.pdf Reflecting the strength of the local economy, FY 2017/18 operating budget is a balanced budget, with use of General Fund reserves dedicated for one-time uses. However, the five-year financial forecast projects revenue shortfalls resulting primarily from the increased pension contributions as a result of recent actions taken by CalPERS to lower its discount rate. The shortfalls are projected over future years and need to be addressed proactively either through revenue enhancements or service delivery adjustments, barring unforeseen increases in existing local revenue sources. The FY 2017/18 budget has been balanced largely due to revenue enhancements, resulting from the positive economy and the Town's growth in the economically sensitive revenue sources such as Property Tax, Transient Occupancy Tax, and Business Licenses. In regard to expenditures, the Town's employer -paid benefits are expected to increase for the foreseeable future, including obligated pension contributions, the pre -funding of premiums for retiree health coverage, and the increasing costs of current health plans. Specific trends affecting the fund balance forecast include: Pension contributions are also a significant portion of the Town's budget, as the Town is obligated to contribute a mandatory amount established by the California Public Employees Retirement System (CaIPERS) as a percent of salary. The rates are established by actuarial formula and are controlled by the policies adopted in the Public Employment Retirement Law (PERL). Despite the $4.5 million CalPERS side fund payoff in June 2014, the Town's employer pension contributions continue to rise reflecting the lower than expected CalPERS investment earnings for its pension trust coupled with a CaIPERS January 2017 action to lower its discount over time from 7.5% to 7.0%. The lower discount rate takes effect for the Town in FY 2018/19 employer rates. For FY 2017/18, the rate for sworn employees will increase from 36.18% in FY 2016/17 to 39.60% in FY 2017/18. For all other employees, the rate will increase from 26.96% in FY 2016/17 to 27.40% in FY 2017/18. Los Gatos -Saratoga Recreation - Beginning January 2010, Los Gatos Saratoga (LGS) Recreation entered into a 20-year lease with the Town for the former Neighborhood Center, renamed the Adult Recreation Center. In exchange for providing and expanding senior services, the facility is leased at a below market rate. LGS Recreation also leases the Town -owned facility located at 123 E. Main Street, on a month to month basis. 3 In addition to providing subsidized leases, the Town provides in -kind staffing support for the Holiday Tree Lighting and the Children's Holiday Parade. Costs to provide maintenance and public safety services for the Holiday Tree Lighting are estimated to be $1,600; the Children's Holiday Parade costs are estimated to be $25,000. These estimates only include expenses that occur at the event and do not include time dedicated to event planning and logistics. The estimated total of all in -kind expenses is $810,738. Development Impact Fees are not ongoing fees or taxes; they are one-time fees, paid at the time of construction. Impact fees are not special assessments, nor are they permitted to cover on -going operations and maintenance costs. By definition, "a fee is voluntary and must be reasonably related to the cost of the service provided by the local agency/' The fees are collected by local governmental agencies to pay for infrastructure or capital facilities needed to serve new development. Because impact fees are collected during the development approval process, the fees are typically paid by developers, builders, or other property owners who are seeking to develop property as a way of paying their "fair share" of needed facilities. The Town collects three Development Impact Fees that meet the reporting requirements of AB 1600: the Traffic Impact Mitigation Fee, Below -Market Priced Housing Program In -Lieu Fee, and the Construction Activity Impact Fee. The following tables provide potential project lists. Town of Los Gatos Traffic Mitigation Improvements Potential Project List 22,799,000 1. More recently, however, CalPERS has significantly increased contribution rates to cover rising retiree costs and CalPERS investment losses sustained in the down economy. In FY 2014/15, the Town's miscellaneous employee rate was projected to increase to 23.45% and the safety rate was projected to increase to 43.87%. By Council authority in June 2014, the Town paid off its CaIPERS side fund liability of $4.5M which substantially decreased PERS sworn rates in future years. As a result of this payoff, the FY 2014/15 Town's miscellaneous employee rate was 22.38% and the safety rate was 29.56%, a sworn rate reduction of 14.31% from previously forecasted. In FY 2017/18, the Town's miscellaneous employee rate is projected to increase to 27.40%; the safety rate is projected to increase to 39.6%; and the PEPRA safety rate is projected to be 12.8%. SUMMARY OF PERSONNEL CHANGES FY 2017/18 In December 2016 the CaIPERS Board announced a plan to lower its discount rate from its current rate of 7.5%. The phase -in of the discount rate change approved by the Board effective beginning FY 2018/19 is as follows: The immediate effect of this change is the actuarial valuation report being prepared for June 30, 2016 by CalPERS which sets the employer contribution rate for FY 2018/19 at a the lower discount rate of 7.375%. This action will in turn lead to increased actuarial accrued liabilities because with lower expected returns there are lower projected assets to meet the expected pension obligations. Town staff had already anticipated increases in employer contributions in its Five Year Financial Plan, but the rates in years three through five of the plan increased beyond staff estimates due to the lowering of the discount rate. The CalPERS Board had previously adopted 4 recommendations to modify both the smoothing and amortization policies and implement these changes going forward with an impact to employer rates which began in FY 2015/16. As a result of this change, the smoothing period changed from a 15-year rolling period to a five-year direct smoothing rate. The amortization period changed from a 30- year rolling period to a 30-year fixed rate. The cumulative effect of these changes will require the Town to pay significantly more into the system. Estimates indicated that these changes would result in the Town increasing from the FY 2017/18 rate of 39.6% to 65.7% in FY 2022/23 of pay rate for safety employees and from the FY 2017/18 rate of 27.40% to approximately 43.30% in FY 2022/23. Using official information issued by CaIPERS, the following schedule reflects the Town's actual CalPERS pension rate for FY 2017/18 and the expected rates for the following fiscal years based on the Town's five-year forecast model which was updated using a CaIPERS employer bulletin in January 2017 that provided a calculation method to estimate rate impacts of the discount rate change approved in December 2016. 7. Conclusion If we take effective now, we can avoid later painful fiscal events. Let's keep the small town character of Los Gatos with a fiscal policy that allows us to fund the services we need and want, while maintaining our independence from the promises of large tax revenues from big developments that can wreck havoc on traffic and our status as a town. Thank for considering the above review. If you have any questions or feel free to give me a call. John Shepardson, Esq. 408-966-9709 Sent from my iPhone 5 John Shepardson, Esq. shepardsonlaw@me.com 59 N. Santa Cruz Avenue, Suite Q Los Gatos, CA 95030 T: (408) 395-3701 F: (408) 395-0112 CONFIDENTIALITY NOTICE: the information contained in this e-mail, including any attachment(s), is confidential information that may be privileged and exempt from disclosure under applicable law. If the reader of this message is not the intended recipient, or if you received this message in error, then any direct or indirect disclosure, distribution or copying of this message is strictly prohibited. If you have received this message in error, please notify Marti H. Castillo at the Law Office of JOHN A. SI-IEPARDSON immediately by calling (408) 395-3701 and by sending a return e-mail; delete this message; and destroy all copies, including attachments. Thank you. IRS CIRCULAR 230 DISCLOSURE To ensure compliance with new requirements of the Internal Revenue Service, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication. 6 Dear Mayor and Other Council Members: 1. Introduction Enclosed is my review of the Town of Los Gatos' budgetary situation. I would not keep commenting on the budget as it stands if I did not think it was in so serious peril. I suggest tough and effective action must be taken now to avoid greater problems later. 2. Questions Presented Does the Town of Los Gatos proactively cut services and/or raise taxes? What, if any, nonPD services should be cut? Should the Town cut the parade and save $880/yr? Should the Town outsource the library to save an est. $500K/yr? Will citizens approve a parcel tax for the PD after rejecting one for the schools? Is a 40.8 percent PD expenditure budget financially responsible and reflect community priorities (Cupertino is approx. 11 percent, Saratoga approx. 27 percent, and both are rated safer)? Does the Town pay down the unfunded pension liability to save millions? How much will the anticipated recession affect the budget? 3. Options a. Comprehensive review of the budget by finance committee. b. Management Partners or auditor do compressive review of budget. c. Outsource PD to Sheriff (est. $5M/yr savings). d. Outsource library to County of Santa Clara (est. $500K/yr savings). e. Raise taxes, including parcel tax and/or approving large commercial developments. f. Do nothing. Let problems worsen or hope revenues increase on their own. Perhaps N. 40 is approved via court, which will bring in millions. However, residential is a net drain on Town budget. Increased PD services given projected level of commercial activity, including 1 nightlife. 4. Recommendations a. Across the board 10 percent cut in services and raise taxes equal amount. b. Parcel tax for PD. 5. Commentary on Budget First paragraph--LG budget short-term shortfall --cut services or raise taxes (financial pressure to approve big developments). Later paragraphs --long-term prob--pensions & infrastructure (est. over $54M & $22M totals so total est. over $76M). 6. Pertinent Excerpts from Town Report https://I egista rwe b- production.s3.amazonaws.com/uploads/attachment/pdf/71959/Attachment1E_- _Financial_Summaries_Section.pdf Reflecting the strength of the local economy, FY 2017/18 operating budget is a balanced budget, with use of General Fund reserves dedicated for one-time uses. However, the five- year financial forecast projects revenue shortfalls resulting primarily from the increased pension contributions as a result of recent actions taken by CaIPERS to lower its discount rate. The shortfalls are projected over future years and need to be addressed proactively either through revenue enhancements or service delivery adjustments, barring unforeseen increases in existing local revenue sources. The FY 2017/18 budget has been balanced largely due to revenue enhancements, resulting from the positive economy and the Town's growth in the economically sensitive revenue sources such as Property Tax, Transient Occupancy Tax, and Business Licenses. In regard to expenditures, the Town's employer -paid benefits are expected to increase for the foreseeable future, including obligated pension contributions, the pre -funding of premiums for retiree health coverage, and the increasing costs of current health plans. Specific trends affecting the fund balance forecast include: (emphasis added) Pension contributions are also a significant portion of the Town's budget, as the Town is obligated to contribute a mandatory amount established by the California Public Employees Retirement System (CaIPERS) as a percent of salary. The rates are established by actuarial formula and are controlled by the policies adopted in the Public Employment Retirement Law (PERL). Despite the $4.5 million CaIPERS side fund payoff in June 2014, the Town's employer 2 pension contributions continue to rise reflecting the lower than expected CaIPERS investment earnings for its pension trust coupled with a CaIPERS January 2017 action to lower its discount over time from 7.5% to 7.0%. The lower discount rate takes effect for the Town in FY 2018/19 employer rates. For FY 2017/18, the rate for sworn employees will increase from 36.18% in FY 2016/17 to 39.60% in FY 2017/18. For all other employees, the rate will increase from 26.96% in FY 2016/17 to 27.40% in FY 2017/18. Los Gatos -Saratoga Recreation - Beginning January 2010, Los Gatos Saratoga (LGS) Recreation entered into a 20-year lease with the Town for the former Neighborhood Center, renamed the Adult Recreation Center. In exchange for providing and expanding senior services, the facility is leased at a below market rate. LGS Recreation also leases the Town -owned facility located at 123 E. Main Street, on a month to month basis. In addition to providing subsidized leases, the Town provides in -kind staffing support for the Holiday Tree Lighting and the Children's Holiday Parade. Costs to provide maintenance and public safety services for the Holiday Tree Lighting are estimated to be $1,600; the Children's Holiday Parade costs are estimated to be $25,000. These estimates only include expenses that occur at the event and do not include time dedicated to event planning and logistics. The estimated total of all in -kind expenses is $810,738. Development Impact Fees are not ongoing fees or taxes; they are one-time fees, paid at the time of construction. Impact fees are not special assessments, nor are they permitted to cover on -going operations and maintenance costs. By definition, "a fee is voluntary and must be reasonably related to the cost of the service provided by the local agency." The fees are collected by local governmental agencies to pay for infrastructure or capital facilities needed to serve new development. Because impact fees are collected during the development approval process, the fees are typically paid by developers, builders, or other property owners who are seeking to develop property as a way of paying their "fair share" of needed facilities. The Town collects three Development Impact Fees that meet the reporting requirements of AB 1600: the Traffic Impact Mitigation Fee, Below -Market Priced Housing Program In -Lieu Fee, and the Construction Activity Impact Fee. The following tables provide potential project lists. Town of Los Gatos Traffic Mitigation Improvements Potential Project List 22,799,000 More recently, however, CaIPERS has significantly increased contribution rates to cover rising retiree costs and CaIPERS investment losses sustained in the down economy. In FY 2014/15, the Town's miscellaneous employee rate was projected to increase to 23.45% and the safety rate was projected to increase to 43.87%. By Council authority in June 2014, the Town paid off its CaIPERS side fund liability of $4.5M which substantially decreased PERS sworn rates in future years. As a result of this payoff, the FY 2014/15 Town's miscellaneous employee rate was 22.38% and the safety rate was 29.56%, a sworn rate reduction of 14.31% from previously 3 forecasted. In FY 2017/18, the Town's miscellaneous employee rate is projected to increase to 27.40%; the safety rate is projected to increase to 39.6%; and the PEPRA safety rate is projected to be 12.8%. SUMMARY OF PERSONNEL CHANGES FY 2017/18 In December 2016 the CaIPERS Board announced a plan to lower its discount rate from its current rate of 7.5%. The phase -in of the discount rate change approved by the Board effective beginning FY 2018/19 is as follows: The immediate effect of this change is the actuarial valuation report being prepared for June 30, 2016 by CaIPERS which sets the employer contribution rate for FY 2018/19 at a the lower discount rate of 7.375%. This action will in turn lead to increased actuarial accrued liabilities because with lower expected returns there are lower projected assets to meet the expected pension obligations. Town staff had already anticipated increases in employer contributions in its Five Year Financial Plan, but the rates in years three through five of the plan increased beyond staff estimates due to the lowering of the discount rate. The CaIPERS Board had previously adopted recommendations to modify both the smoothing and amortization policies and implement these changes going forward with an impact to employer rates which began in FY 2015/16. As a result of this change, the smoothing period changed from a 15-year rolling period to a five-year direct smoothing rate. The amortization period changed from a 30- year rolling period to a 30-year fixed rate. The cumulative effect of these changes will require the Town to pay significantly more into the system. Estimates indicated that these changes would result in the Town increasing from the FY 2017/18 rate of 39.6% to 65.7% in FY 2022/23 of pay rate for safety employees and from the FY 2017/18 rate of 27.40% to approximately 43.30% in FY 2022/23. (emphasis added) Using official information issued by CaIPERS, the following schedule reflects the Town's actual CaIPERS pension rate for FY 2017/18 and the expected rates for the following fiscal years based on the Town's five-year forecast model which was updated using a CaIPERS employer bulletin in January 2017 that provided a calculation method to estimate rate impacts of the discount rate change approved in December 2016. 7. San Jose Mercury News Articles a. Copy and paste from http://www.mercurynews.com/2016/12/19/caipers-fiddles-while- taxpayers-wallets-burn/ CaIPERS fiddles while taxpayers' wallets burn By DIANA DIAMOND I DianaLDiamond@gmail.com 1 PUBLISHED: December 19, 2016 at 4:36 pm I UPDATED: February 8, 2017 at 4:05 pm Note: This column has been updated to correct CaIPERS' percentage rate of return the past year. 4 CaIPERS, the nation's largest pension fund with assets of $301 billion, invests money to pay the pensions of most California city and school employees. But it has really screwed up these investments the past couple of years, and we taxpayers will have to make up for that. For example, although CaIPERS (California Public Employees Retirement System) projected a 7.5 percent rate of return, it made only .6 percent this past year and 2.4 percent the previous year. Off a wee bit, I'd say. (emphasis added0 So now most cities are going to have to increase their own annual fees to CaIPERS to help cover that agency's Toss. In Palo Alto it will be $21 million this year, according to city Administrative Services Director Lalo Perez, who attended a CaIPERS conference last week. Some of that money comes from our taxes, and Perez is seeking other ways to fund the fee. (emphasis added) This is CaIPERS' fault. Its projected earnings fell through because it had a poor return on a lot of its investments and unrealistic earnings estimates. How can it say the return will be 7.5 percent and it comes in at .06? At the conference there weren't many details, Perez said, though there was an acknowledgement its global investments were off. Our savings accounts yield more. This system used to be a win -win. Once cities contracted, CaIPERS assumed their pension obligations, and lucrative transfers at first helped 1,251 local governments "confer highly compensated pensions to 10,000 local public employees," according to a Nov. 26 article in Forbes magazine by Adam Andrzejewski. The cost: $2.8 billion annually. Among 21,682 retirees in those cities, some 115 from Palo Alto were in the $100,000-plus pension club: former city police chief Lynne Johnson, who in 2015 received pension checks of $16,774.69 per month (that's $201,291.48 a year); former city manager Frank Benest, who gets $16,030.94 a month ($192,371.28 a year); and former city manager June Fleming, who retired 16 years ago in 2000 with a monthly pension now of $15,121,52 ($181,458.24 annually). Of course, retirees and spouses receive lifetime health insurance. So far, no one has been able to control this expanding growth of CaIPERS. Member benefits have doubled, according to the California Policy Center. In 2014 (its latest figures), the pension benefits CaIPERS bestowed were 50 percent better than 20 years ago, and the annual member payouts have increased at a rate exceeding inflation. And, according to the Forbes article, "the system itself became an outright lobbyist for higher member benefits." There's a decided tilt of former union members on CaIPERS' board, so they understand the perks of a public pension, which are far better than those for private industry. Some other cities are upset about these unscheduled payment hikes, but cities don't have any clout over CaIPERS' board. I understand Gov. Jerry Brown has asked CalPERS for better investments, but the board is not beholden to the governor either. 5 Everyone should ask if the pensions the retirees receive are defensible and financially sustainable. I don't see how they are. While cities spend taxpayer money on their employees' retirements, roads and bridges go unrepaired and the numbers of police officers are reduced to cut back expenses. Cities have to gang up and demand a better performance from CaIPERS. (emphasis added) There is a glimmer of hope, though. In August, a state appellate court in San Francisco decided reasonable benefit cuts are permissible. Up until now, courts have held that pensions are inviolate and cannot be reduced. This case will take awhile and chances are if CalPERS loses, it will appeal. I think the courts are the best way to resolve these new pension problems. Diana Diamond is a columnist for The Daily News. Her email is DianaLDiamond@gmail.com. b. Copy and paste from http://www.mercurynews.com/2017/03/10/borenstein-calpers-unions- deceiving-public-about-pensions/ PERS, unions deceiving public about pensions 20160714_042057_calpers0717-1 Borenstein: CaIPERS, unions deceiving public about pensions By DANIEL BORENSTEIN I dborenstein@bayareanewsgroup.com I Bay Area News Group PUBLISHED: March 10, 2017 at 8:15 am I UPDATED: March 22, 2017 at 1:53 pm Last month, I wrote that Gov. Brown's 2012 attempt at pension reform has failed. CalPERS, the nation's largest pension system, immediately responded on its website declaring that "Pension Reform Has Made a Difference," and claiming that my column "greatly oversimplifies and needlessly discounts the real impact" of Brown's plan. Sure, Brown's pension changes have produced small savings. But they're dwarfed by the soaring costs. It's time to stop deceiving the public. It's time to stop cherry -picking data and provide the complete picture. Jerry Brown announces his pension reform plan. Things have gotten much worse since the changes were implemented. Total pension debt at California's three statewide retirement systems has increased about 36 percent. Add in local pension systems and the total shortfall across California has reached at least $374 billion — about $29,000 per household. The necessary payments over the next three decades to cover the shortfall will strangle many local government budgets. Taxpayers should be deeply concerned. So should public employees. (emphasis added) 6 In coming years, local governments will be forced to drastically cut services and eliminate union jobs to pay the debt. Some public agencies will try to head that off by asking for tax increases. And some will simply go broke, file for bankruptcy and endanger the pensions employees and retirees worked so hard to earn. (emphasis added) Across California, we're already starting to see this happening. It's will get worse as payments on pension debt increase, as they must to shore up the system. (emphasis added) Yet labor unions issue vacuous denials. CaIPERS lambastes critics who dare question the soundness of the system, and downplays the seriousness of the situation — even though its own in-house financial experts and outside consultants warn of danger ahead. And local government leaders act surprised that they face steeply increasing pension rates for which they didn't plan. Either they're fiscally incompetent for not seeing this coming or they're disingenuous for feigning surprise. Labor leaders. CaIPERS. Local officials. They have all failed to responsibly serve their respective constituents. Ironically, Brown seems to understand the gravity. While his 2012 pension changes merely nibbled on the edges of the crisis, he has since pushed for more needed changes at CaIPERS. Earlier this month, he told a Bloomberg reporter that CaIPERS will probably lower its investment forecasts again, which would mean more painful, but necessary, rate increases for state and local governments. (emphasis added) Unfortunately, he has not pushed hard enough, and has been unwilling to use political capital to force the issue. (emphasis added) Meanwhile, CaIPERS' spin misses the forest for the trees. Take, for example, its absurd reaction to my column last month. They say I discount the "real impact" of Brown's pension changes: "Cost savings for the state range from 1.2 percent of payroll for miscellaneous plans ... up to 5.1 percent of payroll for safety plans." 7 Percent of payroll is a key measurement of the annual contributions CalPERS requires to fund the system. In this case, those numbers lack context. Nearly three weeks later, a CalPERS' spokesman acknowledged that the savings apply only to the roughly 30 percent of the workforce hired since the pension changes went into effect. So, the largest claimed savings, 5.1 percent of payroll for state public safety workers, is only roughly 1.5 percent of payroll when applied to all those workers. Now the big picture: During that same time, the overall state employer contribution rate for public safety workers has increased from 34 percent of payroll in 2013 to 49 percent this fiscal year. What CalPERS' claim means is that, without the pension law changes, the current 49 percent rate would have been about 50 percent instead. But it's still about 15 points higher than it was in 2013, when the changes were launched. Worse, that rate will likely hit or surpass 60 percent in the next five years. That means that, for every dollar of salary, the state will give CalPERS another 60 cents. (emphasis added) The only way to meaningfully reform pensions is to address prospectively the unaffordable benefit levels for all employees. Brown failed to do that. 8. Conclusion If we take effective now, we can avoid later painful fiscal events. Let's keep the small town character of Los Gatos with a fiscal policy that allows us to fund the services we need and want, while maintaining our independence from the promises of large tax revenues from big developments that can wreck havoc on traffic and our status as a town. Thank for considering the above review. If you have any questions or feel free to give me a call. John Shepardson, Esq. 408-966-9709 8 Laurel Prevetti From: John Shepardson <shepardsonlaw@me.com> Sent: Saturday, May 13, 2017 6:12 PM To: Marico Sayoc; Rob Rennie; Steven Leonardis; Marcia Jensen; BSpector; Wasserman Mike; Howard Miller; Rod Sinks; Barry Chang; swanee Edwards; Robert Schultz; kchurches@brookings.edu; sean.McMahon@heritage.org; Bruce.mcpherson@co.santa- cruz.ca.us; districtl@co.monterey.ca.us; Stephen Conway; Diana Abbati; district2 @co.monterey.ca.us; district3@co.monterey.ca.us; district4@co.monterey.ca.us; district5 @co.monterey.ca.us; greg.scharff@cityofpaloalto.org; lizg@cityofcampbell.com; dkuehne@lodi.gov; citycouncil@cityofsantacruz.com; bweaver@cityofredding.org; kschreder@cityofredding.org; Laurel Prevetti; councilmember.wesson@lacity.org; mayor.garcetti@lacity.org; mayoredwinlee@sfgov.org; kevinfaulconer@sandiego.gov; MayorSteinberg@cityofsacramento.org; hharmon@slocity.org; emailcouncil@slocity.org; Mayor@bakersfieldcity.us; City_Council@bakersfieldcity.us; sean.morgan@chicoca.gov; reanette.fillmer@chicoca.gov; HSchneider@SantaBarbaraCA.gov; sam liccardo; officeofthemayor@oaklandnet.com Cc: dborenstein@bayareanewsgroup.com; DianaLDiamond@gmail.com; nchase@bayareanewsgroup.com; joenation@stanford.edu Subject: Los Gatos Budget Challenge; Statewide Challenge (Market value of California's total pension debt at $1 trillion or $93,000 per California household in 2015.) Attachments: LG Budget 51617.docx Copy and paste from http://www.zerohedge.com/news/2016-12-02/stanford-study-reveals-california-pensions- underfunded-1-trillion-or-93k-household Stanford University's pension tracker database pegs the market value of California's total pension debt at $1 trillion or $93,000 per California household in 2015. Public Employee ID+"nsion (!ndc rfun<iin Per J Ionschs>1d ▪ rd. rr S4votic'I $36,159 wli r� • r 2009 2010 2011 �C;,i,l•+;iva i 201 1157% I I 1 ?tit 2 Sourer: Stanton! Institute For Seouonilc Foik,- Research and Zero Hedge. rr 21:q '4° 1 May 15, 2017 Dear Madam Mayor, Town Council Members, Town Manager and Finance Director; Let me again salute the Council for going forward with citizen appointees on the Finance Committee. These folks will be a great asset and should not only help with strategic analysis and planning, but also should be engaged as a novel resource to help the Finance Department with their tasks. And while total Town staff shouldered additional workloads in the recent recession period by agreeing to both leaving vacant some staff positions and maintaining salary freezes, we are now more recently in recovery mode. Conservative "catch-up" now has salaries and current benefits accounting for 46.8% of the Town's total expenditures and 60.3% of General Fund expenditures planned for FY 2017/18. While the direct compensations seem both competitive and reasonable, this Budget does not include Pension, OPEB benefits and the ongoing challenges to balance current compensation obligations with earned future benefits for Town Employees. The Town's employer pension contributions continue to rise reflecting the lower than expected CaIPERS investment earnings for its pension trust obligation (last year's CaIPERS' return ((00.64%)) netted negative after inflation). The unfunded liability to CaIPERS and OPEB is now north of the total amount before you as our Total Town Budget. A staggering, and growing sum! To help give Town Council and Town residents visibility on the full impact and nature of labor costs, I propose the following: Because benefit costs are a large and increasing percentage of total labor costs, I encourage Town Staff any time they talk about Staffing costs as they do on pages A-6 and A-7, to provide both the salary cost and the benefit cost, as the total abor cost. This will give Town Council and Town residents visibility on the full nature of labor costs. For Example - How much do our fully burdened Police Services cost us in FY2017-18? I salute you for allocating funds ahead of and in larger amounts than is required by the annual payment to CaIPERS. To build on this thinking, please also consider the following: Per the Schedule of Town's General Reserve Fund A-5, the anticipated June 30, 2017 balance in the CaIPERS/OPEB reserve is $1.284M and the proposed June 30, 2018 balance is $2,284M. Since these funds are earning only about 1%, I encourage the Town to invest these funds sooner rather than later woth CaIPERS, the existing OPEB fund (CERBT), and perhaps a higher percentage in the proposed Section 115 fund with the expectation that invested conservatively, the long term returns will exceed the current - 1%. Thank you for the commitment demonstrated to the Town, by each of you, and we look forward with the citizens of Los Gatos to continue to enjoy the quality of life here we are all pursuing for our families. Regards, Lee Fagot 845 Lilac Way Los Gatos, CA 95032 408 828 7080 leefagot@gmail.com DATE: May 15, 2017 TO: Town Manager and Town Finance Director FROM: Peter Hertan SUBJECT: Questions about the our Fire Protective Services from County Fire 1. Fire Protective Services (FPS) are listed as an Ongoing Budget Issue again this year. Could you discuss the issue? 2. I understand that our FPS are paid on our Property Tax bill under an agreement between the town and the County a. What is the total annual cost to residents for Fire Protective Services? b. Property assessed values change annually as do the cost of services. What is the process the county uses to adjust the property tax rate for Fire Protective Services as Los Gatos property assessed values change and as the cost of those services change? c. What control does Los Gatos have over the Service Level and Cost of Fire Protective Services? Peter Hertan Los Gatos Town Council Meeting 5-16-17 Comment on the 2017-2018 Budget and the new Financial Committee: I applaud the Town Council for expanding the Town Council Finance Committee to include 3 non -voting citizen members. I've attended their first 2 meeting and they are clearly engaged, asking good questions, and offering an expanded perspective. I realize that we are in the early stages and that the budget issue has been pressing a shorthanded staff. Hopefully, there will be a pick up in the pace as I feel the FC should meet at least monthly until matters are further along than they are now. I support the Town's Strategic Priority for 2017-2019 to "Address Unfunded Pension and OPEB Liabilities" AGENDA ITEM 4: AUDITOR SELECTION PROCESS Selecting the new auditor would seem to have been an opportune time to utilize the members of the Financial Committee, and perhaps, an assignment for them to handle. It appears that only the staff was utilized to make the selection. Is it a common practice for those being audited to select who audits them? AGENDA ITEM 7: The Operating and Capital Budgets: Based on the 5 Year Financial Plan on page A-9, I would like to monetize the problem created by increasing employee costs. These increases are driven primarily by benefits. We need to put a long term plan in place to address the issues caused primarily by these increasing costs. As it stands currently, our current plan is not sustainable without sacrificing other critical government services or people. Per the 5 Year Financial Plan, Employee Benefit Expenses are forecast to increase from 22.1% of total expenditures in the current fiscal year to 28.2% of total expenditures in FY 2022/23. As a result of the 6.1 percentage point increase, other expenditures will have to be reduced. The dollar amount of the increase is $4.1M or 9.6% of total expenditures. One consequence of the increase in the cost of benefits, the Town will have $4.1M less to spend on strategic initiatives, key personnel and opportunities to enhance service delivery through technology investments. Another way to say this is that forecasted available expenditures 5 years from now, other than for benefit costs, are only $1.1 M or 4% higher than in the current proposed 2017/18 budget. Furthermore, between now in then there will be another labor contract negotiation that is not reflected in the FY 2022/23 forecasted expenditures. These future increased costs are in addition to a 7.1% ($1.7M) increase in total labor costs between the estimated FY 2016/17 final expenditures and the proposed FY 2017/18 budget. The largest single dollar amount of the General Fund Reserves is Other at $4.876M (per page A-5). The explanation on page A-6 does not seem consistent with the dollar amount. Could you please provide more detail of the "Other" classification? Pg. A-5: General Fund Reserve 6/30/2013 Actual -.IL I 6/30/2014 Actual 6/30/2015 Actual 6/30/2016 Actual 6/30/2017 Estimated 6/30/2018 Proposed Commited to: Budget Stabilization Reserve Catastrophic Reserves CalPERS/OPEB Reserve Almond Grove Reserve Assigned to: Open Space Reserve Sustainability Strategy Reserve Capital / Special Projects Special Studies Post Retirement Medical Vasona Land Sale Other Total General Fund Reserve $ 5,450,000 $ 5,450,000 $ 5,450,000 $ 6,621,808 $ 4,637,406 $ 4,969,847 5,450,000 5,450,000 5,450,000 4,637,406 4,637,406 4,969,847 - - - 300,000 1,284,402 2,284,402 - - - 8,459,973 2,896,200 - 562,000 562,000 562,000 562,000 562,000 562,000 140,553 140,553 140,553 2,600,000 2,600,000 600,000 12,427,161 10,218,579 9,511,527 4,222,405 2,822,405 3,125,901 490,000 490,000 490,000 - - - 400,000 - 400,000 - - - 410,599 411,245 - - - - 787,294 297,294 339,837 99,284 4,847,721 4,876,845 $ 25,977,054 $ 22,879,118 $ 22,203,364 $ 27,643,429 $ 24,428,093 $ 21,529,395 Pg. A-6: "Other The Town has several other smaller reserves that have been classified as other. These reserves include an open space reserve which may be used to make selective open space acquisitions and a sustainability reserve which will be used to fund projects that enhance the community environment" Jak VanNada Los Gatos Community Alliance.