Attachment 4Gitta Ungvari
To: Laurel Prevetti; Stephen Conway; Arn Andrews
Cc: Shannon Lombardo
Subject: RE: Agenda Item 11 - comment
Begin forwarded message:
From: Phil Koen <pkoen@monteropartners.com>
Date: April 17, 2018 at 2:29:01 AM PDT
To: Laurel Prevetti <LPrevetti@losgatosca.gov>
Cc: "ivannada@gmail.com" <jvannada@gmail.com>
Subject: Agenda Item 11- comment
Dear Town Council,
I have attached a copy of the most recent Moody's Report on the Town of Los Gatos.
While obviously very complimentary regarding the credit rating of the Town (Aaa) which is significantly
higher than the median Aa3 rating for US cities, the report points out that the notable positive credit
rating is a result of a robust financial position, a considerable tax base with affluent income and wealth
levels and a manageable debt burden. We are very fortunate to have these factors working for us.
However, the report also pointed out two troubling issues, namely a significant and growing pension
liability and cash balance as a percent of operating revenues which is far superior to other Moody's
rated cities nationwide. It is the combination of these factors together that should be concern to the
Town Council and are very concerning to a number of residents.
Per the report (which was issued November, 2017) the Moody's Adjusted Net Pension Liability (3 year
average) for the Town has gone from $57.2m in 2012 to $111.7m in 2016. That is a staggering 95%
increase in 4 years and compares to the US Median of $29.8m. You have heard this issue from a number
of residents, and now you are hearing it directly from Moody's. The Town has a significant and growing
pension problem that needs to be aggressively dealt with.
At the same time the net pension liability has sky rocketed, the Town has accumulated cash in the
General Fund to levels that are far superior to any other cities. Some might call this "cash hoarding" and
reflects the Town's lack of investing in infrastructure or paying down pension liabilities over a number of
years. Furthermore cash held by the Town is invested in securities paying 1% interest while CALPERS is
charging the Town 7% on the unfunded pension liability.
Clearly the Town has a problem with its capital allocation process. Holding cash in the face of exploding
pension liabilities is not a prudent financial management practice.
Let me share with you a couple of ratios that will point out the magnitude of the "cash hoarding".
Moody's uses two metrics to evaluate this — fund balance as a percent of annual operating revenues and
cash balance as a percent of annual operating revenues. For the Town these metrics for 2017 were
75.3% and 93%, respectively. This compares to a US median of 32.5% and 35.4%!
But I am sure some of you are saying, we aren't a "median city", we should run higher ratios. But how
high should they be?
1
I quickly looked at three towns (Saratoga, Campbell and Cupertino) that we often compare ourselves to
in order to have a better sense of this. Here is what I learned. The average fund balance as a percent of
operating revenues for the three was 56.6% and the average cash balance as a percent of operating
revenues was 62.9%.
The Town of Los Gatos carries almost 50% more relative cash than these three cities. What that suggests
is there is "excess cash" of approximately $12m (30% x 2018 operating revenues of $40m) which could
be used immediately to pay down pension liabilities or invested in infrastructure.
In closing, you have already received a number of letters proposing using a significant amount of the
cash available to the Town to pay down the pension liability. The Moody report and prudent financial
management strongly support this move.
I urge the Town Council to act on this matter.
Phil Koen
2
U.S. PUBLIC FINANCE
MOODY'S
INVESTORS SERVICE
ISSUER COMMENT
3 November 2017
RATING
General Obligation (or GO Related) 1
Aaa No Outlook
Contacts
Nathan Carley
Associate Analyst
nathan.carley@moodys corn
Eric Hoffmann
Senior Vice President/
Manager
eiic hoffmann@moodys.com
312-706-9958
415-274-1702
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454
Town of Los Gatos, CA
Annual Comment on Los Gatos
Issuer Profile
The Town of Los Gatos is located in Santa Clara County in west central California,
approximately 10 miles southwest of San Jose. The county has a population of 1,868,149
and a high population density of 1,469 people per square mile. The county's median family
income is $108,637 (1st quartile) and the August 2017 unemployment rate was 3.8% (2nd
quartile) z . The largest industry sectors that drive the local economy are professional/
scientific/technical services, manufacturing, and health services.
Credit Overview
The credit position for Los Gatos is extremely strong. Its Aaa rating is well above the median
rating of Aa3 for US cities. The notable credit factors include a robust financial position, a
considerable tax base with affluent income and wealth levels, a manageable debt burden and
a significant pension liability.
Finances: The town has a very healthy financial position, which is in line with the assigned
rating of Aaa. Los Gatos' fund balance as a percent of operating revenues (71.1%) far
surpasses the US median. However, this metric declined slightly from 2012 to 2016. In
addition, the cash balance as a percent of operating revenues (91.7%) is far superior to other
Moody's-rated cities nationwide.
Economy and Tax Base: The economy and tax base of the town are exceptionally healthy
and are consistent with its Aaa rating. The median family income equals a robust 238.9%
of the US level. Moreover, the full value per capita ($338,948) is materially above the US
median, and saw an impressive increase between 2012 and 2016. Lastly, Los Gatos' total full
value ($10.6 billion) is much larger than other Moody's-rated cities nationwide.
Debt and Pensions: The debt and pension liabilities of the town are mid -ranged overall,
yet they are weak relative to the assigned rating of Aaa. Favorably, the net direct debt to full
value (0.2%) is materially lower than the US median, and remained the same from 2012 to
2016. On the other hand, the Moody's-adjusted net pension liability to operating revenues
(2.7x) is materially above the US median.
Management and Governance: California cities have an Institutional Framework score
of A, which is moderate compared to the nation. Institutional Framework scores measure a
sector's legal ability to increase revenues and decrease expenditures. California cities' major
revenue sources can only be raised with voter approval, or, in the case of ad valorem property
taxes, cannot be raised except to meet GO bond payments. Ad valorem property tax rates
cannot be increased above 1% except to meet GO bond payments, and assessed valuation
growth is also generally limited to 2% annually unless a property changes ownership.
MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE
Unpredictable revenue fluctuations tend to be moderate, or between 5-10% annually. Across the sector, fixed and mandated costs
are generally less than 25% of expenditures. However, California has strong public sector unions, which can limit the ability to cut
expenditures. Unpredictable expenditure fluctuations tend to be moderate, between 5-10% annually.
Sector Trends - California Cities
California cities will continue to benefit from a strong and improving state economy. Growing assessed value trends and resulting
property taxes, as well as robust statewide sales tax growth, will continue to raise city property tax and sales tax revenues. Housing
values statewide continue to increase and provide long-term strength to the state's cities. Employment trends are positive and will
continue to boost the statewide economy, particularly in the high tech sector. California cities, however, remain exposed to growing
long term pension and OPEB liabilities.
EXHIBIT 1
Key Indicators 4 s Los Gatos
2012 2013 2014 2015 2016 US Median Credit Trend
Economy / Tax Base
Total Full Value
Full Value Per Capita
Median Family Income (% of US
Median)
$8,324M $8,632M $9,419M $9,995M 510,634M $1,787M Improved
$281,968 $289,583 $312,274 $328,808 $338,948 $88,380 Improved
239% 244% 241% 239% 239% 113% Stable
Finances
Available Fund Balance as % of
Operating Revenues
76.0% 75.1% 65.4% 59.3% 71.1% 32.5% Stable
Net Cash Balance as % of Operating
Revenues
94.4% 93.1% 82.9% 77.0% 91.7% 35.4% Stable
Debt / Pensions
Net Direct Debt / Full Value
0.3% 0.3% 0.2% 0.2% 0.2% 1.2% Stable
Net Direct Debt / Operating Revenues 0.69x 0.61x 0.57x 0.51x 0.48x 0.93x Stable
Moody's-adjusted Net Pension Liability
(3-yr average) to Full Value
0.7% 1.0% 1.1% 1.1% 1.1% 1.7% Stable
Moody's-adjusted Net Pension Liability
(3-yr average) to Operating Revenues
1.67x 2.29x 2.63x 2.59x 2.69x
1.46x Weakened
2012 2013 2014 2015 2016 US Median
Debt and Financial Data
Population
29,522 29,809 30,163 30,398 31,376 N/A
Available Fund Balance ($000s) $26,012 $28,261 $25,155 524,121 $29,574 $7,221
Net Cash Balance (S000s) $32,327 $35,062 $31,906 $31,339 $38,147 $7,930
Operating Revenues ($000s) $34,229 $37,650 $38,468 $40,710 $41,619 $21,262
Net Direct Debt ($000s) S23,745 $22,820 $21,865 $20,875 519,850 $18,822
Moody's Adjusted Net Pension
Liability (3-yr average) ($000s)
S57,276 $86,071 $101,264 $105,241 $111,786 $29,896
Source: Moody's Investors Service
This publication does not announce a credit rating action For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www moodys.com for the most updated credit rating action information and rating history
2 3 November 2017 Town of Los Gatos, CA. Annual Comment on Los Gatos
MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE
EXHIBIT 2
Available fund balance as a percent of operating revenues decreased from 2012 to 2016
Available Fund Balance as % of Operating Revenues US Cities Median
100%
80%
60%
40%
20%
Source: Issuer financial statements; Moody's Investors Service
i
2012 2013 2014 2015
EXHIBIT 3
Full value of the property tax base increased from 2012 to 2016
(millions)
$11,000
$10,000
$9,000
$8,000
Total Full Value
41
■
2016
2012 2013 2014 2015 2016
Source: Issuer financial statements; Government data sources; Offering statements; Moody's Investors Service
EXHIBIT 4
Moody's-adjusted net pension liability to operating revenues decreased from 2012 to 2016
4.0x
3.0x
2.0x
1.0x
00x
• Debt Pensions
2012 2013 2014 2015 2016
Source. Issuer financial statements; Government data sources, Offering statements; Moody's Investors Service
D1r
MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE
Endnotes
1 The rating referenced in this report is the issuer's General Obligation (GO) rating or its highest public rating that is GO -related. A GO bond is generally
backed by the full faith and credit pledge and total taxing power of the issuer. GO -related securities include general obligation limited tax, annual
appropriation, lease revenue, non -ad valorem, and moral obligation debt. The referenced ratings reflect the government's underlying credit quality
without regard to state guarantees, enhancement programs or bond insurance.
2 The demographic data presented, including population, population density, per capita personal income and unemployment rate are derived from the most
recently available US government databases. Population, population density and per capita personal income come from the American Community Survey
while the unemployment rate comes from the Bureau of Labor Statistics.
The largest industry sectors are derived from the Bureau of Economic Analysis. Moody's allocated the per capita personal income data and unemployment
data for all counties in the US census into quartiles. The quartiles are ordered from strongest -to -weakest from a credit perspective: the highest per capita
personal income quartile is first quartile, and the lowest unemployment rate is first quartile.
3 The institutional framework score assesses a municipality's legal ability to match revenues with expenditures based on its constitutionally and legislatively
conferred powers and responsibilities. See US Local Government General Obligation Debt (December 2016) methodology report for more details.
4 For definitions of the metrics in the Key Indicators Table, US Local Government General Obligation Methodology and Scorecard User Guide (luly 2014) .
Metrics represented as N/A indicate the data were not available at the time of publication.
5 The medians come from our most recently published local government medians report Medians — Growine Tax Bases and Stable Fund Balances Support
Sector's Stability (March 2016) which is available on Moodys.com. The medians presented here are based on the key metrics outlined in Moody's GO
methodology and the associated scorecard.
4 3 November 2017 Town of Los Gatos, CA. Annual Comment on Los Gatos
MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE
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5 3 November 2017 Town of Los Gatos, CA Annual Comment on Los Gatos
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6 3 Novembef 2017 Town of Los Gatos, CA. Annual Comment on Los Gatos