Alternatives for Funding the Town s Unbilled Tier 1 PENSION Liability. Finance and Investment Committee Recommendations

Transcription

1 AGENDA ITEM #8.B Town of Los Altos Hills Town Council Meeting November 16, 2017 Agenda Item 8.B Alternatives for Funding the Town s Unbilled Tier 1 PENSION Liability Finance and Investment Committee Recommendations Roddy Sloss, Chairman 11/8/2017 4:26 PM footnotes in appendix 1

2 Town of Los Altos Hills Council Meeting Nov 16, 2017 Agenda Item 8.8 ALTERNATIVES FOR FUNDING THE TOWN S TIER 1 UNFUNDED PENSION LIABILITY INTRODUCTION Note (1): This analysis only addresses the Tier 1 Pension Unfunded Liability affecting 73 beneficiaries of which 9 are current Town employees. Tiers 2 and 3 are ignored because they are small, new and unlikely to be a financial issue. The Problem: The June 30, 2016 Unfunded Pension Liability (reported by CalPERS in August 2017) of $3.248 million (2) is pension cost incurred and owed but not billed. The liability is reported in the Town s draft 6/30/17 CAFR at $2.9m (3) but Bartel (Town s actuary) says it is really $5.7m (5). The Town has timely and completely paid all CalPERS billings and yet the liability has grown because: > CalPERS has and continues to under bill ( negative amortization ) (4) > Investments underperformed and the related cost increases are deferred (4) > Costs from negative beneficiary assumption changes are deferred (mortality, compensation and retirement age) (4), AND > The interest on this unpaid liability is presently 7.375% compounded annually (5) In 2013, St. of Calif. legislation PEPRA allowed Agencies to begin prospectively lowering benefits which will eventually (20 years +(13) lower annual CalPERS billings but for now and the foreseeable future (next 8 years) annual billings will increase by 60% (10% /year) (14) or more. 11/8/2017 4:26 PM footnotes in appendix 2

3 Town of Los Altos Hills Council Meeting Nov 16, 2017 Agenda Item 8.8 SOLUTIONS Council can do ALL, ANY or NONE of the following: Invest some of the Town s Unassigned capital surplus in the Unfunded Pension Liability at current rates from 3 ½% (PARS) to 7.375% (CalPERS) (15) compared to 1/4% the Town earned in the March 2017 quarter (most recent reported(7)) by: 1. Partially retiring the unfunded liability (called prepayment (6)) and/or 2. Investing in a Trust, similar to OPEB ( called a Section 115 Trust ) The FIC recommends both of the above. (Attachments 1A and 1B) (Other actions related to staffing and headcount impact pension costs but are beyond the FIC s scope and are not addressed here.) 11/8/2017 4:26 PM footnotes in appendix 3

4 Town of Los Altos Hills Council Meeting November 16, 2017 Agenda Item 8.8 INVEST What is the goal? (The goal is to reduce pension costs and generate a better return on the Town s non operating cash.) CalPERS will allow the Town to payoff as much of the 6/30/16 Unfunded Liability ($3.248 million) as it wishes. However, even if the entire amount is retired, to the extent future performance does not meet CalPERS assumptions, the Unfunded Liability will arise again (the 6/30/18 balance (before prepayment) is estimated at $3.5 million) (8). Conversely, if CalPERS outperforms its assumptions, PEPRA precludes recovering excess funds paid in (8). Due to planned reductions in the discount rate from 7.375% to 7% (9), $3.860 million is the $3.248 million liability at a 7% discount rate (9). I believe up to $2.9 million (75% of $3.860 million) could be prepaid without undue risk of losing credit for funds paid. How much can we afford? The Town s 6/30/17 draft audited balance sheet has Unrestricted funds of $14.5 million of which $10.5 million are Unassigned and $.6 million are assigned to pensions. (10). The FIC recommends an initial investment of between $1.5m to $2.5m. (Attachment 1A: 5/8 voting members recommended $2.5m and 3/8 recommended $1.5 to $2.0 million). 11/8/2017 4:26 PM footnotes in appendix 4

5 Town of Los Altos Hills Council Meeting November 16, 2017 Agenda Item 8.8 Where will the initial investment go? A vote in the FIC favors splitting the initial investment between a CALPERS Prepayment and a Section 115 Trust (see Attachment 1 for voting results). Prepayment to CalPERS: Prepayment can be made anytime directly to CalPERS and can vary in amount and choice of prepayment type. The unfunded liability is made up of layers (you can think of them as separate liabilities) each having a different balance and amortization period. The Town can choose to pay a) any part of each one or all them or b) a prepayment can be applied pro rata to all layers. The choice will affect the amount and timing of future liability payments (11). Due diligence on CalPERS prepayment: My analysis confirms the CalPERS actuary s representation that all choices have the same discount (interest) rate (Attachment 3). The Town s CalPERS actuary recommends prepaying the longest and most recent layers as that will result in the largest interest savings. (Attachment 4). The FIC concurred (Attachment 1B). Continued 11/8/2017 4:26 PM footnotes in appendix 5

6 Town of Los Altos Hills Council Meeting Nov 16, 2017 Agenda Item 8.8 Where will the initial investment go? continued CalPERS prepayment risks: Once the payment is made, a portion of the overall unfunded liability is paid off and can not be recovered. So, the risks are: 1. The funds could have been better used elsewhere; 2. Interest rates will rise in the next few years and the funds could have been invested elsewhere at a better rate of return. My Reasoning: I believe there is not a good reason not to proceed with CalPERS prepayment because the Town s reserves are substantial (close to a long term record) and there is no apparent higher need for the funds in the foreseeable future. The risk that the Town might be better off investing elsewhere seems small given that: 1) The Town earned ½% on its funds last year (attachment 5); 2) In a normal year the Town might earn 3% (12); 3) The interest rate on the liability we are prepaying is 7.375%; and 4) A PARS investment with similar risk would earn perhaps 4% in a good year (12). 11/8/2017 4:26 PM footnotes in appendix 6

7 Town of Los Altos Hills Council Meeting November 16, 2017 Agenda Item 8.8 Where will the initial investment go? (continued) Section 115 Trust: The second Pension Prepayment choice recommended by the FIC is a Section 115 Trust (Attachment 1A). A Section 115 Trust is similar to the Town s existing OPEB Trust except that CalPERS is not licensed to administer it. First offered in 2015, there are approximately 100 such trusts (11). Presently only Keenan, PFM and PARS have IRS permission to administer a Pension trust (11). The FIC interviewed PFM and PARS then selected PARS because of lower fees, more flexibility and more experience. The advantages of a Section 115 Trust compared to a CalPERS prepayment are: 1) Although funds invested are only available for pension related expenditures, they can be used for any pension related expenditure while the CalPERS prepayment can only be used for the Unfunded Liability recognized by CalPERS. 2) With PARS, the Town controls: a) Investment strategy; b) Disbursements; and c) Timing of both. continued 11/8/2017 4:26 PM footnotes in appendix 7

8 Town of Los Altos Hills Council Meeting Nov 16, 2017 Agenda Item 8.8 Section 115 Trust Advantages: continued The largest advantage of a Section 115 Trust is that its funds can be invested in a much broader range of investments than what is available by law for funds managed by PFM. So, for example, if the Town wanted to prefund the next few years normal Pension minimum payments and invest them during the interim, it could do so safely at a least twice the rate available to PFM. Implementation status: Presently the proposed Agreement between PARS and the Town is being reviewed by outside Counsel. We are waiting for PARS to return a model Investment Policy which is similar from a control viewpoint to our existing Investment Policy with PFM. Assuming the initial investment is approved, those matters will come before Council in January /8/2017 4:26 PM footnotes in appendix 8

9 Town of Los Altos Hills Council Meeting Nov 16, 2017 Agenda Item 8.8 Future Prepayments / Investments (after the initial one): This is a subject not yet formally considered by the FIC. The FIC will consider it with Staff and make a recommendation to Council in the Town s 2019 Budget review process. Ideas that could be considered are: 1. Make recurring annual payments in the $100,000-$160,000 range representing the difference between what the Town would have paid in minimum required CalPERS payments if the CalPERS prepayment were not made and the amount paid in after the prepayment. (13). 2. Put funds earmarked for minimum required annual CalPERS payments in a Section 115 Trust for perhaps the next 3-5 years to take advantage of medium term high quality bond yields (which PFM is not allowed to do.) 11/8/2017 4:26 PM footnotes in appendix 9

10 Town of Los Altos Hills Council Meeting Nov 16, 2017 Agenda Item 8.8 NEXT STEPS: Initial prepayment to CalPERS 1. Staff report (unless waived) 2. Council resolution 3. Request / receive updated CalPERS instructions and forms 4. Staff / PFM marshalling funds and related transfers with PFM and CalPERS Initiate Section 115 Trust 1. Outside Counsel review of proposed PARS Agreement 2. Staff, FIC and outside Counsel review PARS specimen investment policy 3. Council approves agreement and policy 4. Staff / PFM marshalling funds and related transfers with PFM and PARS Recurring Annual CalPERS prepayments: 1. FIC and Staff consider in 2019 Budget planning session 2. FIC recommendation to Council for 2019 Budget review 3. Staff advise PFM and change long term cash investment planning 11/8/2017 4:26 PM footnotes in appendix 10

11 Town of Los Altos Hills Council Meeting November 16, 2017 Agenda Item 8.8 SUMMARY: To realize incremental savings of approximately $100,000 per year *, the FIC recommends that Council act to authorize prepayment of pension costs in the amount of approximately $1.8 million. The Town s CalPERS actuary, David Clement, recommends a $1.223 million CalPERS unfunded liability prepayment as having the best return as measured by interest savings (13). The FIC accepted this recommendation (Attachment 1B). The FIC recommends initiating a Section 115 Pension Trust with PARS with an initial investment of $500,000 using the moderate investment strategy. The expected annual return rate is 4 ½%. (Attachment 6) * Savings calculation: Once the CalPERS prepayment is completed annual savings of $84,000 can reasonably be expected ($1,223,199 X (7.375% - ½%)) = $84,094). An additional $20,000 of annual savings from $500,000 invested in the PARS program can reasonably be expected ($500,000 X (4½% - ½%) = $20,000). 11/8/2017 4:26 PM footnotes in appendix 11

12 Town of Los Altos Hills Council Meeting Nov 16, 2017 Agenda Item 8.8 ATTACHMENTS: 1. FIC balloting tally sheets 9/27/17 (1A) and 10/25/17 (1B) FIC Meetings 2. Footnotes references to supporting third party documents 3. Due diligence spreadsheets comparing CalPERS and PARS alternatives 4. s: David Clement (CalPERS actuary responsible for LAH) and R Sloss 5. Staff analysis of 6/30/17 year PFM results (9/21/17 Council Meeting) 6. PARS Investment Performance by Strategy 6/30/ /8/2017 4:26 PM 12

13 Town of Los Altos Hills - Council Meeting Nov 16, 2017 Agenda Item 8.8 ATTACHMENT 1A Questions Town of Los Altos Hills September 27, 2017 FIC Meeting Pension Plan prepayments Meeting Participant Survey Bartel & FIC Committee Members Staff Associates Epstein Karlsson Kayton Mason Mok Silver Sloss Welborn Cahill Huang Sandhu Pryor 1. Do you favor a prepayment? Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes 1a. Amount? ($ millions) Do you Periodic (lump sum) or Annual (payments) lump sum lump sum lump sum lump sum lump sum lump sum undecided lump sum lump sum lump sum lump sum Do you favor prepayment to: CalPERS undecided X Section 115 Trust undecided Both ($ in millions) X X X X X undecided X X Notes: 1. Total $ amount influenced by assumption that ~$14 million in unreserved cash is available per FY 18 budget 2. Sloss undecided on payments amounts and timing pending results of additional work to confirm respective rates of return (completed - reservation withdrawn 11/1/17) 3. Concerns noted: a) CalPERS unduly influenced by labor unions; b) Section 115 Trust may presume minimum balance that exceeds recommended amounts; c) longer term distrustful of CalPERS/St of Calif raiding wealthier Agency funds to benefit poorer Agencies similar to Redevelopment Districts; d) CalPERS not transparent enough; e) investment returns ultimately based on actual CalPERS results i.e. no commitment to return on prepaid funds; f) CalPERS has historically and underfunded pension billings to favor larger agencies with tight budgets. 11/8/2017 4:26 PM 13

14 Town of Los Altos Hills Council Meeting Nov 15, 2017 Agenda Item 8.8 ATTACHMENT 1B Questions 1. Which PARS (Section 115 Pension Trust) Investment Strategy do you prefer? PARS 10/25/17 FIC Presentation - pg 19 PARS Investment Strategies Fixed Returns for past: Equity Income Cash 1 yr 3 yrs 5 yrs Conservative 5-20% 60-95% 0-20% Kayton, Lai(a), Lloyd(a) 3.9% 3.0% 4.0% Moderately Conservative 20-40% 50-80% 0-20% Sloss 6.7% 3.6% 5.4% Moderate 40-60% 40-60% 0-20% Epstein,Karlsson, Silver, Nam 10.5% 4.6% 7.3% Balanced 50-70% 30-50% 0-20% 12.7% 5.0% 8.3% Capital Appreciation 65-85% 10-30% 0-20% 14.2% 5.6% 9.7% % = portion of total invested funds (a) Associate Member 2. Which CalPERS Amortization Base(s) do you prefer? Recommended by CalPERS actuary D Clement Used for studying details Town of Los Altos Hills October 25, 2017 FIC Meeting Participant Survery - Pension Plan Prepayments (a) associate member CalPERS Amortization Bases: Years Negative Combined totals Yes Name Prepayment Amount $ Ttl Int $ Ttl Pymnt $ Remaining Amortiz'n Yrs Prepayment Int. Saved Assumption Change , , , Epstein Non Asset (Gain) / Loss 2016 (81,414) (184,883) (266,297) 30 9 Kayton Asset (Gain) / Loss ,914 1,507,689 2,171, Nam Asset (Gain) / Loss ,285 1,144,202 1,703, ,223,199 2,651,891 Silver Non Asset (Gain) / Loss 2015 (45,172) (92,413) (137,585) 29 9 Sloss Non Asset (Gain) / Loss ,041 1,910 2, Asset (Gain) / Loss 2014 (962,401) (1,766,938) (2,729,339) 28 8 Asset (Gain) / Loss ,345,636 2,238,357 3,583, Share of prep pool UAL ,605 1,063,368 2,050, Assumption Chg , ,058 1,210, ,587,729 1,673,426 Non Asset (Gain) / Loss 2013 (12,936) (2,518) (34,454) ,247,778 4,784,067 8,012,845 Other attending members abstained: Karlsson, Lai (a), Lloyd (a), Mok (a) Associate Member 11/8/2017 4:26 PM 14

15 Town of Los Altos Hills Council Meeting - Nov16, 2017 Agenda Item 8.8 ATTACHMENT 2 FOOTNOTES: ALTERNATIVES FOR FUNDING UNBILLED PENSION LIABILITY Tier 1 Footnote Slide Reference 1 1,2 CalPERS 8/17 Reports page 5 for Tiers 1, 2 and 3 : Tier 1 = 99% of total unfunded liability 2 2 CalPERS 8/17 Tier 1 Actuarial Report page June 30, 2017 DRAFT Basic Financial Statements - page 20 - Pension Liability 4 2 CalPERS 8/17 Actuarial Report page 15 - Unfunded Liability at 6% discount rate Bartel (Pryor) 9/27/17 DRAFT Report pg's 14, 6, and CalPERS 8/17 Actuarial Report - Cover Letter - page 2, Bartel 9/27/17 report pg 7 PEPRA effective 1/1/ Announced pg 3 of 10/13 Actuarial Report and first explained 6/ Actuarial Report pg 5. Prepayments first allowed for Fiscal Year ending June 30, /13 Actuarial report pg PFM 2016/17 Annual Report - Staff Report 9/21/17 Council Meeting - page 3 (attachment 5) 8 4 CalPERS 8/17 Actuarial Report page 9-6/30/18 balance is $3.496 million; PEPRA minimum payment is Normal Cost 9 4 CalPERS 8/17 Tier 1 Actuarial Report - pages 2 and June 30, 2017 DRAFT Basic Financial Statements - page 24 LAH Governmental Funds Balance Sheet 11 5,7 Bartel (Pryor) 9/27/17 DRAFT Report pg's 27, 28 and Earliest PFM report in my file is 2/08 when the Town was earning 4.5% on its investments 13 2,9,11 Attachment _ - s from David Clement, CalPERS actuary assigned to LAH - see tables of annual payment tables with and without prepayment of $1.5 million (too large to attach) Calculation by R Sloss extracted from CalPERS Actuarial Reports: 11/15 pg 91 and 11/17 pg's as follows: $000's FY FY Growth Rate Normal cost Unfunded liability Annual required minimum payment % Staff Report 9/21/17 Council Meeting - June 30, 2017 Annual Investment Report - pg 2 Quarterly Results % see Footnote 2 and Attachment 4; 4% see Attachment 6; for 10/25/17 FIC Meeting ballots Attachment 1B 11/8/2017 4:26 PM 15

16 Town of Los Altos Hills Council Meeting Nov 16, 2017 Agenda Item 8.8 ATTACHMENT 3 Town of Los Altos Hills - Finance and Investment Committee Assuming there is $1.5 million available to prepay CalPERS directly or pay to a Section 115 Trust, which is the better strategy? Introductory Comment: The purpose of this model is to find the most efficient method for retiring the CalPERS Unfunded Liability using the three available methods; 1) Do Nothing; 2) Prepay to PARS and 3) Prepay to CalPERS. An accounting model is used instead of an interest rate model for reasons explained in the note below. The result is two fold. If we would like the added safety of investing with PARS so we do not have to put all of our eggs in one basket with CalPERS, the model says in about eight years (depending on interest rates) we will be able to payoff the unfunded liability. But if we only look at Balance Sheet position, then the CalPERS prepayment is preferable as it results (each year) in the highest net amount comparing cash to the unfunded liability. (I am still looking for a better way to solve this this problem and explain the results.) PFM CalPERS PARS PFM CalPERS PFM CalPERS Assumed interest rate 0.5% 7% 4.4% 0.5% 7% 0.5% 7% $000's $1.5 m PARS prepayment Do Nothing $1.5 m CalPERS prepayment LAH ACCOUNTS PARS Combined LAH ACCOUNTS Combined LAH ACCOUNTS Combined Transaction description Cash CalP Liab Cash Net Cash CalP Liab Net Cash CalP Liab Net Day 0 Beg Balance 7/1/18 (1) 5,899 (3,496) 2,402 5,899 (3,496) 2,402 5,899 (3,381) 2,517 Day 1 Make $1.5m payment (1,521) 1, (1,521) 1,521 0 Day 1 CalPERS billing (175) (77) (252) (175) (77) (252) (63) (72) (135) Day 1 Balance 7/2/18 4,203 (3,573) 1,521 2,150 5,724 (3,573) 2,150 4,315 (1,932) 2,382 Day int earned LAH Day int earned PARS Beg Yr 2 7/1/19 4,224 (3,573) 1,588 2,238 5,752 (3,573) 2,179 4,336 (1,932) 2,404 Day 1 CalPERS billing (220) (36) (256) (220) (36) (256) (92) (47) (139) Day 1 Balance 4,004 (3,609) 1,588 1,983 5,532 (3,609) 1,923 4,244 (1,979) 2,265 Day int earned LAH Day int earned PARS Beg Yr 3 7/1/20 4,024 (3,609) 1,658 2,073 5,560 (3,609) 1,951 4,265 (1,979) 2,286 Day 1 CalPERS billing (247) (10) (257) (247) (10) (257) (103) (39) (142) Day 1 Balance 3,777 (3,619) 1,658 1,815 5,313 (3,619) 1,694 4,162 (2,019) 2,144 Day int earned LAH Day int earned PARS Beg Yr 4 7/1/21 3,796 (3,619) 1,731 1,907 5,339 (3,619) 1,720 4,183 (2,019) 2,164 Beg Yr 31 7/1/47 (408) (21) ,350 (21) 1, (21) 1 Day 1 CalPERS billing 0 21 (176) (155) (22) 21 (1) Day 1 Balance (408) (15) 1, ,350 0 (0) 0 Day int earned LAH (2) (2) Day int earned PARS Beg Yr 32 7/1/48 (410) , ,356 0 (0) 0 $1.5 m PARS prepayment Do Nothing $1.5 m CalPERS prepayment Note: 1. Beginning cash value is the amount required so that cash is zero at end of amortization period in CalPERS prepayment column assuming PFM is earning the current 1/2%. COMMENTS: Breakeven w/calpers Rates The Town has 3 choices, 1) Do nothing and earn the PFM rate on its $1.5m, 2) Prepay $1.5m to CalPERS PFM PARS difference or 3) Invest $1.5m with PARS. Regardless of external interest rates, the CalPERS rate is fixed at 7%. So, at 0.5% 3.3% 2.8% first glance, for the PARS investment to make sense, the PARS rate should be equal to or higher than the 1.0% 3.7% 2.7% CalPERS rate. It turns out that assumption is incorrect and the reason is CalPERS applies its 7% rate to 1.5% 3.9% 2.4% balances that are not proportionate to payments made, but rather arbitrary balances in its amortization 2.0% 4.2% 2.2% bases, while PFM and PARS cash invested compounds symmetrically. For example, in the extreme, 2.5% 4.6% 2.1% assume CalPERS interest rate is 90% but its first payment is 99% of the balance, is made on day 1, and 3.0% 4.9% 1.9% the next payment (which is also the last payment) is the remaining 1% and is made 30 years later. Then 4.0% 5.6% 1.6% the amount of interest paid would be much smaller than if each payment were the same amount (like a 5.0% 6.3% 1.3% mortgage.) So, in this case, the PFM or PARS rates do not have to be as large as the CalPERS 7% rate to achieve a better result. The model above illustrates that point. It is an accounting model which increases the Town's fund balance every time interest is received and decreases the Town's fund balance every time a payment is made. The CalPERS payments (information from CalPERS) are for a $1.5m prepayment (I selected) using amortization bases I selected. The Town's ending cash balance changes based on the interest rate assumption (which can be changed in the orange cell to view different results). The breakeven table above to the left, shows the required PARS rate for various PFM rates ranging from 1/2% (today's rate) to 5% which is higher than we can reasonably expect. Above the red numbered cells are results using the interest rates selected. The rows between 63 and 165 have been hidden to make the chart easier to read. But they can be unhidden by using keystrokes Alt R U after putting the cursor over rows 63 and 155. And the can be hidden again by using keystrokes Alt R H and putting the cursor over the rows to be hidden. The two green tabs are base data provided by David Clement, our CalPERs actuary, although I added some derived data needed for the model. In a nutshell, this schedule makes it easier to decide on investing with PARs or CalPERS by choosing an appropriate interest rate assumption and looking at what the ending fund balances are produced at the end of the 30 year CalPERS amortization period. In terms of strategy, I think it is comparatively easy to earn up to 3.5% on a PARS investment after fees. Today that would be a 5 yr BBB Corporate Bond (paying 3.75% before fees). When interest rates rize, we can accomplish this with higher quality bonds. At what point should the PARS account balance be used to payoff the unfunded liability. By policy, it should be no later than the first date when the PARS balance is lar than the unfunded liability. Using the model and the breakeven interest table, those dates are as follows: Cross Over Balance $000's Breakeven w/calpers Rates Date Unfunded PFM PARS difference Year Beginning PARS Liability Comment 0.5% 3.3% 2.8% 7/1/26 1,970 1,957 These termination dates are theoretical. In reality, the Unfunded 1.0% 3.7% 2.7% 7/1/26 1,970 1,957 Liability will be larger than the amounts shown due to more 1.5% 3.9% 2.4% 7/1/26 1,970 1,957 amortization layers being added to the unfunded liability calculation 2.0% 4.2% 2.2% 7/1/25 2,024 2,005 by CalPERS due to: 1) lowering the discount rate to 6%; 2) changing 2.5% 4.6% 2.1% 7/1/25 2,079 2,005 demographic assumptions for Tier 1 retirees related to retirement age 3.0% 4.9% 1.9% Not applicable because and compensation, and mortality. 4.0% 5.6% 1.6% no high quality fixed rate 5.0% 6.3% 1.3% securities are available to PARS 10/24/ /8/2017 4:26 PM 16

17 Town of Los Altos Hills Council Meeting Nov 16, 2017 Agenda Item 8.8 ATTACHMENT 4A S D Clement R Sloss from David Clement, CalPERS Actuary assigned to the Town: October 15, 2017 Hello again Mr. Clement: I reviewed the pension prepayment information you sent last Tuesday, October 10 th. Thank you again. I calculated the weighted average interest rates in your schedules. The calculations are attached. I have the following questions: 1. I note that annual interest rates in the overall UAL payment, the individual amortization base payments and the 30 yr, 20 yr, and 15 yr amortization schedules all decline with each year s payment beginning at the 7.2% to 7.3% level and declining to the 5% range and below at the end of amortization period. I expected the annual interest rates to stay the same similar to a mortgage payment schedule. Why do they decline? The interest rate is 7.375%. Here is the formula: Bal1 = Bal0 x(1.0375)-payment0x(1.0375) 2. I read an analysis by a financial officer of another agency stating it is advantageous to pay down larger amortization bases that have lives of slightly below 20 years. When I analyzed the amortization bases, they all had about the same weighted average interest rate and therefore I saw no advantage (ignoring external factors) to paying off one over another. The 30yr, 20yr and 15yr amortization schedules had similar average interest rates. (The range of weighted average interest rates for all alternatives was 7.01% to 6.77%). What is your view? To save the most interest, I would pay off the bases with the longest periods and have Direct Rate Smoothing (DRS, the most recent bases). 3. In your specimen requestor letter dated October 15, 2017, you note that a 7.25% discount rate was used in your calculations. I used a mortgage style calculation method and came out with weighted average interest rates of 6.95%. I wonder about this difference. Perhaps it is because I used a mortgage style calculation and perhaps you used an Internal Rate of Return style calculation (i.e. double compounding). Do you agree, or do you think there is another more likely explanation? See answer to question 1. 11/8/2017 4:26 PM 17

18 Town of Los Altos Hills Council Meeting Nov 16, 2017 Agenda Item 8.8 ATTACHMENT 4 B S d Clement R Sloss 4. I believe the prepayment options currently offered by CalPERS are 1) prepayment of the amortization bases; 2)adopting accelerated 20 and 15 year amortization schedules shown on Page 11 of the October 2017 Actuarial Report, and 3) making a lump sum prepayment that would be applied proportionately to all the amortization bases. Are there other alternatives being offered? If so, please describe them. In addition to the three you just mentioned are: Any amortization period is possible as long as the interest is less than to current schedule. Generally lump sum contributions apply to one base, but can be allocated to multiple bases. 5. We received a presentation on the subject from the Town s actuary, Doug Pryor with Bartel & Associates. The following unanswered questions arose in that session. I recognize that you may not be the appropriate person to address the questions, but I will ask and if you can offer a response or suggest another source, I would appreciate it: Mr. Pryor believes CalPERS does not make available the details of amounts paid from the Town s account to beneficiaries i.e. names, dates and amounts paid. Is that a correct understanding of CalPERS policy? And, if yes, what is the reasoning for it? I believe there may be a query the employer can run in my CalPERS. 6. If other Agencies are unable to make their normal payments due, for example, to bankruptcy (or other reasons), is there a risk our Town could be held accountable for those costs? No, these agencies are eventually terminated and the benefits are reduced to the level that the assets can afford. Does being in a pool in anyway effect (reduce) the expected benefit of this prepayment? No, being in a pool does not affect the expected benefit of this prepayment. Thank you. Roddy Sloss 11/8/2017 4:26 PM 18

19 Town of Los Altos Hills Nov 16, 2017 Council Meeting Agenda Item 8.8 Attachment 5 1 of 2 11/8/2017 4:26 PM 19

20 Town of Los Altos Hills Council Meeting Nov 16, 2017 Agenda Item 8.8 Attachment 5 2 of 2 11/8/2017 4:26 PM 20

21 Town of Los Altos Hills Nov 16, 2017 Council Meeting Agenda Item 8.8 Attachment 6 PARS Investment Performance 11/8/2017 4:26 PM 21