Addendum
PREPARED BY: STEPHEN CONWAY
Finance Director
Reviewed by: Town Manager, Assistant Town Manager, and Town Attorney
110 E. Main Street Los Gatos, CA 95030 ● 408-354-6832
www.losgatosca.gov
TOWN OF LOS GATOS
COUNCIL AGENDA REPORT
MEETING DATE: 06/04/2019
ITEM NO: 3
ADDENDUM
DATE: JUNE 3, 2019
TO: MAYOR AND TOWN COUNCIL
FROM: LAUREL PREVETTI, TOWN MANAGER
SUBJECT: A. ADOPT A RESOLUTION APPROVING THE TOWN OF LOS GATOS FISCAL
YEAR (FY) 2019/20 OPERATING BUDGET AND FY 2019/20 – 2023/24
CAPITAL IMPROVEMENT PROGRAM (CIP), NEW APPROPRIATIONS,
OTHER APPROVED ADJUSTMENTS, MINOR CORRECTIONS,
INCORPORATING AFSCME, TEA, CONFIDENTIAL AND MANAGEMENT
SALARY SCHEDULES; AND CARRY-FORWARD APPROPRIATIONS
B. ADOPT A RESOLUTION APPROVING COMMITMENTS OF FUND BALANCE
UNDER GASB 54
C. ADOPT AN UPDATE TO THE TOWN’S GENERAL FUND RESERVE POLICY
RECOMMENDATION:
A. Adopt a resolution approving the Town of Los Gatos Fiscal Year (FY) 2019/20 Operating
Budget and FY 2019/20 – 2023/24 Capital Improvement Program (CIP), new
appropriations, other approved adjustments, minor corrections, AFSCME, TEA,
Confidential, and Management Salary Schedules, and carry-forward appropriations
B. Adopt a resolution approving commitments of Fund Balance under GASB 54
C. Adopt an update to the Town’s General Fund Reserve Policy
REMARKS:
A Council Member had the following inquiry and staff’s response is provided below.
Is the charge on the Unfunded Actuarial Liability (UAL) really interest like a loan if we pay it
off it goes away or is it the assumed rate of return applied on the difference between the
funds we have invested with CalPERS and the funds we need to have invested with CalPERS
to cover all liabilities of future estimated payments to employee’s retirement?
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REMARKS (continued):
While the actuarial valuations from CalPERS do refer to it as interest, it is important to
understand the genesis of the UAL and how various loses/gains are applied to it during the
development of the actuarial valuations. The actuarial assumption is that the UAL is the
recognition of the deficiency in total assets necessary to cover total actuarial liabilities. As such,
CalPERS charges the UAL the exact same expected rate of return assumption that is used for
the assets even though it is referred to as interest. It is also important to note that assets are
currently greater than the UAL so if the assumed rate of return is met, the expected gain on
assets is greater than the cost associated with the UAL/deficient assets. That said, the
additional cost associated with the charge on the UAL does impede the long-term goal of
reducing the outstanding UAL.
If we make the payments, do we save the 7% even if CalPERS only makes 4.3% on our
payment?
Similar to the previous response, it is important to understand how the various components
utilized in the development of the actuarial valuations all ultimately impact the calculation of
the UAL. In addition, actuarial valuations are a point in time measurement similar to our
Comprehensive Annual Financial Report (CAFR). While at that point in time, the line item
interest cost associated with the additional lump-sum discretionary payment toward the UAL
has been reduced, any disparity between the assumed rate of return and actual market returns
is calculated as an increase to the UAL. So, there is single point market entry risk associated
with additional lump-sum discretionary payments.
It could be argued that market fluctuations will happen regardless, but the significant difference
is whether, or when, the Town proactively opts to expose additional discretionary assets to
those market fluctuations. The risk is similar to the arguments used against the issuance of
Pension Obligation Bonds (POBs). If your market timing is poor with the issuance of POBs, the
theoretical arbitrage you would receive between the cost of debt issued at municipal rates
versus the assumed rate of return disappears.
What happens to our payment if CalPERS loses money during a period? Does our unfunded
liability still go away because we have made the payment that should make the 7% interest
go away?
Similar to the above answer, the savings associated with an additional discretionary lump-sum
payment is only one variable in the multivariant actuarial valuation calculation. The calculated
cost associated with missing the assumed rate of return will work against any interest savings
initially associated with a reduction in the UAL from a lumpsum payment.
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REMARKS (continued):
Attachment 7 contains public comment received after 11:00 a.m. Friday, May 31, 2019 and
before 11:00 a.m. Monday, June 3, 2019.
Attachments previously received with the Staff Report:
1. Resolution of the Town Council Approving FY 2019/20 Operating Budget and FY 2019/20 –
2023/24 Capital Improvement Program (with Exhibit A)
2. FY 2019/20 Grants and Arts Funding Summary
3. AFSCME, TEA, Confidential, and Management Salary Schedules
4. Resolution of the Town Council of the Town of Los Gatos Approving Commitments of Fund
Balance under GASB 54
5. FY 2018/19 and FY 2019/20 Estimated General Fund Balance Activities
6. General Fund Reserve Policy - Redline
Attachments received with this Addendum:
7. Public Comments Received before 11:00 a.m. Monday, June 3, 2019