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
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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
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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
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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.
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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.