SANTA FE IRRIGATION DISTRICT BOARD OF DIRECTORS SPECIAL MEETING

Transcription

1 SANTA FE IRRIGATION DISTRICT BOARD OF DIRECTORS SPECIAL MEETING Santa Fe Irrigation District Board Room 5920 Linea del Cielo, Rancho Santa Fe, California THURSDAY, MARCH 29, :30 a.m. In addition, Vice President Dunford will be teleconferencing, pursuant to Government Code section from the following location: 30B Uhaloa Place, Lanai City, Hawaii The public may participate in the meeting from either of the above locations. CALL MEETING TO ORDER PLEDGE OF ALLEGIANCE Director Petree ITEMS TO BE ADDED TO THE AGENDA (Government Code Section ) ORAL COMMUNICATIONS Opportunity for members of the public to address the Board (Government Code Section ) DISCUSSION 1. Board of Directors Planning Workshop - Strategic Financial Planning (pages 3-25) a) Long-term Financial Obligations (CalPERS) b) Reserve Funds Policy c) CIP Funding Strategies DIRECTORS COMMENTS Director s comments are comments by Directors concerning District business, which may be of interest to the Board. They are placed on the Agenda to enable the individual Board members to convey information to the Board and the public. No action is to be taken on comments made by the Board members. 2. Directors Comments INFORMATION ITEM 3. Special Board Meeting Workshop Calendar (page 26)

2 ADJOURNMENT Assistance for the disabled: If you are disabled in any way and need accommodation to participate in the Board meeting, please call the Board Secretary at (858) for assistance at least three (3) working days prior to the meeting so the necessary arrangements can be made. Agenda page 2

3 DATE: TO: FROM: SUBJECT: Board of Directors General Manager Board of Directors Planning Workshop Strategic Financial Planning DISCUSSION: Previously, the Board has held planning workshops to review and update the District Mission and Vision Statements, as well as consider key strategic issues. As a follow-on to the ongoing discussion of key strategic issues, today s workshop will focus on several important financial planning issues that may drive policy considerations or financial initiatives as we move forward with our planning process. This workshop is the fifth in a series of Special Meetings that started in 2017 and are calendared through the remainder of the fiscal year (July 2018). It is anticipated that this agenda item will take up the majority of the morning. The workshop will be held as part of a public meeting and the public will have the opportunity to provide comment and address the Board. This workshop will focus on the financial planning related to the following topics: a) Long-term Financial Obligations (CalPERS) b) Reserve Funds Policy c) CIP Funding Strategies Attached for your review are copies of PowerPoint presentations that staff and the consultant, Fieldman Rolapp and Associates (FRA), will present at the workshop, Attachments A and B, respectively. Staff does not anticipate any organized group public comment or presentations at the Special Meeting. COMMITTEE ACTION: This item was not considered at the Committee level. FISCAL IMPACT: There is no direct fiscal impact associated with this agenda item. Attachment A: Attachment B: CalPERS Pension PowerPoint Presentation Financial Plan PowerPoint Presentation (FRA) Prepared by: Michael J. Bardin, General Manager Agenda page 3

4 ATTACHMENT "A" CalPERS Pension Discussion Changes in Assumptions and Growth in Unfunded Liability 1 SFID CalPERS Retirement Plans All Pooled Plans Less than 100 Employees Classic: 55 Hired before January 1, 2013 Represents 66% of active employees Tier 2: 60 Negotiated with EA for CalPERS members hired after December 14, 2012 Represents 4% of active employees PEPRA: 62 Public Employees Pension Reform Act All new members hired after December 31, 2012 Represents 30% of active employees 2 Agenda page 4 1

5 Current Funding Status per June 30, 2016 Actuarial Valuation Present Value of Projected Benefits $45,128,769 Entry Age Normal Accrued Liability 41,026,139 Plan s Market Value of Assets 29,036,935 Unfunded Accrued Liability 11,989,204 Funded Ratio 70.8% 3 Plans are Rarely 100% Funded Factors Outside Control Fluctuating Investment Portfolio Varying Demographic Experience Varying Economic Outcomes Factors Within Control Changes in Actuarial Assumptions Plan Amendments Funding Policies 4 Agenda page 5 2

6 Two Components of Annual Required Employer Contributions Employer Normal Cost (% of Payroll) Funds accrual of benefits for active members for upcoming year Expected to stay relatively level Replacement of Classic Members for PEPRA members will reduce normal cost Employer Payment of Unfunded Liability (Lump Sum) Annual payment toward unfunded liability Billed as lump sum Determined by CalPERS amortization policies Includes 7% interest 5 Definitions Normal Cost Annual cost of providing benefits to active employees for the upcoming year Accrued Liability (AL) Present value of future expected retirement benefits attributable to past service Unfunded Actuarial Liability (UAL) Equal to AL minus market value of assets (MVA) Unexpected changes in UAL are amortized Assumption changes Actuarial gains or losses UAL Amortization Payments Employer payments calculated under the CalPERS amortization policy to pay off the unfunded liability over a specified period of time Calculated each year based on the impact of assumption changes or plan amendments (20 years) and actuarial gains/losses (30 years) 6 Agenda page 6 3

7 Actuarial Assumptions Discount Rate (Interest Earnings) Mortality (Life Expectancy) Retirement Age Salary Increases (Merit Increases) Payroll Growth (Salary Inflation) 7 Increased Funding Risk Volatile Market Conditions Current Portfolio and Market Environment Market Valuations and Return Expectations Plan Demographics Longer Retiree Lifespan Increased Cash Outflows Benefit Structure 8 Agenda page 7 4

8 CalPERS Modified Funding Policies Phase in of Discount Rate Reduction FY19 = 7.375% FY20 = 7.25% FY21 = 7.00% Five Year Ramp Up/Down of Unfunded Accrued Liability Amortization of Assumption Changes from 30 Years to 20 Years Pay down unfunded liability faster 9 Other Assumption Changes Slowdown in Mortality Rate (15 years vs 20 years) Earlier Retirement for Miscellaneous Plans Later Retirement for Safety Plans Inflation Reduced to 2.50% from 2.75% 10 Agenda page 8 5

9 Drivers Behind Changes Strengthen Long Term Sustainability of Fund Reduce Negative Cash Flows Reduce Long Term Probability of Funded Ratios Falling Below Undesirable Levels Adjusting to Changed Market Conditions Smooth Increases due to Volatile Investment Markets 11 SFID Implications Increase in Normal Cost From % in FY19 to 13.9% in FY25 Increase in AL Payment From $704,463 in FY19 to $1,405,000 in FY25 12 Agenda page 9 6

10 Mitigation Strategies Pay Down UAL with Lump Sum Payment(s) Reduce Amortization Period (Increases Annual Costs but Reduces Interest) Fresh Start 13 Next Steps Explore Options with CalPERS and Financial Advisor Bring Recommended/Preferred Action to Board 14 Agenda page 10 7

11 ATTACHMENT "B" SANTA FE IRRIGATION DISTRICT FINANCIALPLAN BOARD WORKSHOP TABLE OF CONTENTS Section 1 Section 2 Section 3 Section 4 Section 5 Section 6 Section 7 Fieldman, Rolapp & Associates General Financial Overview Capital Funding Mechanisms Reserves and Liabilities Credit Rating Overview Market Update Summary 2 Agenda page 11 1

12 SECTION 1 Fieldman, Rolapp & Associates ABOUT FIELDMAN, ROLAPP & ASSOCIATES Independent Municipal Advisor Registered with SEC and MSRB Exclusive focus on public finance Employee-owned firm Extensive experience with California water agencies In business for more than 51 years TOP 10 FINANCIAL ADVISORS IN CALIFORNIA Water & Wastewater Financings, * FINANCIAL ADVISOR # of Issues Par Amount (US$ mil) 1 Fieldman Rolapp & Associates 159 $4,954 2 Public Resource Advisory Group 111 $13,036 3 Public Financial Mgmt Inc 96 $6,544 4 Montague DeRose & Associates 68 $11,322 5 Urban Futures Inc 36 $636 6 KNN Public Finance 27 $1,920 7 Bartle Wells Associates 25 $856 8 NHA Advisors 24 $308 9 C M de Crinis & Co Inc 16 $ FirstSouthwest 14 $776 TOP TEN TOTALS 576 $40,523 * Source: Thomson Reuters on Demand as of December 31, Includes sole advisory roles only 4 Agenda page 12 2

13 FRA TEAM Engagement Manager and Day-to-Day Point of Contact Robert Porr Senior Vice President Project Manager Paul Pender Vice President 31+ years experience in Public Finance 16 years as a Financial Advisor 8+ years as an investment banker Member NY Bar Series 50 License 13+ years experience as financial advisor. MPP, University of Southern California Series 50 License Specializes as a municipal advisor to water, wastewater, and other special districts Has completed approximately $7.3 billion of municipal transactions Extensive experience with adjustable rate structures Advisor to Santa Fe Irrigation District, Amador Water Agency, Santa Clarita Valley Water Agency (formerly Castaic Lake Water Agency,) Central Coast Water Authority, Cucamonga Valley WD, El Dorado ID, Merced ID, Mesa WD, Mojave Water Agency, Olivenhain MWD, Orange County WD, Rancho California WD, Silicon Valley Clean Water, and Vallecitos WD Specializes in designing of financial models and analyzing financial alternatives Has developed financial models and debt structures for numerous water/wastewater agencies, including Santa Fe Irrigation District, Santa Clarita Valley Water Agency (formerlycastaiclakewateragency),elsinorevalleymwd,orangecountywater District, Mesa Water District, Mojave Water Agency, and Silicon Valley Clean Water Has advised on more than 130 California municipal bond transactions Analytical and Quantitative Support Lora Carpenter Assistant Vice President 4 years experience with FRA. BS in Mathematics, Bucknell University Series 50 License Specializes in structuring new money and refunding bond issues Creates cash flow and debt portfolio modeling analysis Prepares credit presentations Performs credit rating pricing research Conducts market research supporting bond pricing negotiations 5 PREVIOUS FRA ENGAGEMENTS Client Financial Plan or Modeling Revenue Policy Debt Management Policy Olivenhain Municipal WD Silicon Valley Clean Water Mesa Water Borrego Water District Padre Dam MWD Merced Irrigation District Orange County Water District Castaic Lake Water Agency Vallecitos Water District Westlands Water District West Valley Water District South Coast Water District Sweetwater Authority Yorba Linda Water District Cucamonga Valley WD Rancho California WD Western Municipal 6 Agenda page 13 3

14 SECTION 2 General Financial Overview OBJECTIVES FOR TODAY Provide a General Overview of District s Financial Position Identify Challenges Cash flow Structural Issues Are rates keeping up with expenses? Capital Expenditures needs and resources Balance Sheet - Debt vs. Cash Outline of analysis to be undertaken Use of debt to smooth out rate increases and fulfill capital needs More efficient use of reserves Establish objectives for next steps 8 Agenda page 14 4

15 DYNAMICS OF FINANCIAL PERFORMANCE* Revenues From Volumetric Sales 68% Fixed Charges 20% Property Taxes 9% Other Revenues 3% 79.6% 88% 2013 Operating Expense as % of Water Revenues** Operations & Maintenance Including CalPERS 2017 Operating Expense as % of Water Revenues** 101.5% DEBT SERVICE RESERVES INCLUDING CAPITAL CAPITAL EXPENDITURES *Represents Fiscal Year 2017 audited financial results. **Operation and Maintenance expenses as a percentage of Water Sales and Fixed Charges. 9 SECTION 3 Capital Funding Mechanisms Agenda page 15 5

16 MUNICIPAL FUNDING MECHANISMS Cash Generally impractical method to fund large capital projects Requires raising rates well in advance of expenditures and investing cash to maintain pace with inflation Can be advantageous to use when investment earnings on reserves are low Debt bonds, certificates of participation, bank loans, direct placements Borrow money from investors for an identifiable return and period Promise to repay from identified source of funds, e.g. taxes, revenues from providing services Debt allows municipal entities to effectively fund large capital projects Municipal debt is a promise to repay investors borrowed moneys Municipal issuers enjoy lower interest rates due to tax-exempt advantage Issue is divided into different maturities and interest rates (i.e year maturities) to appeal to various investors and constraining interest expense Accessing the public markets with tax-exempt debt generally results in getting the lowest cost of borrowing 11 GOVERNMENT SUBSIDIZED LOANS State subsidized loans can be advantageous, if obtainable Advantages: low interest expense, 30 years amortization and low fees to apply Challenges: Currently timing and funding availability is uncertain/problematic Applying now for actual funding beyond FY2020 may be worthwhile Federal Loan programs such as WIIN and WIFIA Loans More appropriate for large costly projects, as costs to obtain can be high Strong competition for funding Significant staff time required to apply, obtain and close 12 Agenda page 16 6

17 CASH / DEBT FUNDING OVERVIEW Cash Funding R&R / maintenance projects Shorter useful life projects Existing funding available or available in the near future Requires potentially significant rate increases in short time period May require excessive rate increases on a single generation of rate payers Tends to create volatility in reserves Preserves debt capacity Debt Funding New large scale projects Projects with long useful lives Insufficient existing funding for the entire project Permits smoothing of rate increases to meet increased O&M and debt payments Creates payment period = life of asset so cost is spread over multiple generations Judicious use of debt provides additional tool for capital and allows planning platform 13 CAPITAL FUNDING VS. INFLATION Deferring capital projects can add significant costs over time due to inflation Rate increases ultimately will need to capture true cost of using/replacing infrastructure To the extent projects can be accelerated, potential to generate meaningful cost savings - use of debt may create opportunity to accelerate Illustration of Cost of $35 million CIP Phased over 5 Years Year Total CIP in 2018 dollars $7,000,000 $7,000,000 $7,000,000 $7,000,000 $7,000,000 $35,000,000 CIP + Inflation* $7,210,000 $7,426,300 $7,649,089 $7,878,562 $8,114,919 $38,278,869 *assumes 3% annual inflation rate 14 Agenda page 17 7

18 SECTION 4 Liabilities and Reserves SFID LIABILITIES AND RESERVES Liabilities $2.5 million in debt obligations R.E. Badger (final payment 9/2019) $11.9 million UAL to CalPERS (as of 6/30/2016 balance)* = 71% Funded Projected to be $12.3 million at 6/30/2017* OPEB UAAL of $4.5 million (as of 6/30/2015 actuarial valuation) = 40% Funded $482,764 annual required contribution for OPEB (as of June 30, 2017) $2.9 million in Operating Reserve $14.3 million in Capital Reserve Current Reserve Policy Fund Minimum Maximum Operating Capital Improvement Reserves 60-day average of current year operating budget 90-day average of current year operating budget 100% of current year 100% of 10-year CIP costs PAYGO CIP + 50% of next in Asset Management Master year PAYGP + 25% of 3rd Plan year PAYGO 8% of property tax + 10% 100% of property tax + 30% Rate Stabilization of current water sales + 5% of current water sales + 25% of current water costs of current water costs *Based on SFID Miscellaneous Plan only. 16 Agenda page 18 8

19 CONTEXT FOR PENSION COSTS District's Projected Pension Normal Cost* District's Projected UAL Payments** 12.2% 12.8% 13.9% 13.9% 13.9% 13.9% 13.9% $704,463 $968,000 $853,000 $1,244,000 $1,331,000$1,405,000 $1,115, Pension costs are increasing for all CalPERS participants due to key assumption and methodology changes over last 5 years Significant growth in retirees has required CalPERS to gradually derisk their investment portfolio *Percentage of District s total payroll cost **District s most recent CalPERS plan / valuation report (August 2017). 17 PENSION UAL FUNDING OPTIONS Advance Funding in general means paying down the UAL sooner than the CalPERS standard payment schedule CalPERS allows for two main options: Fresh Start CalPERS will make a new, official UAL payment schedule of higher payments over a shorter term, e.g. 10 or 15 years Once directed, new payment schedule cannot be changed back or altered, other than to further shorten payment period Advance Funding Plan (AFP) Typically adopted as an amount per year over 3-5 year plan Discretionary payments made annually (e.g. $1 million per year) CalPERS applies funds to reduce UAL and future payment schedule* Taxable Debt *Note on UAL Payment schedule: Changes / savings in UAL payments start 2 years after each respective Advance Funding deposit, due to CalPERS policies, valuation timing, etc. Full benefit of funds is realized over time, however. 18 Agenda page 19 9

20 PENSION AND OPEB FUNDING OPTIONS Analyze different options to reduce/contain District s unfunded pension liabilities with CalPERS District s current unfunded liabilities is effectively debt of ~$11.9 million owed to CalPERS at an interest rate of 7.0% Objectives / Benefits Reduce unfunded pension liabilities More efficient use of reserves - paying off 7% debt with reserves earning fees Achieve medium-term pension operating cost savings Maximize long-term total pension cost savings Potentially increase the District s funding of OPEB Debt financing of pension obligations can be completed at taxable rates as a last resort, if it all 19 IMPROVING FINANCIAL PERFORMANCE BALANCING CASH AND DEBT $18 MM in Reserves at 2% Efficiently use cash reserves while still maintaining adequate liquidity Decrease $ MM in Reserves at 2% Strategize optimal use of cash to pay down debt and/or liabilities $ $19 MM MM Debt at at 5% 7% $ MM Decrease of Debt of Debt at 5% 7% at 5% 7% Reduction in costly liabilities Aligns with S&P Rating Criteria 20 Agenda page 20 10

21 RESERVE ANALYSIS RESERVE LEVELS LIQUIDITY NEEDS CAPITAL NEEDS RATE STABILIZATION NEW PROJECTS DISASTER REPAIRS & REPLACEMENTS CONTINGENCIES ADMINISTRATION APPLY TO LIABILITIES OPERATIONAL EMERGENCIES ECONOMIC DOWNTURNS STRATEGIC SUPPLY Target funding levels that allow flexibility to meet Reserve Policy requirements and maintain strong credit rating. 21 SECTION 5 Credit Rating Overview Agenda page 21 11

22 S&P METHODOLOGY Optimizing the District s credit rating puts the District in the best position to receive the lowest possible interest rates when issuing debt in the public market Recent changes in S&P rating criteria have been favorable to many California water agencies Key financial metrics required for highest ratings easier to meet Increased emphasis on Enterprise Risk and Management criteria generally very favorable to water agencies Enterprise Risk Profile (50%) Criteria Weight Economic Fundamentals 45% Industry Risk 20% Market Position 25% Operational Mgmt Assessment 10% Financial Risk Profile (50%) Criteria Weight All in Coverage 40% Liquidity and Reserves 40% Debt / Liabilities 10% Financial Management Assessment 10% Operational Mgmt Assess. Evaluation (10%) Criteria Weight Asset adequacy and operational risk 40% Organization effectiveness, management 20% Rate setting practices 40% Financial Mgmt Assess. Evaluation (10%) Criteria Weight Revenue and expense assumptions 10% Budget monitoring and interim reporting 10% Long term financial planning 15% Long term capital planning & asset manag. 20% Investment and liquidity policies 20% Debt Management policies 10% Transparency and accountability 15% 23 CREDIT RATING CRITERIA Credit Rating Customers: Classification & Wealth Governance: Establishing Policy and Rate Setting Management: Abilities to Plan and Execute Financial Ratios: Coverage, Days Cash, Free Cash/Depreciation Capital Needs: Funding Sources, Amounts and Timing Legal Structure: Additional Bonds Test & Rate Covenant Policies: Debt, Reserve & Investment 24 Agenda page 22 12

23 SECTION 6 Market Update TAX CUTS AND JOBS ACT (TCJA) TCJA eliminated the use of a certain type of advantageous tax-exempt refunding done in advance of the call date Results in a reduction in value of optional redemption feature in typical tax-exempt municipal bond issue TCJA lowered personal income tax rates, but change in treatment of mortgage expenses and State and Local Taxes may increase demand by some taxpayers in California Since January municipal issuance is down, but demand is high Recently, roughly 15% - 30% of municipal issuance has been advance refundings 26 Agenda page 23 13

24 MUNICIPAL MARKET DATA Source: Thomson Municipal Market Monitor 27 MUNICIPAL MARKET DATA Note: Far right column is for the month of February 2018 as of Source: Investment Company Institute (Fund & Market Statistics) and Thomson Municipal Market Monitor 28 Agenda page 24 14

25 SECTION 7 Summary SUMMARY District s financial position is being compromised by external forces Mandatory reduction in demand O&M costs are rising Pension costs are increasing Capital needs are prevalent and can become more costly in the future Strategy: identify challenges, risks and resources Focus on risks that can be managed Develop resources to mitigate risks Implement a plan that achieves objectives Develop strategic financial plan Analyze opportunities to reduce / replace existing expensive liabilities Trading more costly debt with less costly manageable debt Augment pay-go practices with debt to avoid large rate increases in the short term 30 Agenda page 25 15

26 SPECIAL BOARD MEETING SCHEDULE DATE TIME TOPIC Thursday, March 1, :30 a.m. Noon Review Draft 2018 Strategic Business Plan Review District Mission and Vision Statements Update Strategic Goals Thursday, 8:30 a.m. Noon Strategic Financial Planning w/consultant o Reserve Funds Policy o CIP Funding Strategies o Long-term Financial Obligations Wednesday, April 25, :30 a.m. Noon Water Rates w/consultant o Rate Setting Objectives/Goals o COSS Overview/Legal/Procedural o Alt. Water Structure Development o Rate Setting Policies (Pass Through, Demand Reduction) Tuesday, May 29, :30 a.m. Noon Regulatory Issues o Long Term Water Use Efficiency Standards o Operational Budget Workshop Wednesday, June 27, :30 a.m. Noon TENTATIVE Review Draft Cost of Service Study Review Alt. rate structure designs Wednesday, July 25, :30 a.m. Noon TENTATIVE Review Draft Cost of Service Study Review Draft alt. rate structure customer impacts Agenda page 26