The URL can be used to link to this page

Attachment 07 From: jvannada Sent: Tuesday, February 12, 2019 4:17 PM To: Shelley Neis Cc: Arn Andrews; Laurel Prevetti Subject: Re: For Council Meeting 5-19-19 Hi Shelley (et al) , I can see that I've been in front of this computer too long ! 🙂 The date of the meeting should have said 2/19/19. Thank you for noting that. Jak On Tue, Feb 12, 2019 at 2:58 PM Shelley Neis wrote: Good Afternoon Jak, We will include your email and attachment as public comment with the staff report for the appropriate May agenda. Thank you, Shelley From: jvannada Sent: Tuesday, February 12, 2019 9:02 AM To: Laurel Prevetti Subject: For Council Meeting 5-19-19 Good morning Laurel, Attached you will find an email with 2 suggested alternative payment plans for the Miscellaneous Plan. I addressed the option of the large ADP at the last council meeting, but we thought it best to research other methods of paydown. These both seem very doable and I think Council will like them also. Please include this email in the 5-19-19 Council Meeting. I have bcc'd the Council and the FC to give them additional time to digest these new alternative payment plans. I don't believe these alternatives have ever been brought up to Council in the past, and both seem very viable. They are starting to take hold in other progressive California towns and cities. They are lightly addressed in Bartel's June 2017 report, but in my opinion they need to be reviewed by every municipal finance department in California. I hope to hear from Steve or Gitta should they have any questions prior to the meeting. My desire is to get these options discussed prior to the budget meetings as they could have a big impact on pension paydown plans Jak VanNada - Los Gatos Community Alliance www.lg-ca.com ATTACHMENT 7 pg. 1 C:\Users\jvann\Documents\LGCA\Unfunded Liabilities\Paydown Analysis\PayDownUALDebtLump sum payment V8.docx Council Meeting 2-19-19 Dear Council Members, While trying to find another way to pay down pension debt, Mr. Koen contacted CalPERS Santa Clara County’s representative, David Clement, (916-795-2472) to discuss “new information” he found in the Bartels presentation on pensions. Mr. Clement confirmed Mr. Koen’s finding that Los Gatos (or any California city) could make targeted payments to the UAL schedule of amortization bases that result in the maximum benefit for the money spent. The following proposal is not something that we’ve heard from Staff, but is mentioned as an option in the Bartel’s report (slide 62, “Target Specific Amortization Bases”). While he is traveling, Mr. Keon asked me to put together two proposals that I’ll call Scenarios 1 and 2. Our objective was to find alternatives in case our original $11M proposal did not work for you.  Scenario 1 Make an Additional Discretionary Payment (ADP) that pays down the longest period of time.  Scenario 2 Make an ADP that pays down the shortest-term amortization bases which will produce the largest immediate decrease in mandatory UAL payments.  Note that Staff can and perhaps should develop other scenarios if this looks as compelling to you as it does to us. What are the problems?  We need to pay down pension debt. The challenge is what payment plan provides the most strategic value?  Miscellaneous annual Payments have increased 49% in 10 years while Safety annual payments will increase 75% in the same period.  As currently scheduled, the Miscellaneous and Safety Plans mandatory UAL payments alone will increase from $3.3M to $6M over the next 10 years (FY 18/19 to FY 28/29). The plans total mandatory minimum contribution will grow from $5.3m to over $9.7m.  Paying for high levels of service will become increasingly challenging What is the most immediate problem are we trying to solve?  The challenge the Town is facing is the minimum mandatory payments begin to increase rapidly starting in FY 2018 and grow over the next 10 years. The payments then flatten for a couple of years and begin to decrease starting in FY 31/32. The rapid increase in CalPERS mandatory minimum payments over the next 10 years will “crowd out” the Town’s ability to provide services, pay operational costs and invest in infrastructure, especially if there is a slowdown in revenue receipts. What payment options do we have now?  Build additional reserves in the General Fund  Paying ADP directly to CalPERS  Pay an ADP directly into the 115 Trust  Pay ADP to CalPERS targeting specific Amortization Bases (slide 62 of Bartels Report) pg. 2 C:\Users\jvann\Documents\LGCA\Unfunded Liabilities\Paydown Analysis\PayDownUALDebtLump sum payment V8.docx What does Paying ADP directly to CalPERS provide?  It adds to our assets immediately  Therefore, it reduces our UAL immediately  The CAFR will show the lower UAL  CalPERS will adjust our mandatory UAL payments down  CalPERS investment cost is baked in, therefore no additional investment fee.  An ADP to CALPERS will lower annual payments to CalPERS that may be re-deployed to many options; eg, savings account for unexpected discount rate reduction; pay-down debt; pay for priorities, etc.  The town’s balance sheet looks stronger that it would with a payment to the 115-pension trust  Bartels and the Staff recommended the Additional Payments be made directly to CalPERS What does the 115 Trust provide?  It may provide flexibility in investments as well as when payments are made to CalPERS.  May overperform or underperform CalPERS  Investment management fee is higher than the CALPERS fee  There is no synchronization between the 115 trust and the CAFR balance sheet which may make the Los Gatos balance sheet look worse than it is. How does a targeted ADP to CALPERS help us in the next 10-year period?  By targeting, ADP’s can be directed to pay down specific Amortization Bases covering specific time periods  One the one hand, we can target larger long term, higher total results  On the other, we can increase short term results with a higher short-term payback, though for a shorter period of time  An ADP to CALPERS will lower annual payments to CalPERS that may be re-deployed to many options; eg, savings account for unexpected discount rate reductions; pay down other debt; pay for priorities, etc.  Provides known results for a specified time period  The results show up on the CAFR balance sheet and makes the town look financially stronger  It is consistent with Bartels’ and the Staff’s recommendation that the Additional Payments be made directly to CalPERS How does Scenario 1 work?  The proposed ADP would be $10,895,000 – See Exhibit A below  The time period of this payback would be 26 years.  The reduction in annual payments for the 26 years will amount to $897,062 annually or $18,856,000 in total for the 26 years.  The $897,062 is currently budgeted as an expense and therefore well become available to the Council as a reduction to budgeted pension expenditures. pg. 3 C:\Users\jvann\Documents\LGCA\Unfunded Liabilities\Paydown Analysis\PayDownUALDebtLump sum payment V8.docx How does Scenario 2 work:  The proposed ADP would be $7,006,000 – See Exhibit B below  The time period varies over the four selected Base Periods; from 6, 9,12 and 14 year time periods  The largest reductions to pension costs will come in the first 6 years. That reduction will amount to $5,382,372, or 61% of the reduction. The pension reduction will be $7,648,642, over 10 years.  The annual monies not paid for the pension can be used by the town as necessary.  See Exhibit C which has been constructed to show the first 6 years of cost reductions compared to the originally scheduled payments. So far, I have not found the projected pension costs beyond this time period. Note that in year 7, the reduction to the pension cost will go down to $616,583 per year for the following 3 years. Exhibit A CalPERS Actuarial Valuation 6-30-17 – pg 16 Scenario 1 Reason for Base Date Established Ramp Up/Dow n 2019- 20 Amorti- zation Period Balance 6/30/17 Expected Payment 2017-18 Balance 6/30/18 Expected Payment 2018-19 Balance 6/30/19 Scheduled Payment for 2019-20 ASSUMPTION CHANGE 06/30/03 No Ramp 6 1,780,035$ 266,995$ 1,632,584$ 273,196$ 1,468,020$ 280,479$ METHOD CHANGE 06/30/04 No Ramp 7 $(166,052) $(22,588) $(154,698) $(23,102) $(141,989) $(23,720) BENEFIT CHANGE 06/30/07 No Ramp 9 1,646,511$ 190,679$ 1,568,412$ 194,828$ 1,480,355$ 200,062$ ASSUMPTION CHANGE 06/30/09 No Ramp 12 2,566,712$ 247,607$ 2,496,373$ 252,637$ 2,415,725$ 259,458$ SPECIAL (GAINJ/LOSS 06/30/09 No Ramp 22 2,100,631$ 142,257$ 2,105,604$ 144,524$ 2,108,588$ 148,467$ SPECIAL (GAIN)/LOSS 06/30/10 No Ramp 23 1,755,770$ 116,186$ 1,762,739$ 117,992$ 1,768,343$ 121,214$ ASSUMPTION CHANGE 06/30/11 No Ramp 14 1,710,594$ 150,016$ 1,679,253$ 152,924$ 1,642,629$ 157,063$ SPECIAL (GAIN)/LOSS 06/30/11 No Ramp 24 809,430$ 52,416$ 813,831$ 53,210$ 817,729$ 54,664$ PAYMENT (GAIN)/LOSS 06/30/12 No Ramp 25 199,878$ 12,683$ 201,234$ 12,870$ 202,495$ 13,222$ (GAINJ/LOSS 06/30/12 No Ramp 25 1,791,787$ 113,697$ 1,803,946$ 115,376$ 1,815,246$ 118,531$ (GAIN)/LOSS 06/30/13 100% -» 26 10,388,059$ 419,466$ 10,706,787$ 567,711$ 10,895,099$ 729,061$ ASSUMPTION CHANGE 06/30/14 80% 17 4,484,869$ 166,960$ 4,637,116$ 255,108$ 4,709,113$ 349,398$ (GAINj/LOSS 06/30/14 80% 27 $(7,403,556) $(202,526) $(7,730,575) $(308,168) $(7,971,898) $(422,159) (GAINJ/LOSS 06/30/15 60% *28 3,320,211$ 46,754$ 3,512,507$ 94,780$ 3,669,008$ 146,078$ ASSUMPTION CHANGE 06/30/16 40% *19 1,502,722$ $(42,200) 1,655,372$ 31,238$ 1,743,036$ 64,186$ (GAINJ/LOSS 06/30/16 40% *29 4,225,172$ -$ 4,531,497$ 62,882$ 4,794,909$ 129,230$ ASSUMPTION CHANGE 06/30/17 20% *20 1,176,961$ $(50,144) 1,314,221$ $(51,586) 1,462,925$ 27,570$ (GAIN)/LOSS 06/30/17 20% *30 $(1,513,779)-$ $(1,623,528)-$ $(1,741,234)$(24,135) TOTAL 30,375,955$ 1,608,258$ 30,912,675$ 1,946,420$ 31,138,099$ 2,328,669$ Total Cash Flow Annually 729,061$ 26 years X $729,061 18,955,586$ pg. 4 C:\Users\jvann\Documents\LGCA\Unfunded Liabilities\Paydown Analysis\PayDownUALDebtLump sum payment V8.docx Exhibit B CalPERS Actuarial Valuation 6-30-17 – pg 16 ( I have eliminated non-essential rows to reduce the visual clutter) Exhibit C visually shows the effect of reduced UAL payments Scenario 2 - Abbreviated Version CalPERS Actuarial Valuation - June 30, 2017 Page 16 Reason for Base Date Established Ramp Up/Dow n 2019- 20 Amorti- zation Period Balance 6/30/17 Expected Payment 2017-18 Balance 6/30/18 Expected Payment 2018-19 Balance 6/30/19 Schedule d Payment for 2019- 20 Amort. Period X Sched. Payment ASSUMPTION CHANGE 6/30/2003 No Ramp 6 1,780,035$ 266,995$ 1,632,584$ 273,196$ 1,468,020$ 280,479$ 1,682,874$ BENEFIT CHANGE 6/30/2007 No Ramp 9 1,646,511$ 190,679$ 1,568,412$ 194,828$ 1,480,355$ 200,062$ 1,800,558$ ASSUMPTION CHANGE 6/30/2009 No Ramp 12 2,566,712$ 247,607$ 2,496,373$ 252,637$ 2,415,725$ 259,458$ 3,113,496$ ASSUMPTION CHANGE 6/30/2011 No Ramp 14 1,710,594$ 150,016$ 1,679,253$ 152,924$ 1,642,629$ 157,063$ 2,198,882$ SUB-TOTAL 30,375,955$ 1,608,258$ 30,912,675$ 1,946,420$ 31,138,099$ 2,328,669$ Total payments saved based on the 4 Periods 8,795,810$ Total lump sum payment 7,006,729$ Total Amount Saved 1,789,081$ Per Year Per period Total of above 4 top highlighted rows Cash flow for years 1 to 6 897,062$ 5,382,372$ Cash flow for years 7 to 9 616,583$ 1,849,749$ Cash flow for years 10 to 12 416,521$ 1,249,563$ Cash flow for years 13 & 14 157,063$ 314,126$ What's Interesting about this: Even with the Expected Payments in 2018 and 2019 (a total of $3,554,000, the balance still rose by $763,000 and the payment in 2020 rose to $2,328,669 from $1,946,420 theprior year adding another $382,249) The largest "cash flow" came in the first 6 years which is where we need the cash due to the increased cost of pensions. By paying down these 4 bases, the payment in 2019-2020 would be reduced from $2,328,669 to $1,431,607 pg. 5 C:\Users\jvann\Documents\LGCA\Unfunded Liabilities\Paydown Analysis\PayDownUALDebtLump sum payment V8.docx Conclusion: As you can see, both Scenario’s 1+2 have their advantages. Scenario 1 requires a $10,895,100 ADP but has a $18,956,000 overall reduction to pension liabilities over 26 years. Scenario 2 was an Alternative Mr. Koen devised if the $10,895,100 was too high for some of you. Scenario 2 requires a $7,006,000 ADP, but reduces pension liabilities by $8,795,000 over 14 years with 61 % coming in the first 6 years and 87% within the first 10 when we need pension reductions the most. We believe that the $11 million can come from the three sources: 1. Excess Capital Project Reserve $6,500,000 2. Excess Internal Service Funds $3,000,000 3. Proceeds from the sale of surplus property $1,900,000 Total $11,400,000 In addition to the above, the Town could elect to use some of the current 115 Pension Trust balance to help fund an ADP. For example, if the Town elected to withdraw $2.5m from the current 115 Pension Trust balance, the Town would only need to find an incremental $4.5m from the sources listed above for Scenario 2. We hope you find this helpful. We feel that the most important thing Council can do would be to make as big a payment to CalPERS as possible. I think the above should help you feel better that we’ll not be shooting ourselves in the financial foot. With either scenario, there will be annual cash flows in terms of annual payment reductions to the present and future budgets. Our interest is to provide information to the Council and the Staff that helps with the overall success of the Town by thinking of creative ways to extricate ourselves from the pension debt. Jak VanNada Phil Koen PS It should be noted that for any effect on the next fiscal year’s UAL payments, Los Gatos would need to make the ADP to CalPERS sometime in May of 2019. CalPERS Santa Clara County’s representative, David Clement, (916-795-2472)