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Staff Report PREPARED BY: STEVE 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: 4/17/2018 ITEM NO: 11 ITEM NO: 11 DATE: APRIL 10, 2018 TO: MAYOR AND TOWN COUNCIL FROM: LAUREL PREVETTI, TOWN MANAGER SUBJECT: INCREASE THE PAYMENTS TO THE IRS 115 PENSION TRUST TO LOWER THE TOWN’S LONG-TERM UNFUNDED PENSION OBLIGATIONS AS RECOMMENDED BY THE COUNCIL FINANCE COMMITTEE RECOMMENDATION: Increase payments to the IRS II5 Pension Trust to lower the Town’s long-term unfunded pension obligations as recommended by the Council Finance Committee. BACKGROUND: On January 22, 2016, the Finance Committee discussed the Town’s unfunded liabilities with respect to retirement benefits. During this discussion , the Finance Committee asked Town staff to return to the Committee with various pay off options for the pension-related unfunded actuarial liability (UAL). On February 18, 2016, staff presented various pay off options to the Finance Committee which included reduced amortization strategies for the UAL. The Committee requested that these options be provided to Council for its consideration during the 2016/17 budget discussion. It was determined that the increased pension costs associated with a shorter amortization period were not tenable for the Town’s finances at the time. Since that time, the Town Council has made a concerted effort to accumulate additional funding to increase options for addressing the Town’s unfunded liability. The following table (Table 1) illustrates the actions Council has taken to date to address the Towns pension obligations through prudent additional discretionary payments. In addition to the aforementioned ADP strategies, the Town has also taken steps to change benefits or introduce PAGE 2 OF 6 SUBJECT: INCREASE PAYMENTS TO THE IRS 115 PENSION TRUST TO LOWER THE TOWN’S LONG-TERM UNFUNDED PENSION OBLIGATIONS AS RECOMMENDED BY THE COUNCIL FINANCE COMMITTEE DATE: APRIL 10, 2018 S:\COUNCIL REPORTS\2018\04-17-18\11 Town Pension Payments\11 Staff Report Town Pension Payments FINAL.docx 4/12/2018 8:58 AM BACKGROUND (Continued): new benefits which provide the Town with ongoing savings. To date these actions have resulted in $290,000 of ongoing annual savings as illustrated in Table 2. For additional information, please visit: https://www.losgatosca.gov/2479/Town-Pensions- Information TABLE 1 Council Action Additional Discretionary Funding The Town authorized payment of the entire approximate $4.5 million side fund liability associated with the Safety Plan (June 2014). $4,500,000. The Town Council established a General Fund reserve for CalPERS/Other Post-Employment Benefits (OPEB) (May 2016). Additional minimum of $300,000 funding annually The Town authorized the creation of an irrevocable Internal Revenue Code (IRS) Section 115 Trust for the Town’s pension obligations (December 2017). The Town Council to date has set aside $3.4 million towards additional Pension funding (115 Trust) and authorized an additional $1.0 million to be placed into the CalPERS/OPEB Reserve in the adopted FY 17/18 budget. $4,300,000 (accumulated to date) The Town Council initiated systematic OPEB funding since 2009 for future benefits rather than remaining a pay as you go system. $14,000,000 (accumulated to date) Additional discretionary pension/OPEB funding to date - $22,800,000 PAGE 3 OF 6 SUBJECT: INCREASE PAYMENTS TO THE IRS 115 PENSION TRUST TO LOWER THE TOWN’S LONG-TERM UNFUNDED PENSION OBLIGATIONS AS RECOMMENDED BY THE COUNCIL FINANCE COMMITTEE DATE: APRIL 10, 2018 S:\COUNCIL REPORTS\2018\04-17-18\11 Town Pension Payments\11 Staff Report Town Pension Payments FINAL.docx 4/12/2018 8:58 AM BACKGROUND (Continued): TABLE 2 With the advent of the aforementioned budget actions, staff reanalyzed the ability of the Town to consider reduced amortization strategies and the potential for associated interest savings. On February 12, 2018, the Council Finance Committee received information about two potential approaches, the first being a California Public Employees Retirement System (CalPERS) managed “fresh start” method and the second being the use of voluntary additional discretionary payments (ADP) or “lump-sum” payments managed by the Town (Attachment 1). Staff recommended consideration of the voluntary ADP payoff strategy because of its flexibility and the ability to control timing and amounts of additional contributions. Staff also proposed that a UAL Funding Policy be adopted by Council as part of the implementation of the ADP strategy. The Committee reviewed the fiscal impacts and potential interest savings of both Council Action Additional Benefit and Savings Strategies To help reduce costs related to OPEB benefits, the Town introduced dependent cost sharing and a reimbursement cap to Medicare eligible employees. Employees retiring after February 1, 2016 are reimbursed to a maximum amount of benefit. It is estimated that this cap on reimbursement will achieve approximately $200,000 in savings per year in actuarially required contribution to the OPEB trust account. Estimated savings $200,000 per year. The Town closed the CalPERS retiree Tier 1 benefit for non-safety employees and created a new Tier 2 for non-safety new employees (Effective Date: September 15, 2012). TBD The Town implemented the Public Employees’ Pension Reform Act (PEPRA) for all new non-classic employees (Effective Date: January 1, 2013). TBD The Town participates in the CalPERS discounted prepayment option (July 1, 2015 for Safety Plan and from July 1, 2017 for both Safety and Miscellaneous Plans). Estimated savings $90,000 per year. Additional discretionary Benefit and Savings Strategies - $290,000/year *does not include the potential for additional interest savings of $9,000,000 PAGE 4 OF 6 SUBJECT: INCREASE PAYMENTS TO THE IRS 115 PENSION TRUST TO LOWER THE TOWN’S LONG-TERM UNFUNDED PENSION OBLIGATIONS AS RECOMMENDED BY THE COUNCIL FINANCE COMMITTEE DATE: APRIL 10, 2018 S:\COUNCIL REPORTS\2018\04-17-18\11 Town Pension Payments\11 Staff Report Town Pension Payments FINAL.docx 4/12/2018 8:58 AM alternatives and directed staff to pursue the ADP strategy along wi th development of a UAL Funding Policy. BACKGROUND (Continued): On April 9, 2018, the Council Finance Committee reviewed the analysis of the ADP strategy and the proposed UAL Funding Policy (see Attachment 2 for the report, analysis, and draft Policy). The Committee unanimously opted to pursue a strategy different than that proposed by staff and instead recommended increasing payments to the Town’s 115 Trust Fund as opposed to CalPERS with the purpose of accumulating funds to cover the Town’s unfunded pension obligation. DISCUSSION: During the April 9, 2018, Council Finance Committee discussion, the voting members provided a consensus recommendation not to adopt staff’s recommendation and to increase payments to the Town’s 115 Trust. Provided below is a synopsis of the d iscussion that took place among Committee members and staff. Staff presented analysis based on the approximate $31.3 and $23.3 million in unfunded actuarial liabilities related to the Town’s CalPERS Miscellaneous and Safety employees’ pension plans respectively, projected as of July 1, 2018. In examining the Miscellaneous plan, the additional payment schedules provided by CalPERS indicate a total savings of approximately $8.2 million dollars if the Town maintained an annual additional discretionary payment (ADP) commitment of $235,000 to effectively reduce the amortization period from 30 to 20 years . In examining the Safety plan, the schedules provided by CalPERS indicate a total savings of approximately $5.6 million dollars if the Town maintained an annual ADP commitment of $155,000. These payments to CalPERS would be in addition to the annual required employer contributions. As currently calculated, the expected total savings would be approximately $13.8 million dollars for both plans if these ADPs are implemented versus the payments made under the current amortization schedule. Staff explained that the analysis contained in the report, and any potential savings, were only completed for the scenario provided of additional principal payments being made directly to CalPERS. At the conclusion of staff’s presentation, Committee members heard public testimony and then discussed the matter (Committee member Dr. Monk absent). The majority of questions and comments from both the voting and non-voting Committee members centered on their reluctance to provide additional funding to CalPERS. In particular, Committee member Tinsley expressed deep skepticism regarding the efficacy and solvency of CalPERS. The Committee PAGE 5 OF 6 SUBJECT: INCREASE PAYMENTS TO THE IRS 115 PENSION TRUST TO LOWER THE TOWN’S LONG-TERM UNFUNDED PENSION OBLIGATIONS AS RECOMMENDED BY THE COUNCIL FINANCE COMMITTEE DATE: APRIL 10, 2018 S:\COUNCIL REPORTS\2018\04-17-18\11 Town Pension Payments\11 Staff Report Town Pension Payments FINAL.docx 4/12/2018 8:58 AM agreed. Committee members preferred having the additional $400,000 in payments be directed toward the Town’s 115 Pension Trust for a future lump-sum payment to CalPERS. DISCUSSION (Continued): To accomplish the Committee’s recommendation to the Town Council, there is no need for a Town Council Policy as previously recommended to the Finance Committee. Instead, the Manager’s Proposed Operating Budget for Fiscal Year 2018/19 will include a supplemental payment of $390,000 for the Town’s IRS 115 Pension Trust. Per the current General Fund Reserve Policy, upon the close of the fiscal year, if sufficient revenues are available and minimum reserve levels have been met, an additional $300,000 will be placed into the General Fund Pension/OPEB Reserve. With the proposed Budget in May, staff will also bring forward an update to the General Fund Reserve Policy which will propose higher payments to the Pension/OPEB Reserve to make the additional Pension Trust contributions. This modification will be in addition to th e other recommended clarifications to the General Fund Reserve Policy that the Finance Committee considered and recommended for Town Council approval at its April meeting. CONCLUSION: In addition to the aforementioned Council actions, staff believes the Town currently has the ability to consider additional payment strategies to address the Town’s long-term unfunded obligations. The accumulation of additional monies in the 115 Pension Trust is one important element of a comprehensive approach to managing the Town’s pension obligations. COORDINATION: This report was coordinated with the Town Manager’s Office, the Town Attorney’s Office, and the Finance Department. FISCAL IMPACT: Potential funding for some of the increased level of future payments has been identified with approximately $390K available from expenditure savings in the proposed FY 2018/19 budget. In June 2018, staff expects to receive an updated forecast from its actuaries on future employer required pension contributions that along with revenue estimate updates incorporating assumptions about known developments will be added to the Town’s Fi ve Year Financial Forecast to provide a level of assurance that adequate cash flows or other funding sources are available to meet the higher level of payments to the 115 Pension Trust. PAGE 6 OF 6 SUBJECT: INCREASE PAYMENTS TO THE IRS 115 PENSION TRUST TO LOWER THE TOWN’S LONG-TERM UNFUNDED PENSION OBLIGATIONS AS RECOMMENDED BY THE COUNCIL FINANCE COMMITTEE DATE: APRIL 10, 2018 S:\COUNCIL REPORTS\2018\04-17-18\11 Town Pension Payments\11 Staff Report Town Pension Payments FINAL.docx 4/12/2018 8:58 AM ATTACHMENTS: 1. Finance Committee materials from the February 12, 2018 meeting, item 3. 2. Finance Committee materials from the April 9, 2018 meeting, item 3.