 Thank you all for being here. It is November 9th, 2023, and this is a special meeting of the long-term financial policy audit subcommittee. We will now call it to order and seeing a quorum. Madam Post, may you please call the roll. Chair Rodgers. Present. Member Staff. No. Member McDonald. Here. Let the order reflect that all subcommittee members are present. Thank you. And may you please explain how public comment will be heard at today's meeting. Thank you, Chair Rodgers. Welcome to the subcommittee members and members of the public. Thank you for joining us today in person and by Zoom. As a reminder to all present, please set your cell phone so as not to disturb others. Our meeting format is integrated with the members of the public watching via Zoom. Members of the public who are using Zoom may view and listen to the meeting and hear from members of the community as being recorded. The City of San Rosa is committed to providing a safe and inclusive environment for you from disruption and will not tolerate hateful speech or actions. Everyone is expected to participate respectfully or if necessary, the meeting will end immediately. After an agenda item has been presented, the chair will ask the subcommittee members for their comments or questions and then immediately following their discussion, the chair will open the item for public comment. You will be called on when the agenda item is open for public comment. Please raise your hand to indicate that you would like to comment. You will be asked if you wish to state your name for the record. Each public comment is limited to three minutes and a courtesy timer will appear on the screen. Any email comments that were received by the deadline will have been included and uploaded to the agenda prior to the start of today's meeting. Emails received are not read into the record. All right, seeing no one here from the public, we will move on to item three, which is approval of the minutes. We have one set of minutes for a special meeting on October 19, 2023, and I am looking to the committee to see if there are any changes that need to be made. Seeing none, we will approve them as presented and we still have no one in present to provide public comment. So we'll continue on to item 4.1, which is CalPERS unfunded liability. Good evening, Chair Rogers, members of the committee. My name is Scott Wagner. I'm the deputy director of finance. I'm very pleased to bring this item today for CalPERS unfunded accrued liability update. I want to start off my presentation by saying that CalPERS and pension is such a broad technical item. And my goal with this presentation, as we've kind of discussed before, was really to provide some building blocks around pension knowledge to start at the bottom a little bit and start with some basics and then cover some history of the system and kind of what's happened in the recent past here over the past decade and a half. Along with where we are today and then where I think we're going and where we know we're going, along with some city actions and where strategies that we've implemented to help. Next slide, please. So like I said, this is what we'll be covering today. We're going to talk about the section 115 trust towards the end and what we're really hoping to get back from the committee is some feedback regarding our prior strategy. Alan and I have brought this item to the subcommittee each year since it's implemented. It's our intention to continue to bring a pension item back to the subcommittee. I would share that every department in the city could come forward and say what their most pressing issue at the city is. I think for finance, the way that we look at the city is pension. And I think the reason for that is that it impacts every single operation the city does. It impacts us in every way, given the size and the scale of the problem. Next slide, please. So let's let's talk about some of the building blocks of how pensions work and just the basics of our pension plans. So pensions really get paid for by three different sources. It gets paid for by the employees out of every single employees paycheck. They're going to pay a little bit of their other pay a percentage of their pay for paying towards their pension. The city is going to pay a percentage of the employees salary towards their pension as well. They're going to send that over to CalPERS or contracting agency to help pay for their pension. The third major way that a pension is paid for is through investment earnings. And we're going to see later in another slide that that is a major way that pensions are paid for. It's over half of a pension dollar going to a beneficiary is paid through by the investments of CalPERS. The main components of a pension plan when I think about it really are the benefit formula. When I think benefit formula is really how generous the benefit is for your employee. You frequently hear that termed as 3% at 60, two and a half at 55. It's shorthand for a public employee that kind of doesn't make sense right at first, but we're going to talk about the specifics and what really that formula means and how it impacts the city and how it impacts an employee. The actuarial assumptions. So when the actuaries get together and they try to figure out how much a pension could cost, they're going to think of a lot of different factors. They're going to think of when an employee enters the system and when they leave. That's a really fancy way for saying when do they retire and when do they die? They're going to talk about when they think of employee, when they're thinking about how much a pension would cost for a company, when they think of how much a pension would cost for a company, service years they're going to have, what's their final compensation going to look like. So they come up with a bunch of assumptions to think about how much that employee is going to cost throughout their career. And when that changes, it makes a big impact. The other third major building block when it comes to pension is what I'll call the expected rate of return. That also gets called discount rate. Those are slightly different, but really the same thing is how much a pension would cost for a company. The big thing to understand is that when any of those three things I just talked about change, it impacts the city greatly. When CalPERS changes how much they think they're going to make, it's a very large impact to us. If they change how long people think are going to remain in the system, it changes things a lot for us. When we change a benefit formula, all these things have major effects, but it's really important for us to understand that when they make these changes or one of two things, and that makes a really big difference, we're going to talk a lot more about in a minute. Next slide. So let's talk about benefit formulas. This is that 3% of 50, 3% at 60 kind of thing. So it really is a way of looking at the years of service that employees put in, the age of when they retire and their final compensation. So the city has three different tiers of formula that are employees and that's really based on two different sets of employees. There are sworn public safety members and then our miscellaneous members. And that's a function of the employees' retirement benefit formula is based on their date of hire. So in the state of California, it is protected legally that when an employee is hired, it is essentially a contract for them of what their retirement formula is. And then they go back later and change what an employee's retirement benefit is because essentially you've agreed to it at the point that you've hired them. They have agreed to that as well. That's called the California rule. There's 12 other states that follow California and that guidance and point to us directly and say that that's the way it is and should be done. What I have here on the board, it shows the counts amongst those formulas within the city. And I think this is really important in that these counts are changing every single year and they're changing in one direction. You can see in miscellaneous that over half of our employees now are what we call PEPRA. That is the lowest formula rate. That is the 2% at 60. They're at the very bottom, 426 employees. And every year the old, the classic employees or the more senior employees kind of fall off and we get a better, more proportionate members of new employees. So really the employees with the more generous pension plan are essentially phasing out of current employment. The same could be said for public safety. They're not quite at half. That change may kind of happen all at once as folks phase out. More miscellaneous is more of a gradual change. Next slide. So a couple of different, let's talk about the left side of this slide first. And what I wanted to show here is what the average retiree within our plans, what is their benefit really like? And I think this is valuable to look at because I think there's a misconception sometimes about what an employee earns here at the city on an average. We hear a lot about employees that make over $100,000. The classic example is when an executive of the city retires or a chief retires of the city. We can always guarantee it. The very final line in the paper is going to be how much they're going to be making for their pension. And that's appropriate. What also though is never in the paper is what our average person is making in retirement. And that's what I'm showing here. So our average miscellaneous retiree is earning around $36,000. Police around 66, fire around 77. So when you look at all the employees as a whole, there's many different careers within there. Some folks just stay around for a little bit. Some folks stay around for their entire career. But when we take a huge step backwards, that's what we look at at the plan. So like we talked about a moment ago, we have three different formulas for each group of employees on what their benefit is based on when they were hired. And just looking at those numbers from the top, you know, well, what's really the difference between 3% of 50 or 2.7 at 57? It seems very abstract. So what I try to do here is I try to put just a, you know, the same employee receiving three different plans. What really does their pension benefit look like? And so the example I gave for public safety was an employee was hired at the age of 30. They did 25 years of service here at the city. Their final compensation was $100,000. And what that meant to them as a final pension benefit. So as you can see at the top, the 3% of 50, that employee earned $75,000 as a pension benefit. The new benefits, the pepper benefits would have earned them 62,500. So you can see that that benefit has been reduced. The second, second example is miscellaneous. And what you'll see here is a slightly different example, same concept though. Employee hired at the age of 30, 30 years worth of service, $100,000 compensation at the end of their salary at the end of their career. That, that classic employee earning 3% at 60, they had a $90,000 benefit. When we look at pepper, that's $54,000. And I think it's fair to say that that's a dramatic decrease in what the, what the pension benefit was for that, that employee. Next slide. The concept I brought up a moment ago about who, who pays for pensions. This is, this is the classic example. It's called the CalPERS dollar. And it shows for every dollar, the dollar that CalPERS pays out, where did that dollar come from? So 32% of it came from employers, 12% came from the employees, and 56% came from investment earnings. And I think the thing to take away from this, that I take away from this is first of all, that's a really good deal for the city. And that we've located, we've been able to offer a benefit to our employees that 56% of it is coming from a funding source outside of normal city revenue. That's a lot. Additionally, 12% employees are paying for. So the city's paying 32 cents on the dollar for every dollar being paid out. That's good. Ask a question about that though. Yeah. How have they done in the investments and have they gotten the 56 cents on the return? So we'll get there. Absolutely. So I have a slide in the future. We're going to talk about the thing. No, I said wait until he's done with the whole reason. Let's hold our questions. So that's a great deal. But as we, as we just brought up, there's a lot goes into that to say whether or not that came to fruition. What I will say though to your question is that is based on actuals. So the dollar is going out the door. That is the truth. The accurate statement at the moment, but the story is a lot more broad than that. Like we brought up pensions are a broad subject. We can't look at any one thing and say that that's the full story. So let's go on to the next slide. So next slide is exactly what we wanted to talk about. That 56 cents sounds fantastic. A great deal. But it's based on risk and risk goes one of two ways risk can either be good or it can be bad and has CalPERS been able to do what they said they were going to do. Meaning meet their expected return, meet their discount rate for a return. And that answer isn't quite as straightforward as you might think. CalPERS is the first thing to look at. At the very bottom maybe is the first good thing to look at. And that's just a compounded annual rate of return. Now we can look at that and say well over 20 years CalPERS has earned 6.9%. That's a good thing when again we think about how CalPERS has created value for the city, how they've been able to create funding for the city for this employee benefit program. But what that's really measured against when we look at how we're doing on a funding basis is well how close is that to what you said you were going to do, right? Because that matters. It doesn't just matter what you did. It matters what you say you were going to do versus what you did. And this is going to be a little hard to see, but there's a really important line on this graph I want to point out first. And that's the line that goes across the X axis. It is a blue line and it starts on the left hand side right around seven and a half, seven and three quarters percent. You see that line that goes all the way across? It's blue. That's what CalPERS was supposed to be earning each year along the way. That's their discount rate. That's their expected return. And so the way that we think about it in finance is really that's zero. So when CalPERS when we look at the 2009 great recession year where CalPERS lost 23.6% of the portfolio, it's really much worse than that. It's really 23.6 additionally minus the seven and a half they thought they were going to get. They really lost 30%. So we judge them about what they say they're going to get, how close they were to their plan. Now, if you look at the line, which is very hard to see on this small graph. So I'm sorry. You'll see that there's a dot along the way, along that line going across. And that's each time that CalPERS has lowered its expected return. If we went back farther, you would see expected returns from CalPERS over eight. Right now we're at 6.8. So over time here, CalPERS has dramatically decreased what they expect to earn. Now that's on the surface a good thing. Less return, less risk. That's good. But it's not that simple. And we're going to talk about that a little bit more in a minute. But in general, I think the other thing to take away from this graph is volatility. Look at how those numbers are just all over. And really if we were to look at CalPERS returns from 1980 to a similar period in different decades, it wouldn't, the volatility doesn't look like that. We've got great recession and now we've got COVID. That 21.3 at the end and then the 6.1. Just volatility and pension funds don't do great with volatility. Which is going to lead us to some more discussion points in a moment. Next slide please. So what's, what's been the big changes with pensions? And this is the story. I think this slide is more important than the prior one with, with returns. I think returns over a very long period of time. When you look at that slide, they mostly even out to what CalPERS probably thinks they're going to get. But this one really matters. I'm going to start with the bottom one first. So CalPERS board actions and meeting new accounting standards. So back around 2011, 2012, the same time I started with the city, a lot changed in pensions big time. First of all, they've dramatically decreased that expected return rate. Again, a high around 8.5%. Now it's 6.8%. When you impact your discount rate, this is a critical thing to understand. You impact it backwards. So everyone, all of your retirees, all of your employees that have been earning service credit, they've been earning the benefit. You thought that you were going to be getting 7.5. And now you've moved it to 6.8. You've created a very, very large unfunded liability. When you change 1% for Santa Rosa backwards, you give us a $200 million liability. So the story with pensions is not just investment returns. That is part of the story, certainly. But a very large part of this story is changes to the pension system, meaning we don't think we're going to make as much as we used to. And now we've got a large liability from it. Another huge change with how it happened was CalPERS was originally, I will say created by very smart actuaries and very smart finance people, maybe a little too smart. And that some of their ideas I think were pretty good, but they were very hard to explain. And one of the things that was very hard to explain was how they amortized their losses. So when CalPERS lost a bunch of money, they had this rolling average, very complex way of amortizing the loss in the city paying for that loss. And in practice, that rolling average really meant that it took about 50 years to pay off a loss. If we lost a dollar today, it was going to take the next 50 years for the city to pay off that dollar. Now an actuary would take a little bit of issue with that statement, but I'll tell you what's true. That's how one of it took. That doesn't make a lot of sense. It doesn't make a lot of sense for a generation to essentially push its losses onto the next one that way. And so they aggressively cut that from a 50 year rolling average loss schedule to a 30 year fixed, much like your house has a 30 year amortization schedule. And just like when you change the mortgage on your house and you go to a much shorter term, your payment goes up by a lot, especially if you could imagine you had a 50 year mortgage and anyone to a 30 year mortgage, your payment just went way up. Again, it sounds great, but where the rubber hits the road is where the city needs to make payments. Another big component of why our payments are going way up. Recently, they doubled down on that methodology. And now when we lose a dollar, it takes 20 years to amortize it. So sometimes I explain this as the reform is still getting reform reform, where we are reforming ourselves a lot here within this system. The top part, again, critical to understand. PEPRA. PEPRA, the former actions I just talked about, we are facing, they're affecting things that have happened in the past. PEPRA affects things happening in the future. So a lot of times there are some confusion saying, I'm waiting for all this benefits of the PEPRA employees. They're costing us so much less. I should see all these benefits coming so quickly. It's not that way because they're forward facing really. The benefits of PEPRA really the city sees 20 years from now. 30 years from now. We see some benefits and we're going to talk about that. We're going to talk about PEPRA. We're going to talk about PEPRA. We're going to talk about PEPRA. I'll tell you a little bit more in a moment. But the critical thing to understand is PEPRA will not solve our unfunded liability problem we have now, because that has happened in the past. PEPRA is affecting the future. Next slide. We talk about good news. Right. This is good news. And the city. We can be really proud. And we are leaders in the pension area. But we need to have four options to begin with. On this issue. Here's a question. What is on this issue? Sure. First. Starting in 2013-14, I believe. Employees came forward, recognizing these increased. Contributions, we're going to be necessary to CalPERS. And all bargaining units. That are classic employees pay more. Then they're required chair. pay as high as an extra five and a half percent of their paycheck towards their unfunded liability cost. And that's good. In FY20, the city made an additional $4.2 million payment to CalPERS. We paid more than what we had to to help future payments. We are still benefiting from that today in our benefits, in our budgets that we're putting together. We see a little benefit of that from each year. That was a very good action. And then, personally, I think the biggest or one, they're all big. But in last year, we created a section 115 trust to pre-fund pensions. GFOA sees this as the best practice for agencies like us. We feel very strongly about our strategy. We feel really enthused with how it's gone so far. And we're going to talk about that some more in a minute. Next slide. So as I'm going to show here in the next slides, the pension expense for the general fund has gone much higher. So just take a look at the screen. We're talking about topping out at $42 million in fiscal year 31, fiscal year 24, we're at 25. I have a graph here in a moment that shows our history. These are really large numbers. And the actions that we're taking, I believe, are going to help mitigate some of this impact. Not all. This will continue to impact city operations. There is no easy way out of this. Next slide. Okay. So this is the most important one. So hopefully, let me do my best here. This one's going to come with a story. So I started with the city right at the beginning of this graph. And one of the first things I was given was pensions. And the reason for that is because all the new accounting implementations came in and they said, new guy, congratulations on your new job. Here you go. And Alan's laughing because he's the one that did it. So back then, when I went through the exercise to look at it, I looked at all these changes that happened and all these major changes that happened. And I put together a graph very similar to this. And I said, this is what's going to happen at the city. And we were going from a $3.5 million contribution from the general fund to a $5 million general fund contribution. And the reaction I got was that's not $3 to $5 million. How could we do that? How could that be? How could we go from $3 to $5 million? This was management and that was used to zero and negative. They weren't used to having to pay unfunded liability like this. How the question is where how can we maintain city services if you're saying that we're going from $3 to $5 million. We're going to have to make cuts on our budget. We're going to have to impact operations. And I was told, so again, I gave them a graph just like this and it looked just like this. And it said, you know what, 2031, this is where I think we'll be. And they said, and them and some other folks that have been around and experienced with CalPERS said, that's not the way it works out. What's going to happen is that sometimes CalPERS is up and sometimes CalPERS is down. We lost some money. They'll make it up. It's going to be okay. This isn't going to happen. And I rejected that at the time and I still do today. The other comment would be, well, that's great, but you're not really factoring in PEPRA. We're going to be saving so much money from our PEPRA employees that that's going to mitigate this graph and we're not going to get there. And I rejected that at the time and I reject that today. And where we are today is where we are here on the graph. And as you can see, I call this CalPERS mountain and we're halfway up. And I think we're going to reach the top of the mountain. I think I don't think that there is a tunnel. I don't think that there's a shortcut. I don't think there's anything that will come along and stop it out. Now, Alan and I would both tell you that during COVID, when CalPERS had the 20 some odd percent return, we both sat and we were both flabbergasted and said, because it cut that graph. The graph I said wouldn't get cut, it did. And we were flabbergasted and we said, wow, the problem we said wouldn't go away. It kind of is going away a little bit. And that's great news. And we were very happy, but we were realistic and said, well, let's see how it goes next year. And next year we had a horrific return with CalPERS and the graph went right back to where it was. Again, I don't think that there's an easy answer to this problem. I don't think that there's a holistic answer to the problem. I think that come five years and six years and so on down the line. I think the graph is going to look very similar. Now, what's important about that is though, is I also reject the idea that when folks say, hey, you know what, CalPERS just goes up every year. It's going to go up every year forever and that's that. That's not true. Eventually it's going to come down. And it's going to come down because those major changes I talked about, discount rate change, amortization change, the large losses from the Great Recession, eventually start falling off this graph and things start going down. I don't believe that I don't believe that we'll have a just consistent, we'll be at 50 million forever or keep going up forever. I reject that. That's not going to happen. The problem is that we're talking about 2033, 2034, 2035, 2036. How much solace does it give us today and our current needs today to say, hey, great news ever. Again, good news. I think it'd be great in 2035, 2036. That's a very hard message to send, to give. Next slide. Here are those numbers summarized. The city has a $490 million combined unfunded liability across all funds. We're about 69% funded. Fund ratio is a good ratio to understand how well you're doing. We need, they're trying to make the system so we are much higher, much more funded quickly, that is their goal. Next slide. So the section 115 trust. We've looked at a lot of big numbers and as council funded $10 million from general fund stability reserves and Santa Rosa water chipped in as well from their operating reserve into a 115 trust to help mitigate some future pension expenses. Council also did, which was critical during this period is they identified a continuing funding source for the section 115 trust being our pension obligation bonds. Simply put, we no longer have to pay them off starting in this next current budget cycle. And they identified in that what I call pension should feed pension. We shouldn't just let a pension expense fall off. When we know we have higher pension expenses, we should retain that funding and put it towards our pension expenses versus kind of a quick boomerang effect of trying to recognize a saving that you're immediately just spending at the same time as well. So they recognized, they said, hey, that pension obligation funding, let's direct that towards the 115 trust, earn interest on it and use that to help mitigate some of our higher years. The goal at that time was to have we when we worked with our consultant, we wanted to have clear measures on how much we wanted in this trust, how much we wanted in the reserve and the kind of industry standard for agencies is you want to have about one year's worth of payment at the time you set it up for us. That was $26 million. So we have the 10 our goal is to have it grow to that $26 million number. We are pleased to say that in FY23, the net return on our pension obligation or on our 115 trust was 6.6%. That's good. It outperformed the cupers. I will say that next year if I come back and it's not good, it's not, you know, over we believed in that over time, we believe in compounding interest, we believe in the ability of our investment portfolio to grow. We're happy that it came in good the first year, but again, we're not going to view this on a year-to-year basis. We're going to view this over time. Next slide. I think that's my want to echo that point is that as we start getting into the trust, that's we're taking a very long view with this. So these aren't these aren't quick wins. I mean, we're happy to see good performance, but we are looking on a long view in order to solve problems in the future. Thank you. Since the time of setting up the 115 trust, we had what we didn't want to happen and that calper has had a very bad fiscal year 21 of a negative 6.1 investment return. When we set it up, we said, hey, our goal is to not touch it, but in the case where something like that were to happen, we wanted to be strategic and revisit that idea and come back and say, no, now our contributions have significantly increased. We need to have a usage plan of our 115 to help our operations. We gave that proposed strategy to the long-term finance to the finance to this committee last year, which was supported. And I plan to do that. We're going to show that again here on the next slide. But the general concept was, hey, we wanted to focus our usage around using the POV money versus the initial investment money, that $10 million. We want that to sit, and we want that to grow over the time exactly what Alan said. That is the long-term seating. We want that to sit and grow over time to get us to where we want it to be. We can redirect the POV funding in the meantime to be used in the trust, at the same time, directed towards the peak of our years within our animalization schedule. That tip of the mountain, we want more of a Mesa versus a mountain. So go to the next slide, please. Here is that in numbers. So our proposal is that we begin to draw down from the section 115 trust beginning in FY25, and it carries on through FY32 through the peak of that mountain to try to mitigate some of those large increases at that time. Water has the same usage scenario on here. As you can see, I wish that our 115 trust could just mitigate our payment and take us from a $35 million payment to a $5 million payment. But what I would say is that as a finance person, I am a very large believer in incremental difference and making it better than it would be. It is very, very good. I love less. That is what I truly love as an accountant. I love to see bills go down. But less than it would have been is still a very powerful thing for the organization, and that is what this strategy accomplishes while still maintaining our balance and maintaining our flexibility. What we really love about the 115 trust is that it gives us flexibility. It gives us an opportunity to receive feedback from council on how we are using it, the right approach, but what we want to stress is consistency and using it and being mindful and purposeful on how we do so, which I believe we are doing. Next slide. So with that, I just covered an incredible amount of information. So what we would really like to hear is comments, concerns, support towards our strategy for the 115 trust that we were proposing to keep. I would like to address any questions towards pensions that you may have. Like I said in the beginning of the presentation, my goal of the presentation is to be general versus get into the weeds. But I know that there is a lot of technical information about pensions that I would be happy to address if I can. So with that, I'll see any questions. All right. Looking at committee members, I know you have. I have to leave in a few minutes. I know that part which you have some questions. I do. Do you want me to go first? Thank you. Okay. So you stated that we have a 200 million dollar deficit that we have to be able to plug because of the CalPERS investment. So how do we eat the elephant? I know we've started on the 115 trust, but how do you actually ultimately move your invented liability? Yeah. Great question. Awesome steps. Great question. Could you go to slide 11, please? So that's what this slide is. This slide is the eating of the elephant. This slide is a, hey, we're paying $20 million this year. We're going to pay $30 million next year. Remember, we're making our payments to CalPERS to accomplish that goal, to eat away at that $500 million elephant. It's a perfect way to put it. So we are on, it's the same way you pay off a mortgage on your house. It's every single month. We're making that payment. We're on a schedule and eventually that really large principle that you owe, you start paying it off piece by piece. What we've done, which is really powerful though, is we are taking additional bites. That 115 trust strategy is us saying we're not just going to follow CalPERS schedule. We are also going to make our own bites at this elephant, additionally, through this strategy. And the investment's going right back in to reinvest, right? So if we're getting 6.8, then that interest on that goes back in to help with the unfunded liability. Got it. You got it. So that, that makes sense to me. Great. What's the state's responsibility to helping us fund CalPERS and do they have any responsibility? Because this is similar to what they've dealt with in schools with STRS and FERS. They just put more on the employee in, you know, school districts and more on teachers. So it's the same principle here with CalPERS then. None. The state has no responsibility for our unfunded liability. Okay. When that, that was really, I think the stress test for that has been done when Stockton went bankrupt and Stockton claimed that CalPERS was one of the main components of bankruptcy. CalPERS, you need to do something about this. And that obviously was taking the courts. And what's CalPERS responsibility for their investments that have gone bad? Is there any? I would say again, none. None. We are, we are contracting out. It makes a bad decision and that's that. Yeah. Okay. That's good to know. And I think that's important for us to know too that there's really not anything we can do to mitigate that. How has the CalPERS board chosen? Well, there's different seats on the board. The state treasurers is one of them. There's additional appointees like the all employed, all state employees will basically vote. So there's a state employee representative, all employees within CalPERS. It is. And so there's what I'm really saying is I could name off a few of the ways of the year. I can't name all of them. I think that's where the state feels like they should be responsible when the state treasurer sits as overseer of the CalPERS board. So that's probably where some of my confusion has come in. Sure. So what is our total right now for our unfunded liability? I've heard eventually it's going to be a half a billion. It's the 498. It's the slide. It is that much right now to get. We have a half a billion dollar current fund of liability. Correct. I think it's 498. It's 489. 334 roundup. So just in case. So that's okay. Okay. One of the things we've talked about a lot, Allen is adding back services for things that we've contracted out. And that I can see has been a hesitation based on finance for these unfunded liabilities. From my perspective, the concern is that the contracts continue to go higher and higher and higher. So my concern consistently is we keep outsourcing contracts because there seems to be pushback on this unfunded liability. At what point can we say we still need to take a look at these contracts? Because in the long run, we still are better off to actually deal with adding some employees back to services. And how do we mitigate the unfunded liability component of being able to do that? Because I see things in the city that are also liabilities because we aren't bringing back services. We're very reactive in our approach. And as a decision maker, that makes me uncomfortable. So thank you for that, by the way. That's and what we do is, we still analyze whether a service makes sense to come to be done by city forces. What we're finding, though, is that while contract costs will go up, contractors' costs could go up due to inflation or whatever, how they're doing their pricing, it in the long run, we're still seeing that the cost of city services by city employees is higher. In addition, there is a level of flexibility that a city has. And given what we're going through or will be going through with our budget, I think where we come from is, you know, we want to have the flexibility to be able to lower a cost through ending a contract versus lowering a cost through laying off employees. And that's what we went through, you want to step in? No, go ahead. Oh, I mean, that's what we went through back in the recession. And so, yes, having gone through that, I am very reluctant and skeptical that especially a service that we used to do in-house and have now contracted out to bring that back in-house and re-institute all those costs, I don't see how that works. That said, we do analyze these things objectively. And if it makes sense, we would propose that or at least give that, we would back that recommendation. And so I want to clarify. I want to clarify. Okay. And just on that, though, Alan, if say we are contracting for eight people, but you said, well, counsel, you can hire in four people, and that would be similar in cost. That's the piece that I feel sometimes is missing for us. You may not get the same service, but you could bring back your own service, but you're going to maybe get less because of unfunded viabilities. That when you're doing your analytics on something, that would be of interest to me, because then it's back on counsel to say, we still feel it's best to have our own employees do it, even though we have fewer, I mean, maybe not be able to go as far, we still will have staff on hand to be able to do maybe other jobs, not just what we're contracting for. Because in a contract, it's very clear what they're responsible for. But an employee, sometimes you can send them and do several different things that we come across a lot, I think. So that would be of interest to me when it comes to unfunded viabilities. But it's always back on counsel though, because at the end of the day, we don't have the data to show us. Yeah, then we asked them, but at the end of the day, we're the decision makers. So they can suggest we go through a contract or do it that way. I think part of the thing in the frustration is we feel like we get contracts when it's detrimental to where we're going, right? So we don't really have the time to say, we want to explore hiring instead of continuing with the contract. And so I think that is where some of the frustration, sorry for, but no, it's true. That's where some of the frustration that we can't send it to you to say, well, wait a minute, we'd like to have this information on the unfunded liability because now we're, we are going to be out of contract in a week and a half. Sorry, it says me on. Yeah. So I want to, I want to really clarify something here, because I will say that I worked literally on that exact subject today. Okay. On an analysis of city employee versus contract employee. Okay. And when I did that, I removed any unfunded liability proportion from payroll out of that. So when we look, when we do an analysis for in-house versus out-of-house employee, unfunded liability is not part of that equation. Their CalPERS retirement percentage is, but not unfunded because unfunded is a set amount we are going to pay every year. It is a fixed amount. Whether we had one employee or a million employees, we are following that graph. If we have one or a million, it does not matter. And so when finance gets asked, hey, we are doing an analysis on in-house labor, we need to know are exactly how much a facility's attendant costs. Okay. Our budgeting wants goes through, they pulled the position budgeting amount and they subtract out the unfunded liability amount. Now, let's understand though, that's just one benefit why not I'm an employee's budgeting. They're still budgeting for retirement. They're still in a retirement. They're still healthcare. So I just want to set that to rest that unfunded liability is and should not be a factor. And it is not when we do our analysis on in-house versus out-house. There, and I can say literally I worked on that today. Okay. And the retirement amount just so I'm clear isn't through CalPERS that we set the amount that the employees are coming in at. Is that part of a negotiation? The amount that the employees pay towards their pension is a part of the negotiations within their MOU. With that bargaining unit versus for classic employees, for PEPRA employees, for the new employees, there is a set formula and that is the part that you do when you're doing your projections and analysis. That's very helpful to separate those two out for decision making. And I really apologize. This is the kind of stuff I actually love to learn from all of you. So thank you for the presentation today. I have another meeting at five o'clock, but this will be my last one I missed. So thank you so much and thank you for answering my questions for all that you guys are doing. So thank you, Mayor, for allowing me the chance to have those questions answered. Sure. Scott, this was a really impressive, this is one of the more impressive presentations I've sat through. I think what through that is kind of like nuanced information and make it as clear as you did for basically a lay audience. That was, that's impressive. Thank you. Because some of the stuff I'm at least very familiar with, but you're making me think about some of the things in new ways. Like the accounting standards in terms of when CalPERS does change, it's expected return rates, and we've thought through what that meant before looking back into the past and then having that affect the future on funded liabilities. All right. So as I'm processing some of this, let me start out with some easy ones, just to warm up. So our unfunded are about 68, 69% unfunded rate. When I sat through the CalPERS presentation in Sacramento a few, a couple of months ago, I guess it looked like, it looked like that was somewhere in the middle of the of the cities in the state. Or is that accurate? Like we're not the only ones that are in that range. No, I think what what really matters if I look at different agencies and how funded they are versus not, the thing I look at is how much has that city grown? Cities that, you know, cities that have experienced a huge amount of growth recently, they don't have as many retirees where the CalPERS liability has been built up, built up, built up. Yeah. You know, like cities like we can think of some that have had a lot of growth over the past 15 years. Yeah, in Roseville, those kinds of agencies, they have a much higher funded status. Also, I will say that some agencies down south that have had a more proactive approach towards funding their unfunded liabilities, they have a higher percentage. I think the classic question is 69% is that good or bad? I don't know. I think what really matters is this chart. I think it, I think that's what matters. I think your payments is what matters. We can't, I don't think any agency should look at themselves and go, we're good, 69%, or we're bad 69%. It's really is, how is your agency going to pay for that? How are they going, what is your agency's plan to address that chart? Yeah, I think that's, I think that's, I mean, that's a good, that's a good perspective. And I wasn't putting a value judgment on that, on the percentage so much as just putting it in context. We're not, we're not the only city that's dealing with that right now. This is an ocean rising tide, lowering tide. Yeah, I was interesting how, how recently it was that most of the state was in that, you know, 80, 90% funded rate. And then as you pointed out, the recent return years have pushed everyone down, recent return years plus the actuarial changes have pushed everyone down. So let's actually talk, I don't want to get too, too much into the, into the weeds, but with, with, that's where I live. So it's okay. How much into the actual actuarial tables do you want to get? Calipers had a slide. And so it was Jason, not nice sitting in there. And they had, they basically had the Calipers wide version of this chart. And they were again, they were showing the, they were showing the change, basically the pre COVID post COVID change in the actual area of change in actual actuarial tables where they had their version of the mountain. And then because of, well, they didn't get the reasons, however macabre they might have been, but basically in the last few years, the mountain or the mountain for, for Calipers has turned into more of a Mesa. And the decline starts earlier than they expected a few years ago. Does our chart take into account any recent actuarial changes? This, this chart is the most recent, most updated information possible. Okay. So this is coming straight from Calipers too. They're giving us these numbers. This is coming straight from Calipers. And tomorrow I spoke with our actuary this week. This is, this is as updated as it can get. And I will, I will kind of to the fine, to finances horn, not just me, but our staff in that this information is more updated than the one in our actuary. So when Calipers is, is telling us what we're going to own them, is that based on, that's not based on our specific retired employee data? Absolutely is. When you look at a general Calipers presentation, they're looking at all agencies across the board that may have very different, maybe a fire district, maybe it could be anything. This, all the data that I presented today is specifically for us, it's based off of our retirees, it's based off of our employees. So they're looking at our universe of 1300 retirees or whatever it is, their, their ages, their, their expected life's fans, et cetera. And they're saying, okay, this is what you got to pay us this year. Okay. That was the question I had. It is not granular. Absolutely. Okay. So this would have been taken into account their changes. That's, that's really interesting. Yes. Okay. And when you talk about, I would bet you, when you saw Calipers presentation that presented that Mesa concept, they had not factored in the 6.9, 6.1% loss in fiscal year 22. Oh, I betcha. I like that. I like it. I like if you figured out an error in their presentation in absentia, that would be impressive. And it's not an error. It's the most updated information they have. We're going past that. All right. Good. That's helpful. All right. I know an easy one here, because I'm sure there's some sort of easy explanation, just the jump up and then decline through the end of that graph. What's that coming from? That's exactly what I talked to our actuary about. So what that came from is that we had this amazing year of returns of the 20%, whatever it was in fiscal year 21, right? Great year, that first amazing year returns. And then we had the horrible year after that. That really represents, that one year represents that all the other years prior to that have that awesome credit from that great year of returns. And that year doesn't. That falls off, that credit, big old credit falls off in fiscal year 43, but the big hit from the loss still remains for the year after that. What I'd really say is I double check to make sure it was right and it's right. I'm assuming that'll smooth that over time. It will. That's exactly what I was going to say. Once we start stacking more amortization bases off of it, I think that'll normalize. It'll come down and the graph will make more sense. All right. I think my final question, this is a pretty easy one. So I like the chart you had on slide 15, where you talk, where you show. I like the metaphor too of the Mesa rather than the mountain. That's a really helpful way to think about it. In terms of the amount that's in the section 115 trust. So for pulling out that 1.8 to three to whatever the amount is over those years, what is the level of what's happening to the level of the actual 115 trust? So great question. Thank you for that. The intent of that strategy is to have our balance within the 115 trust be the initial investment of $10 million plus or minus investment returns over that entire time and leave that pure and untouched. So the corpus in the endowment terms, the corpus stays untouched and we're just, we're living off the proceeds. We're holding on the proceeds of air. We're going to let the council initial investment grow over compounding interest over time. Okay. Use the POP funding in its place. So we would anticipate with this plan that in 20, 30, whatever, we still have that 14. That's the goal. We still have it plus interest. Interesting. We still have the long-term aspiration of growing into 26. Absolutely. But we'll live with whatever the less amount is and it helps us to lower it. And it gives us, if we're going to retain through this strategy, the ability that if fiscal year 2031 comes around and forbid something that happens within the markets, we still have that funding to use at our discretion to say, Hey, guess what? Something else. Well, I mean, no one's going to be surprised at this one. Something is happening constantly, right? So something else happened. You know, hopefully not a pandemic again, hopefully not a great recession, but something else happened. We still have our nest egg to still go back and say, wow, something really that we couldn't have anticipated happened. We still have that as a resource to help mitigate something that may happen additionally. Okay. I'll stop there. Again, really, really good and helpful presentation. Thank you for doing this. How many times have you done this, by the way? A handful. Yeah, over the years of a bunch, just like Al Gore's climate change PowerPoint where it's been dated every year for 20 years, unfortunately. It's a good one. Thank you for doing it. So I'm happy that council members can get in the weeds because I'm kind of lost in the middle of the street. So I'm going to ask you a question. So when we talk about the unfunded liability and I'm getting the point that it cannot be reversed, right? It's a set number. Each year it changes. Yep. But think about it as in what you've already racked up. It's like a credit card. It's like the debt you've already acquired is yours. You got it. But we can acquire more debt because we have an endless limit on this credit card. Yes, we certainly can. So if CalPERS were to... These are great questions, by the way. If CalPERS was to have really bad years going forward, yes, that credit card balance is still going to grow. We still are subject to it growing. Now, the pension reformers would say, well, the great news about that is it's going to grow less than it would have because of the benefits not as being as generous as they were before and because you now think you're only going to earn 6.8% versus the 7.5%. So they have taken actions to make that future credit card debt way less than it was before, if that makes sense. So that's a possible. So then I want to get back to something Vice Mayor said. So if we continue to hire in-house and not contracted workers, if it does continue to grow, the number of employees then affects what we keep putting on the credit card. I think that's where it was confusing, is that it's not what we already have, but the more employees we have, it still may impact our unfunded liability if we go back into adding to the credit card. I completely agree. Okay, so I think that's a very good point. The confusing part. And when people say unfunded liability, it's the potential that it can add to our credit card. I think that's a very wise point. Absolutely. Like having a baby, you can't even afford the ones you got. Okay, never mind. I always have to have a metaphor because that's how I remember. I think thinking of it that way is very astute in saying, and those are the, that's exactly what Alan was speaking to, and that it is not just a, one of it is a holistic view on how we manage our workforce in the proper level. Well, I know you have another one, but I too would like to thank you because this is very difficult to understand because there's a lot of different nuances and things when you have to talk about this. But I did want to, I had one more question, and it's, it would be historically, it would be historically why the city didn't choose to do something when I worked at the county. We actually, why you look like that? That is a great question. How you know my question? No, I'm glad. Please, Mary, go ahead. You probably do know my question, but we actually had money, pepper employees had to give money for unfunded liability that we didn't even accrue that we would never ever see, but we were giving money to the unfunded liability. Why is it that the, and I don't agree with that because some of my check went to that, and I don't think it should have, but why is it that the city, and I guess this is a historical question about a decision that was made. Why didn't we put it on the employees to pay for the unfunded liability? Because the county sure did. So we absolutely did. So employees are paying, this is one, one I talked about. So during that same period with the county, the city had a completely similar action. Employees now at the city, the classic employees that this unfunded liability really came from, they are paying more than what they have to. They are paying an additional, like I said, a police warrant pays an additional five and a half percent of their paycheck towards the reason of unfunded liability to help, to help with that. Now, what the city did is that the city didn't direct that five and a half percent towards a pension fund or towards, it is just a credit against operations. So the city is still, to be fair, today it's still the same impact. It's still a credit against a charge. It still works out in that favor, but they didn't direct it towards, let's say, a 115 trust, etc. The employees are making additional contributions towards unfunded liability. That is absolutely true here. Interesting. They left those funds as general fund. They didn't restrict them. Yes. Okay. Wrong answer. Just for reasons of flexibility. I won't speak to what I don't know. I won't speak to that. I wasn't expecting a shrug. I'm more curious. Well, no, it's not. I mean, I can't get into the mind of policymakers. Yeah. Okay. What I would say is that we've done everything to try to be more forward-looking and to provide the mitigation as well as we could, as well as we can now. So forgetting about whatever happened in the past, it's important to note that going forward, we're trying to rectify some things, I guess. That was an impeccably diplomatic answer. We'll take that. Thank you. I'm waiting for the text. Again, love it. Love it. Thank you for being real with us because I think that we should be able to answer these questions. Employees should be able to know and community members should be able to know how it works because there's a lot of misconceptions about unfunded liability and retirement and things like that. So thank you. Thank you. At this time, normally we would take public comment but seeing that there are no members of the public that are currently at this meeting, we will forego public comment and we will now go to item 4.2 M.H.C.A. section 115, Tress. Take it away. Thank you, Chair Rogers. This will fall right into line of taking the right actions and we're really excited about this item a lot. So next slide. We're going to talk about what PEMCA means. We're going to talk about the unfunded liability the city has for it. Some history, city actions. What we're going to propose is an additional section 115 trust to address this problem. We're going to talk about the next steps and then we'll open it up for discussion. Next slide. So PEMCA, what this is really about is that the city offers retiree health to public safety employees that are sworn employees. After they retire because the city contracts with CalPERS for our healthcare, PEMCA is the law that says that we need to offer those employees post-retirement health. And I cite the government code and next slide. So there's some problems with this construct of being able to offer employees retirement at health through CalPERS. And the big problem is what we call pay as you go. Meaning that the city gets an invoice from CalPERS each month for the premiums of their retired employees and we pay it. But that's not really how it should work. It should work more like a pension plan, meaning that while you're an employee, the city should be setting aside a certain portion of your paycheck to help pay for your healthcare when you're retired. The city should be paying for your retiree health while you're a current employee the same way we are trying to accomplish pensions. There was no way to do that. CalPERS on a health basis side, they can't take your they weren't able to take our money in advance. And so what happened was because of this a really large unfunded liability happens. We've got all these expenses that have been accrued through employees, but we've got no money to pay for it really simply. So as of if we look at the city's financial statement as of 2023, that liability is almost $25 million. So not a small amount at all in the very impactful amount. Next slide. So the city recognizes this is a huge problem in 2011 and what we decided to do at that time was we had nowhere to put the money. But what we said was, hey, we know we have this growing liability, we're going to start budgeting for it and we're going to start saving for it to offset the liability. We're going to build up cash in an internal service fund to help pay for it. And so every single year from then, as part of our budget process as part of employee benefits, we are recognizing that, hey, the current employees have a safety employees have a retirement health benefit cost associated with them. Here's the amount and it's going to go to that fund. As of 2023, the balance in that fund is about $11 million. So we've got about $24 million or $25 million worth of liability and we've got $11 million worth of cash. That's not enough. We still have a huge gap there to fill. And the problem is that the way we're doing it, that money sits within the city's general treasury and the investment returns in our general treasury as we all know are not very high. So unlike CalPERS where we're receiving a higher or unlike our 115 trust for pension where we receive that higher benefit of investment returns, our Pemka money just sits within the city's books runs very little interest. And it doesn't keep pace with what our Pemka liability is. The other issue is that the by having the money on our books, it can't be included in the actuary reports. Because the actuary see that money as like, you're not really going to use it for this, you all are going to use it for something different. So that really is a struggle for us. And also our current strategy really provides no guidance on how we're going to use it. We're just essentially, we've got $25 million worth of liability, we're just throwing money at a problem. And we're trying to offset it and we're just not keeping up. The more money we throw, we're just not getting there. Next slide. So what we're proposing to do is to create a section 115 trust just like the one we were talking about with pension. It would take the balance within that OPEP fund that $11 million and it would fund, it would move right into the 115 trust. And that's going to do a lot of really good things for us. We're going to be able to invest it more broadly than we do the city's treasury fund, which in turn would give us higher returns. The funds can be used in that actuary report. And once it gets into an actuary report, at that point, we can have a really productive and meaningful strategy built off of that just with our actuaries to say, how are we doing on a funding basis? When do we need to start paying this down? How do we do that? And the payments would come straight from the 115 trust. So instead of us paying CalPERS, our 115 trust would pay CalPERS and we would fund our 115 trust. It is more of a, instead of a one to one payment relationship, it is a triangle with the 115 trust being in the middle, which flows through it, which is going to make our resource planning a lot, a lot better. I will always give the final bullet. And when I talk about investment returns, this comes with risk. Next slide. So if what we're looking for today is some guidance from the subcommittee to say that yes or no, we're interested in this and to move forward. If the committee were to give us the support for this item, it would follow the 115 trust and how this worked out with council and that we've already appointed a trustee through our pension 115 trust. We would be retaining that trust administrator. We would not be going on getting a brand new contract for this. It very much falls in line with what we're already doing. Finance would essentially bring an item to council approving the deposit of the money. We would bring that item to council and give a full explanation of this is what we're doing. This is how we're looking to do it. And then we would bring an investment policy to statement as well. Like we did with the 115 trust to say this is our plan for investment of these funds. Next slide. So it's a broad subject again. And I did go through it very quickly. But just in summary, we've got a $25 million liability that we've got $11 million for that following our previous discussion we just had. We want to improve our process. We want to do this better. And we strongly feel that a section 115 trust will accomplish that. And I will also say that I feel that once we get an actuary study back from after this action, I think they even see an immediate reduction to operating and for this expense line item city wide. I think once we get that money in there and invested, I think we're going to see significant savings very quickly. All right. So I think the question was on the last one is CalPERS responsible for if they lose the money? Great question. Are you responsible if we lose? Unfortunately, no. So who's doing the actual it'll be the person we contract or the agency that we contract with? No. So PFM, they are contracted out investment folks for our 115 trust. They manage our money for us through this process. We pay them to do that. So this would be the same thing. We are contracting out with PFM to manage our investments. We really like 115 trusts unlike CalPERS in a way because we have more authority over those funds. At any point, we could change our methodology and how we invest. We could become very conservative. We could become very aggressive within our policy. I will say that we would most likely be following our same guidance with the pension fund to say we don't want to be too aggressive. We don't want to be too passive in our management. So I'm in favor of bringing it to the council because we have to take risks in order to get somewhere we can't just continue to sit where we're at and hope for the best because that hasn't gotten us very far. But I just want the risks to be very clearly pointed out because to me the game's outweighed but everybody might not see it like that. But I want the council to be as informed as they can. So scenarios about well what happens if this or what happens if this just so we can put it in perspective not only for us but so the public can understand also what it is that we're looking at. Agreed. The presentation council would be full throughout a discussion along those lines with PFM President to talk about our strategy, to talk about its development and really from this point forward if we get the go ahead today that is when we go to work developing that process along with our consultant to nail exactly what you said. Councilmember Seth. Yeah, it's a no-brainer and we really had up to $11 million. It wasn't $11 million at the start. We've had millions just sitting at an account earning essentially nothing. Correct. And I will say that this hasn't always been an option. So it's been an option over the last few years. Alan and I would both say it falls in the same conversation we just had. We are trying to address these issues quickly. When did the one of the 115's first start popping up? I may be wrong. I don't want to say that. It's fairly they're fairly new but I can't remember the exact date. We started looking at it at the city. I think the first time we looked at it the first time we actually did a presentation to this board was right around 2000 probably 2015. So that's going back a few CFOs but that particular one was a big fan of them. We started going in that direction. Then I think the fires happened and she left the city. We redirected. The next CFO wasn't a big fan of them. So why don't you just keep it sitting there earning nothing? And that was, well I guess we were talking. Were we even talking about Pemko back then? I would share your sentiment and I would say that as our guidance has been that we are focused on getting back to focusing after the fires. This has been through a lot. Our focus now is really getting back to business and this is an example of that. Well again, a no-brainer. One final question for me. So with this 115 truck across, am I intuiting correctly that it would have to be a bit more liquid than the convention because you will be taken down. You will actually be pulling cash out on an annual basis. Correct. And that'll be part of the investment. When we develop the investment policy, those are all the things that we look at and consider and absolutely. Absolutely. We have this in the money market government and money market encountering 5% right now. All those types of, this is why we pay folks that understand these things. So that no one comes back looking for me. Count me in. Oh gosh. All right. So it looks like you have two thumbs up for this. But this is normally a time when we were have public comment. We currently do not have any members of the public that are present. So we will forgo our public comment for right now. And again, you have two thumbs up to continue and bring it to council. Sorry. So now we'll go to item 4.3 update on future valid measures. Sure. This is just a quick update on where we are. We've been working on the opinion survey questions. We think we have those ready and they are, the polling company is programming that into their database. So they should be going out with that survey toward the end of this month. They'll be asking just the general questions that you would find in the city, but the ballot test questions will revolve around an increase in TOT and then modernization of our EUT ordinance and modernization of business tax. So those will go out. We are still refining our revenue estimates on the business tax part. The other ones would be TOT increase of 2% would be around $1.2 million estimated additional revenue to the general fund. EUT modernization, which would include mobile devices, would be probably around $1 million to $1 million and a half of your extra revenue that would come in. There, like I said, we're still working on the number on business tax. So $2.5 million annually from those two approximately plus than whatever a million from the business tax. Yeah. And this is just the initial survey that would come out. Yeah. And we would take those results and try to figure out what our next step forward is at the upcoming ballot cycle and once beyond that. Okay. Just still very preliminary stages, but we're about ready to end of this month, beginning of next month, we'll have community feedback at least to see where we're at. All right. So again, at this time is when we would go to the public to have public comment, but there are no members of the public that are present. So it should have been here today. This is a good topic. Should have to mark into this more. So we will now go to item five, future agenda items. Next regular meeting would be I don't have anything for that other than just the standard update on where we are with the what with the revenue measures. What is the date? It is December 13th. Let me double check. Yeah. That sounds about right. December 14th. Okay. Sounds even more right. All right. So a thing is though we do not have anything currently ready for that agenda. We will go ahead and cancel that meeting. Happy holidays. That shock it. There you go. January will do our mid-year general fund budget update. Perfect. So December 14th will be canceled for the record and January we will be back with the update. Yeah. Are there any anything else you'd like to add before we adjourn? No. All right. Seeing nothing else, thank you very much for the presentations and we will now adjourn. Thank you. Thank you.