Attachment 3Page 1 of 5
I would like for the Council to consider the following information before agreeing to the staff’s
recommendation in the 4-17-18 Council meeting. My premise is that we pay down the pension
debt from excess money in funds. As it is, we have already allocated payments up to $300k if
we have a surplus. The Moody’s report attached would suggest that we have more money than
we need in the funds.
My suggestions below should only be considered once we know:
1. What the town requires for a minimum amount of operating capital and,
2. The composition of each town fund as well as why we need the amount of capital in
that fund.
The Moody’s report would suggest that we are significantly over-funded.
However, only after knowing these two facts, should we take money from our fund balances
In the Finance Committee meeting, I suggested that our “conservatism” seems to be measured
by the size of the fund balances and our credit rating, not by the management of capital.
All of this sounds good until you understand that by keeping all of this cash as minimally-
invested capital, we’re losing money faster than we’re making it. If we pay 7.0% on unfunded
accrued pension liability, and we have cash sitting in various funds earning 1%, we’re losing
6.0%.
If the anti-tax people see this, and they will, why would anyone want to support a sales tax
revenue when we don’t use our existing cash wisely?
Staff’s proposal is to try to pay $390,000 per year for 20 years……….if we have the money . The
proposed policy says: “staff shall annually appropriate, to the extent possible, the amount of
annual discretionary payments necessary to maintain the unfunded pension liability
amortization shortening from 30 to 20 years”.
Keep in mind that the following is what is projected for our employer contribution rates as a
percentage of payroll resulting from the dramatic increase in the unfunded accrued liability that
has been happening and will accelerate as the discount rate declines. Pensions and OPEB are
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projected to go up significantly as a result of this rate change and reducing the amortization
period
Additionally, the following table shows our projected bottom line status over the next 5 years
to be less than $0.00. We want to add $300K of surplus to pay down the pension/OPEB
balance; and now we’re proposing adding $390K to that for a total of $690K? But for the next 5
years, we’re not projecting any surplus. We’re totally reliant on passing a sales tax to make
these payments.
I suggest that we take another look at a solution.
As backup to my statement above that we are projecting $0 revenues, the following table can
be found in the 2017-18 Budget Transmittal Letter. It show less than $0 revenues expected over
the next 5 years.
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I would like for Council to consider the following alternative.
The differences between the proposals is so significant that you may want more information
and more time to make the decision than you will have tonight.
I believe that we could find another $3.5 million of fund money that could be added to the $4.3
that we are currently committing to pension debt, for a total of $7.8 million. Should we put that
$7.8 million to work immediately, paying down CalPERS, and not pay it in over 20 years, the
future value of $7.8M invested at 7% for 20 years would be $30.2M. Take away the $7.8M we
gave to CalPERs as a lump sum, and we would have a $22.4M interest savings vs the $8.1M IF
we put in $390K per year, (which is very uncertain).
We would almost double the paydown (i.e. $30.1m vs. $15.9m) projected in staff’s proposal.
Currently the Town’s resolution is a “funding methodology”. We’ll pay down the debt at $390K
per year, IF WE HAVE THE MONEY. We’ll add $300K to that, IF WE HAVE THE MONEY.
Meanwhile, an excess of cash sits in our fund accounts earning a meager 1%.. We’re cash-rich,
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but perhaps, too conservative for our own good and costing us money. Please take the time to
read the Moody’s report of 8/30/2016 also attached to this email. The way it reads, I think we
have the money.
The proposed resolution is soft in that we make payments IF we have the money. The $7.8M is
a hard commitment and you only make that kind of commitment if you have the money in the
first place, and accept that you must prioritize your use of cash.
The Moody’s report basically says that we have lots of cash when compared to the rest of the
United States. One critical metric Moody’s focuses on is cash balance as a percentage of
operating revenues. In FY 2017 the Town was 93% as compared to a US Median of
approximately 35%. Moody’s pointed this out noting that this level was “far superior to other
Moody’s rated cities nationwide”. But are we managing it wisely by sitting on 1% investment
returns?
Paying the $7.8m will be a commitment that will pay for itself with a guaranteed rate of return.
In 20 years, we would save about $22 million in interest charges.
Below is the CalPERS expected rates of return table that even they say will average around 6.1%
for the next 10 years.
My suggestion is as stated at the beginning of this letter, that the Council and staff do a
thorough analysis of the Town’s cash needs. It is clear to Moody’s that the Town has built up
excess cash over time beyond it operating needs. If you used Moody’s US Median cash balance
to operating revenue ratio of 35%, based on the Town’s budgeted 2018 operating revenue, it
suggests a cash balance of $14m for the General Fund is an appropriate level. As of June 30,
2017 there was $36m.
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Cash management decisions may well influence the sales tax vote this November.
The staff needs to take a fresh look at what this town absolutely needs to operate; and look at
the cash on hand and why it hasn’t been deployed to either pay down unfunded pension
liabilities or invested in infrastructure. If the additional $3.5M is there, even given some
delayed projects, those decisions have to be weighed against the cost of money invested at a
6.% loss of revenue.
Jak VanNada
Los Gatos Community Alliance
4-17-18