Be transparent and honest about the problem. Use a comprehensive approach for all funds

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3 Be transparent and honest about the problem Use a comprehensive approach for all funds Establish a vision, develop a budget that promotes long term sustainability, implement best practices and utilize a combination of cost reductions and revenue increases. 3

4 Use a multi-year approach to achieve financial sustainability Identify core services and focus on funding core services Provide clear vision and direction from leadership Engage in a collaborative approach 4

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6 Current Overview & Funding History Impacts to Unfunded PERS Liability Impacts to City Budget League of California Cities Study & Findings on Retirement System Sustainability Strategies to Address Rising Pension Costs 6

7 CalPERS Fund History of CalPERS 1932: Established as State retirement system 1947: City entered into CalPERS 1998: Golden Age CalPERS peak!! 95% of statewide Miscellaneous employees were on 2% at 60 Plan 50% of statewide Safety employees had the 2.5% at 55 Plan Employer Contribution Rates 0% for Miscellaneous 0-7% for Safety City of Santa Ana: Misc.: : 60; : 55; 2009-Present: 55 Safety: : 50; 2001-Present:

8 Funded Status for CalPERS Fund Funded Status 160% 140% 120% 100% 100% During the 90 s-early-2000 s CalPERS was super funded 138% CalPERS Funded Status 01: The DotCom Bubble Recession 101% 09-17: CalPERS Board adopts new smoothing formulas and reduces earnings assumptions 80% 60% 40% 20% 0% 99: CalPERS Board adopts rules that increased the benefit formulas for both Safety & Misc. 01: City of Santa Ana Adopts new Benefit Formula for Safety: 3% at 50 80% 07: City of Santa Ana Adopts new Benefit Formula for Misc.: 2.7% at Fiscal Year Ending June 30 th 61% 08: The Great Recession 12: State adopts PEPRA (pension reform) to reduce benefits for all new employees 68.3% 8

9 City of Santa Ana Retirement Benefits History Safety Plan History : 2% at Present (Classic Members): 3% at 50 PEPRA Members: 2.7% at 57 Miscellaneous Plan History : 2% at : 2% at Present (Classic Members): 2.7% at 55 PEPRA Members: 2.0% at 62 Up to 2% annual COLA for both Classic & PEPRA members Disability benefits; death benefits; survivor benefit; EPMC (classic only) PEPRA = Public Employees Pension Reform Act 9

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11 What Elements Impact PERS Rates? Salary Growth PERSable Compensation Misc.: Safety: Benefit Formula Value of Benefits Demographics Active vs. Retired # of Employees Inflation Investment Returns Discount Rate 11

12 Plan Demographics: Miscellaneous Safety (Police/Fire) Retired employees or beneficiaries currently receiving benefits 1, Separated employees entitled to but not yet receiving benefits Active employees Total 2,847 1,394 Total Plan Participants : 4,241 Source: CalPERS 06/30/2016 Valuation Report for the City of Santa Ana 12

13 CalPERS Income by Source Source: 13

14 20-Year Annual Rate of Return 30.0% 20.0% 20.1%19.5% 12.5% 10.5% 16.6% 12.3% 11.8% 19.1% 13.3% 21.7% 13.2% 17.7% 10.0% 0.0% 3.7% 2.4% 0.2% 0.6% % -7.2% -6.1% -5.1% -20.0% -30.0% -24.0% Source: CalPERS Fact Sheet 14

15 $160 EXAMPLE: $140 $120 $108 $100 $80-50% +100% $60 $40 $100 $100 $20 $50 $- Investment Amount Discount Rate 15

16 CalPERS Changes Enacted During Past 5 Years In response to deteriorating financial conditions, CalPERS began enacting a series of pension cost changes March 16, 2012 Change in Discount Rate From 7.75% % April 17, 2013 Change in Amortization & Rate Smoothing Policy February 18, 2014 Change in Actuarial Assumptions & Asset Allocations December 21, 2016, the CalPERS Board voted to enact two substantial new changes 1. Lower the discount rate from 7.5% to 7.0% (assumed rate of return) 2. Enact an accelerated payback schedule for all unfunded accrued liabilities (UAL) The resulting effect of the two changes includes the following: Discount Rate Reduction Impacts employer rates beginning in FY 2018/19 Option to accelerate the Unfunded Actuarial Liability Payment (30 to 20 years) 16

17 SAFETY PLAN Market Value of Assets $748.0M $711.0M Total Pension Liability (1.0B) (1.1B) Unfunded Liability ($274.7M) ($339.6M) Funded Ratio 73.1% 67.7% MISC. PLAN Market Value of Assets $564.0M $549.3M Total Pension Liability (787.9M) (819.4M) Unfunded Liability ($224.0M) ($270.1M) Funded Ratio 71.6% 67.0% Source: CalPERS 06/30/2016 Valuation Report for the City of Santa Ana 17

18 Millions Unfunded Pension Liability $700.0 $600.0 Safety Miscellaneous $609.6 $500.0 $498.7 Misc. Funded Ratio: 67.0% $400.0 Misc. Funded Ratio: 71.6% $270.1 $300.0 $224.0 $200.0 $100.0 $- Liability +3.3% Year-over-year (Both Plans) Safety Funded Ratio: 73.1% $274.7 $ Assets -3.9% Year-over-year (Both Plans) Unfunded Liability +22.3% Year-over-year (Both Plans) Safety Funded Ratio: 67.7% Funded Ratio -7.0% Year-over-year (Both Plans) 18 18

19 PERS RATES: Employer Contribution SAFETY PLAN* Police Rates 36.2% 41.2% 44.7% 49.1% 52.8% Fire UAL $9.3M $11.4M $12.7M $14.5M $16.0M MISC. PLAN* PERS RATES 30.7% 35.3% 38.8% 41.9% 44.3% Source: CalPERS 06/30/2016 Valuation Report for the City of Santa Ana * Excludes employee contribution: Safety: 12% Misc.: 8% 19

20 SAFETY (PD ONLY) SAFETY (PD ONLY) For every $100 in salary, the City Pays $36 in Pension Benefits Salary + Pension Benefits = $136 FY For every $100 in salary, the City will pay $53 in Pension Benefits Salary + Pension Benefits = $153 FY

21 MISCELLANEOUS MISCELLANEOUS For every $100 in salary, the City Pays $31 in Pension Benefits Salary + Pension Benefits = $131 FY For every $100 in salary, the City will Pay $44 in Pension Benefits Salary + Pension Benefits = $144 FY

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23 Millions $80.0 $70.0 $60.0 Average annual increase of 13.7% over the next five years $7.2M increase $8.5M increase $60.8M $7.2M increase $68.0M $7.1M increase $75.1M $6.1M increase $81.2M $50.0 $40.0 $45.1M $52.3M $45.0 $51.1 $57.1 $61.8 Employer Contribution $30.0 $32.4 $38.2 $20.0 $10.0 $12.7 $14.1 $15.8 $16.9 $18.0M $19.4 FY Estimated FY Projected FY Projected Non-General Fund FY Projected General Fund FY Projected FY Projected 23

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25 Local agencies comprise approximately 40 percent of all CalPERS members. Local Leaders, comprising of mayors, council members, city managers and finance officers shared their own cities stories and concerns during meetings in September & November The message delivered was: the employer just paying more option is no longer viable. Following these meetings where local leaders gave voice to the challenges they face delivering services as pension costs increase, the League decided to commission this study. 25

26 Key Findings: 1. Rising pension costs will require cities over the next seven years to nearly double the percentage of their General Fund dollars they pay to CalPERS; 2. For many cities, pension costs will dramatically increase to unsustainable levels; and 3. The impacts of increasing pension costs as a percentage of General Fund spending will affect cities even more than the state. Employee costs, including police, fire and other municipal services, are a larger proportion of spending for cities 26

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28 Salary Growth Benefit Formula Value of Benefits Demographics Inflation Investment Returns Discount Rate 28

29 BENEFIT FORMULA SALARY GROWTH DEMOGRAPHICS OTHER Ask Employees to contribute more (GF: 1% =$650K; Overall: 1% =$865K) Minimize Salary Growth Monitor classic and PERPRA employee demographics Pre-Pay Unfunded Actuarial Payment for FY ($500k Savings) Explore 3 rd Tier-Retirement Benefits for new classic employees to the City Consider Non-PERSable Compensation Continue to fund Pension Obligation Trust Fund (Current bal.: $500k) Monitor Cal Fire case for impacts to California Rule Evaluate Impacts of EPMC Monitor efforts mandating payment acceleration from 30 to 20 years 29

30 & HISTORICAL OVERVIEW

31 Millions FY GENERAL FUND BUDGET $270.0 $250.0 $230.0 $224.9M $9.3M Budget Gap (balanced w/the use of one-time monies) $234.2M $210.0 h $190.0 $170.0 $150.0 Revenues Expenditures 31

32 FY ADOPTED GENERAL FUND BUDGET-JULY 1, ,235,795* Adopted Budget Includes the Following Elements: PERS Increase 4,631,324 OCFA Increase 1,284,534 Graffiti Abatement Program Funding in the GF 1,198,340 Health Insurance Increase 1,155,600 Allocation for 3rd COPS Grant 997,126 Annual Share of Animal Shelter Construction Costs 750,000 Workers' Comp 1% Increase 745,000 Financing of the 800 MHz Final Phase Backbone 200,000 * Adopted Budget prior to new MOU increases 32

33 Additional GF Adjustments Revenues Expenditures US Marshals' Contract M 5.9M Addition of Combination Inspectors 420K 420K Homeless Services Manager 0 114K Veterinarian Services at SA Zoo 40K 40K MOU INCREASES Salary Increases ONLY POA-Sworn M Salary Increases ONLY-SEIU K Salary Increases ONLY-PMA K Salary Increases ONLY-POA Non-Sworn K Salary Increases ONLY-SAMA K Salary Increases ONLY-CASA k 1 Represents projected only, final value of the short-term 2 year Marshals Contract TBD 2 Partially offset with Cap on Health Insurance Premiums & higher PERS Employee Contribution from 9% to 12% effective 01/01/18 3 Partially offset with Cap on Health Insurance, balance to be absorbed within existing budget 33

34 PERS $32.4M, 14% FY Adjusted General Fund Budget: $240.7M Labor $112.6M, 47% OCFA $39.4M, 16% Programs & Services* $56.3M, 23% *Programs & Services include Contractuals, Commodities, Debt Service, Cross Charges, & Others 34

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36 QUARTERLY REVENUE AND EXPENDITURES Quarterly Trends PER QUARTER 1Q 2Q 3Q 4Q Revenues 10% 24% 28% 38% Expenditures 24% 26% 23% 27% 36

37 GENERAL FUND FY Adjusted Budget FY July-Dec Actuals % Received/ Expended Revenues $235,573,111 $76,000, % Expenditures $240,735,022 $118,834, % 37

38 FY ADJUSTED Budget FY July-Dec Actuals % Received As of 12/31/17 Sales Tax $ 50,300,000 $ 15,468, % Property Tax 34,544,000 19,119, % Property Tax In Lieu of VLF 30,966, % UUT 27,780,000 10,861, % Business License 11,870,000 2,683, % Hotel Visitors Tax 9,900,000 3,956, % Total Top 6 GF Revenues 165,360,459 52,088, % Jail Revenue 12,717,316 2,671, % Medical Marijuana 3,500,000 1,129, % Other General Fund Revenues 53,995,336 20,111, % Total Revenues $ 235,573,111 $ 76,000, % 38

39 Departmental Expenditures FY Adjusted Budget FY July-Dec Actuals % Expended City Manager $ 2,802,902 $ 1,247, % Non-Dept 14,598,981 7,755, % Clerk of the Council 1,094, , % City Attorney's Office 3,226,160 1,185, % Personnel Department 1,706, , % Finance & Management Services Agency 5,575,056 2,472, % Bowers Museum 1,476, , % Parks and Recreation Services Agency 20,006,850 9,699, % Police Department 121,796,278 59,095, % Fire Department 50,417,145 27,903, % Planning & Building Agency 10,526,100 4,779, % Public Works Agency 6,847,195 2,560, % Community Development Agency 661, , % TOTAL GENERAL FUND $ 240,735,022 $ 118,834, % 39

40 DEPARTMENT FY Budgeted Positions GF Vacancies Non-GF Vacancies Total Vacancies Unfunded Positions City Manager's Office City Attorney's Office Clerk of the Council Community Development Finance & Management Services Information Technology * 0 Personnel Services Planning Building ** Police Department PRCSA & Library Public Works Agency Total 1, * Currently filled by contractual services **Two Code Enforcement Officers Pending Fee Study 40

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42 FY ADJUSTED GENERAL FUND EXP. BUDGET 240,735,022 GENERAL FUND BASELINE ASSUMPTIONS Projected PERS Increase (Overall increase $7.2M Citywide) 5,857,009 MOU Salary Increases 3,105,656 Strategic Plan FY ,494, % OCFA & CARE Increase 1,984,890 Additional funding for Type II Jail Facility (US Marshals)* 1,184, % Increase Health Insurance Increase 745,971 Total Additions to the Base 15,373,008 FY GENERAL FUND PRELIMINARY BASE EXP. BUDGET 256,108,030 * Full Year Expense Value of Marshalls short term 2-year agreement - $7.2M 42

43 FY Preliminary General Fund Exp. Budget: $256.1M PERS $38.2M, 15% Labor $117.6M, 47% OCFA $41.4M, 16% Programs & Services* $58.8M, 22% *Programs & Services include Contractuals, Commodities, Debt Service, Cross Charges, & Others 43

44 REVENUE CATEGORY Projected Year-End FY Estimated Budget $ Increase % Increase/Decrease Sales Tax 46,210,473 48,048,000 1,837, % Property Tax 35,626,087 36,912,189 1,286, % Property Tax In-Lieu of VLF 30,966,459 32,140,088 1,173, % UUT 24,550,000 24,550, % Business License 12,245,623 12,551, , % Hotel Visitors' Tax 9,442,127 9,725, , % Medical Marijuana Tax 3,500,000 3,500,000 * % Other Taxes 10,320,205 10,320, % Intergovernmental Revenues 5,871,563 5,871, % Use of Money & Property 1,098,142 1,098, % Miscellaneous 3,993,134 3,993, % Refuse Franchise Fees 6,324,000 6,324, % Charges for Services 12,469,266 12,469, % Franchise Fees 3,358,047 3,358, % Licenses & Permits 5,432,680 5,432, % Fines 5,128,299 5,128, % SUBTOTAL 216,536, ,422,768 4,886, % Additional Potential Revenues Jail Facility Rental-US Marshals 8,414,802 12,240,000 3,825, % Adult-Use Cannabis TBD 5,500,000 5,500,000 N/A Estimated General Fund Revenues 224,950, ,162,768 9,325, % * MMD Tax may experience a change as a result of Adult-Use Cannabis 44

45 Millions PRELIMINARY FY GENERAL FUND BUDGET $270.0 $250.0 $230.0 $239.2M $16.9M Budget Gap $256.1M $210.0 $190.0 $170.0 $150.0 FY BASE REVENUES FY BASE EXPENDITURES 45

46 Internal Service Funds: Balanced Operations & Funding First Year Capital (Operating/Capital) ALL GF Building Maintenance Rate Increase for FY & 1st Yr. Capital (Operations: 740k & Capital: 3.2M) 4,002,435 ALL GF Preliminary IT Rate Increase for FY & Capital (Operations: 1.4M & Capital: 1.5M) 2,923,325 ALL GF Fleet Rate Increase for FY & Vehicle Replacement (Operations: $640K & Capital: $1.8M all PD Veh.) 2,441,344 ALL GF Liability Increase for FY (reflects premium increases) 1,857,425 ALL GF Workers' Comp Increase for FY ,062,717 Subtotal 13,187,246 Other Options & Additional Potential Impacts: PWA Sanitation Enterprise Programs (Worst Case Scenario) (8,646,050) ALL GF Refuse Surcharge & Contract Savings (Worst Case Scenario) (6,324,000) PD Continue Current PD Recruitment Levels (16 positions)? (2,640,000) ALL GF Strategic Plan Funding for FY 18-19? 1.5M-2.5M PBA General Plan Funding (includes staffing)? (0.5M-1.0M) ALL GF Additional Contribution to the Pension Stability Fund (PARS)? (500,000) PWA Street Lighting Financing? (450,000) ALL GF Additional Resources Needed for Cannabis Enforcement? (TBD) ALL GF Departmental Supplemental Requests? (TBD) ALL GF Additional Revenue from Cannabis (expanded uses) TBD Subtotal 20.9M-22.1M TOTAL POTENTIAL IMPACTS/CONSIDERATIONS 34.1M-35.3M 46

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48 14/15 15/16 16/17 17/18 18/19 Millions Revenues Expenditures $ $235 $ $ $ $ $210 $205 $ $195 48

49 16/17 17/18 18/19 19/20 20/21 Mil. Revenues Expenditures $ $ $230 $ Does not include: - Water Transfer Reduction - Graffiti Abatement Transfer - Loss of ICE Contract - Prior to PERS Discount Rate Announcement 12/21/16 - COLA Increases in FY

50 Millions GF Labor Costs & Authorized Positions $140.0 Authorized Positions Labor Costs $ $120.0 $104.4 $110.4 $113.6 $ $100.0 $ $ $ $20.0 $ FY FY FY FY FY Labor Costs 5.5% On average, labor costs in the General Fund have grown at the rate of 5.5% since FY FY vs. FY Labor Costs +$25M 50

51 Millions $240 $230 $220 $ $221.0 $208.4 $ $ $200 $192.3 $197.7 $190 FY Actuals FY Actuals FY Actuals REVENUES FY Actuals EXPENDITURES Revenues 2% On average, total General Fund revenues have grown at the rate of 2% since FY *Excludes the $9.3M in One-Time Revenue FY FY Actuals Actuals Expenditures 4% On average, total General Fund expenditures have grown at the rate of 4% since FY FY Budget July July 1* 1 51

52 Regional Economists are predicting slight economic growth as total GDP growth for the nation will hover around 2.3% in 2018 Wall Street Journal: [National]GDP Grew 2.6% at Year End [ ]U.S. economy is in unusual territory: not quite booming Governor Brown in his Governor s Message as part of the proposed budget warned: In recent years, I have warned of an inevitable recession lurking in our future, which thankfully has not yet arrived [ ] Fiscal restraints are needed more than ever as California approaches the peak of the business cycle. 52

53 General Fund Forecast STATUS QUO Revenues Expenditures Millions $300 $280 $260 PERS: Avg. annual increase of $5.2M for the next four years OCFA: Avg. annual increase of $1.9M for the next four years $240 $ * $200 $180 Budget FY Preliminary Budget FY FY FY FY *Excludes the $9.3M in One-Time Revenue Note: Revenues decreases in FY due to the expiration of the August 15, 2017 US Marshals 2-year short-term agreement 53

54 Be transparent and honest about the problem Use a comprehensive approach for all funds Establish a vision, develop a budget that promotes long term sustainability, implement best practices and utilize a combination of cost reductions and revenue increases. 54

55 Use a multi-year approach to achieve financial sustainability Identify core services and focus on funding core services Provide clear vision and direction from leadership Engage in a collaborative approach 55

56 Prepare a long term financial forecast and plan to achieve stability and sustainability Focus on funding core services Identify new ways of delivering city services at lower costs Identify revenue enhancements Engage with key stakeholders 56

57 General Fund Forecast with preliminary assumptions below PERS: Avg. annual increase of $5.2M for the next four years OCFA: Avg. annual increase of $1.9M for the next four years $280.0 $260.0 $240.0 $234.2 Revenues Expenditures $258.9 $248.1 $247.0 $245.0 $267.0 $249.8 $275.2 $254.1 $220.0 $224.9 $200.0 $180.0 Budget FY Preliminary Budget FY Note: Revenues decreases in FY due to the expiration of the August 15, 2017 US Marshals 2-year short-term agreement FY FY FY Includes the following preliminary assumptions: Transition to Holding Facility, Implement Fee Study, Cannabis Expansion, Development Impact Fee 57

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