 The meeting is now live. Hey, everybody. I don't see John, but let's go ahead and get started and I'm sure he'll join us as he can. So I'll call to order. Let's do a roll call vote. Chair Rogers. Here. Member Schwedhelm. Here. Let the order reflect that all subcommittee members are present with the exception of member Sawyer. He did email me and say that he was not going to be able to make it today. Okay, great. Let's go ahead and jump to public comments then for non-agenda items. If you have something that falls within the committee's jurisdiction, but it's not on the agenda, hit the raise hand feature on your zone. I don't see any. We'll go ahead and keep moving. Let's go to approval of minutes. We had a special meeting on October 27th, 2022, Council Member Schwedhelm, did you have any amendments to the minutes? I've got to abstain from that. I was not at that meeting. Okay. We'll go ahead and hold that over to our next meeting then. Since we don't have two members to be able to vote on it. So we'll just go ahead and pull that off of agenda for now. We'll come back at our next scheduled meeting, which should be in January. Let's go on then, Alan, to item 4.1. Sure. So Chair Rogers and members of the committee, this item is to talk about the CalPERS unfunded actuarial liability and provide an update on where we are with the latest CalPERS investment return. I'm going to introduce you to Scott Wagner. He's the deputy director for finance. He's been in the job for about six months, but he's been with the city for a lot longer than that in the full financial reporting and budget area. And he is definitely the city subject matter expert when it comes to CalPERS all things there. So good on us to have him as the deputy and I thought of no one better to be able to lead us through this discussion. So with that, I'll turn it over to Scott. Thank you, Alan, for that introduction. Chair Rogers, committee member Schweldholm, I'm happy to be here to present this item on CalPERS. Our goal for this presentation, as Alan said, is to recap the last year with CalPERS, including the investment returns. I'm going to provide some historical context for that, give a projection on where we believe we're headed. And we'd like to receive some feedback from the committee on a potential strategy for use of the section 115 trust. As I go through the presentation, I've tried real hard not to put a lot of numbers, graphs or technical CalPERS jargon on here, but as you may have questions, please feel free to ask or hold them till the end. And I'm happy to dive in it in any subject on here. So with that, can we go to the next slide? So the headline of this meeting is that CalPERS last year's investment return was a negative 6.1%. This is a not a good result and the worst result that the fund has seen since 2009 in the great recession, we're going to start to feel the impacts of this last year's return starting in 24-25 and that's going to ramp up over a five-year period. That loss will be amortized like any other loss that we have now over a 20-year period. As we move through some of the tables that we're going to see here coming up, I want everyone to keep in mind that we've done these projections based on CalPERS earning their expected return of 6.8%. For this current fiscal year and fiscal year is going forward. We know that that's going to vary from year to year, but we expect that over the long run and as that changes here on staff, we'll continue to update our numbers to have better pictures of where we're headed. Next slide, please. So this first slide shows that variance of return over the past 15 years. There's a couple of really big events on year. First, from left to right, it would be the great recession where we experienced a major loss of 23.6%. Over to what I would say is that the most recent major event, which was two years ago's, COVID-positive returns of 21.3%. When we look at this graph, the thing I want to point out is the red line first. That red line represents CalPERS discount rate and what the discount rate is again is what CalPERS expects to earn on an annual basis. And from my point of view, I like to explain that line right there is what I feel is 0%, meaning that in reality, let's say if we were to look at the most recent returns that CalPERS has had that negative 6.1%. In reality, they were expecting to earn 6.8. So we need to reduce that 6.1 by an additional 6.8%, making the true loss off of what our expected return was, 13.9%. The same can be true of the prior year's very positive return, meaning that it's not quite as good as it sounds. The 21.3% reduced by the 6.8% number goes down to 14.5%. And I know I promised not a lot of numbers, but I'm already going through a lot of numbers, but think about it like this. The two numbers I just broke down get us to right around a 14% loss and a 14% deane between those two years. And so what I'm saying is that between the two years, it's kind of at an even. And what's important is that last year at this time, we were feeling very positive about things, meaning that the fund had made an incredible return and that was gonna solve a lot of upcoming rate increases for us. And what's happened is really, Lucy has pulled the football from us and that reality is no longer the case. We're on basically the same track we were headed on before, unfortunately. So another thing that this red line really points out is how the discount rate has been reduced over that time. As you can see in 2007, it was as high as 7.75% and now we're at 6.8%. That's really important because small changes in our discount rate have a massive effect on our unfunded liability and therefore the payments we're making. Off of the current year's estimates, if the discount rate were to go from 6.8 to 5.8%, that would equal about $150 million worth of unfunded liability for the city as a whole. So that's just to give you a scale and a scope of how much 1% difference makes in these numbers that are really big. And as you can see on here from 2007 to 2008, we just about hit 1% in a reduction. Can we go to the next slide? Thank you. So let's look at some historical numbers and kind of see where we've been. So just going back five years, the unfunded liability payment for the general fund was right around $12 million, $11.7 number. As of last year, that number was double. It was the $22 million number. And I wanna give a context on why we've experienced that increase and why it keeps going up year after year. There's really three main reasons. That reduction in the discount rate that we just spoke about, you need to pay for it. And the way we're gonna pay for it is through increased payments through our unfunded liability. Policy changes at CalPERS, which we can include the discount rate, but also amortization policies. CalPERS changed the way that it valued its assets back around 2013. And to summarize the effect on that, one of the major effects was that it drastically shortened how long the city is gonna have to pay off losses. The prior policy created a way that really we would be paying off our annual losses, sometimes up to even 50 years, it would take to pay them off. And just like with a credit card or any other interest loan where you're paying very little, it takes a very long time and you end up paying a lot of interest. The reforms in 2013 made that more like a home loan or a car loan where you're making more of a fixed payment and that amortized much faster. That amortization went to 30 years at that time. And just like with a car loan or a house mortgage when you drastically decrease the amount of time you amortize a payment, the payments go way up. And they're retroactive in this case, meaning we had to catch up on all those very delayed payment terms and we are experiencing that on this table. That is why our payments are going up. We are on a track towards increasing these payments to start paying down our unfunded liability. Next slide, please. So let's talk about where we're going. As I mentioned before that negative 6.1% return that we experienced this last year is gonna have a major effect. Let's go through these lines. So our UAL payment as of 22.23 is $31 million. By 30.31, we expect it to be as high as 44 million. Again, we are really ramping up a payment schedule with CalPERS, getting to a place where we're gonna start paying this down. The next line shows that impact of just the losses from 21.22 to illustrate how impactful they were. We're gonna max out around a $16.7 million impact just from that one year's losses. I show the funded ratio for the plan showing how over time this is gonna increase our funded ratio of our plan. So it is doing what you would expect it to do. The more we pay, the better off our plan is gonna be from a funded basis. That last line item we're gonna talk about a little bit more in depth in a couple of slides, but what we're gonna do is we're gonna propose a slight mitigation towards these impact through the use of our 115 FUS, 115 fund, which I'll talk about in some more detail in a minute. Next slide. I've given the same kind of impact for water as they are a full participant at this point in the 115 trust to show their numbers, obviously just a much smaller numbers, but the same concept, they're following the same pattern as a general fund. Next slide, please. So this shows how our unfunded liability is going to amortize and be paid off over time. To use just a simple analogy is we are hiking up a mountain and we are gonna continue to get higher and higher and those steps are gonna be harder and harder for us to take. But what's important that is shown on here is that eventually we start really making a dent and coming back down the other side of the mountain. What we are trying to do is trying to mitigate the height of that mountain through any way we can and this way we're gonna talk about today is the 115 trust. Next slide. So when the trust was established, there was a couple of metrics that were talked about and established to kind of give us a framework for how we were gonna use it and how we were gonna fund it. We worked with PFM at that time, which is our advisor to help us understand what a funding goal for a trust like this should be. And some great feedback that we got from them was that really their other agencies that have been successful have set a funding goal to equal one year of their payment schedule, which is around their current payment for their unfunded liability. At that time, we had kind of pinned that number around $26 million. The powerful thing that also happened as part of this discussion on how we were gonna fund the trust was we not only identified a one-time funding for it, but we established a way that we were gonna fund it in the future. That mechanism being that the city currently makes payments to pay off of our pension obligation bonds that we sold in 2003 originally, and those bonds are gonna be paid off here very shortly. Right around this time, even next year, they'll be very close to paid off from a funding basis of the city. Once that's done, instead of releasing that funding while we know our pension costs are rising, we're gonna redirect those funds instead of the debt fund into the pension obligation, excuse me, into the pension stabilization fund. Annually on an annual basis, this is probably around $3 million. Give or take in the future of what that number will be. So it's gonna give us some funding mechanism to get the money in there was our thought at the time. Now, when we proposed that ongoing funding, what we spoke about though, was that we wanted to have some flexibility to come back at another time, in case a major event were to happen that caused a major spike in our CalPERS payments to maybe look at using funding at that time to alleviate any major strain on our funding. And unfortunately, I think that is the case that we're in today, which is why we're here to discuss it. Next slide, please. So what we're gonna be proposing is that as we begin to see the impacts of this current year of loss hit our payments to start making withdrawals from our funds to alleviate and mitigate those impacts. Now, the framework that we're suggesting today is that we would not be reducing the initial payment and the initial deposit put into the trust. Instead, we would be redirecting the pension obligation bond money that was put in there to gradually start easing our way into this payment schedule as opposed to just a quick hit to our payments. Our goal would be to keep our principal balance as is so that the time value of money and our investments in there can grow that principal over time to still meet our overall funding goal. But that is our current thought process. Increases and decreases for future years and investment returns over the next couple of years are gonna really determine whether or not we wanna necessarily stay with that as we can see from our past experience over just the year and a half, a lot can happen in a very short period of time. And we're gonna suggest that we should be willing to be flexible with that. But we really wanna hear the feedback from you both as far as hearing it, this is where you feel we may be going in the right direction or to maybe alter that path. With that, I know I covered a lot of information very quickly. I would be happy to field any questions. Council Member Schwedhelm, do you have any questions to start? I have no questions. Really appreciate the information, it's gotten the way you presented it. Thank you. Yeah, I mean, it's unfortunate that we have to be considering using the 115 trust sooner than I think any of us would have liked and I think that most of us would have liked that we never have to actually touch it. But that is what it's there for us for us to figure out how to stabilize by flattening the curve to use the term we've all become much more familiar with. Yes. I don't have any questions about it. It makes sense. That's great. And I know that Alan and myself, we've had very in-depth and long conversations regarding this. There's one thing I wanna highlight that I missed is that we really looked at a lot of options. And we did our due diligence in the finance department to not just look at this type of methodology. We also worked with CalPERS Actuary Office to reach out to them and did some additional work on potentially maybe making an initial payment to them now from our trust versus later. In the end of that discussion and our research on that is that the savings of us making a payment to them now didn't really warrant the flexibility loss that we're gonna have from paying them now. So we would have saved, let's say $500,000. But at the same time, we're gonna lose that because of the control of those funds over that time. And additionally, we feel that we're gonna earn, we have the ability to earn maybe that money at the same time with our own funding in-house with due this fund. And I also kind of wanna spend a moment just to shout out our staff. The numbers that you've seen do not represent numbers that are just given to us by CalPERS. We were able to provide our own analysis through contacting CalPERS office, getting updated projections. And I'm really proud of staff and ourselves, specifically Tricia, thank you for your help with this. I'm sure you're listening because this really represents a really great job and providing up-to-date information past what CalPERS gives us. Tom, anything else? Other than I'm fully supportive of the staff recommendations. As you said, Chris, it's unfortunate but it's definitely the way to go. And I'm glad that we had already made the decision to establish this trust. Just wish we didn't have to tap into it so early. Right. And I appreciate the explanation too about essentially prepayment versus the path that's helpful. Let me go to public comment and see if there's any questions or comments from the public. If you do have one, go ahead and hit the raise hand feature on your Zoom. All right, I'm not seeing any. So I'll bring it back to see if there's any additional questions, comments. Last minute thoughts, Alan or Scott? All right, I appreciate that. Let's go ahead and go on then to our next meeting agenda item, item number five. I'll kick it over to you, Alan. Sure. That meeting will be, it'll be a special meeting. It'll be at the end of January and we'll do the budget performance for the first half of this current fiscal year. And that's, I think that's the main item that's there. If anything else comes on, we'll have it on the agenda going forward. But that's the main thing that we'll need to talk about. Okay. Tom, you'll be there, right? In spirit, absolutely. All right, let's go to public comment, see if anybody has anything that they'd like to see on the agenda as well. All right, I don't see any hands. So I'll go ahead and bring it back. Anything else, Tom? Nope, thank you so much, Alan. I really appreciated your leadership on this committee. It's been very helpful and it really, I think adds value at least from my perspective and for the whole city. So thank you. You too, Scott. I've seen your name on a lot of lists, so it's nice to finally actually see your face here. Excellent presentation today though. Thank you. Thanks, Scott and Alan. And with that, we'll go ahead and adjourn. Thanks everybody. Thank you.