"Reducing Unfunded Liabilities" --webinar 2:00 3:30 p.m., Wednesday, May 13, CSMFO Coaching Program

Transcription

1 "Reducing Unfunded Liabilities" --webinar 2:00 3:30 p.m., Wednesday, May 13, 2015 CSMFO Coaching Program Advance registration required for this no-charge webinar: Unfunded liabilities (pensions, retiree medical, and retiree supplemental) present a major challenge for local governments in California. Learn how you can make a plan to reduce these liabilities. Webinar topics: * Why you need a plan for unfunded liabilities. * Benefits of a plan. * How to develop a successful plan to reduce liabilities. Presenter: * Lori Ann Farrell, Director of Finance, Huntington Beach Color Commentator: * Mary Furey, Finance and Administrative Services Director, Saratoga Audience: all local government finance professionals Get connected with these steps. 1. Register in advance for the webinar: There is no charge for participating in the webinars, but each requires advance registration. *** Advance registration required for this no-charge webinar: 2. Connect with the webinar and audio: Use your logon information from the confirmation you receive via from GoToWebinar. We recommend the telephone option dial-in number provided by GoToWebinar for sound quality. Depending upon your internet connection, VOIP option for audio (computer speakers) can have delays or sound quality issues. 3. Ask questions: You may submit questions anonymously via to CSMFO@DonMaruska.com in advance or via the webinar during the panel discussion. As moderator for the session, Don Maruska will pose the questions.

2 4. Presenters presentation materials: We post these with the agenda at Agendas & Archives tab of The PPT will be available at least 2 hours before the webinar. After a webinar occurs, a digital recording along with the PowerPoint materials and results of the polling questions will be available after 24 hours at the "Agendas & Archives" tab of CPE Credits: If you are a member of CSMFO and wish to obtain CPE credit, you need to register and attend in your name, respond to at least 75% of the live polling questions, and pay $25 to CSMFO after notice from CSMFO following the webinar. After payment, CSMFO s the CPE certificate as a PDF. Post-Webinar Group Discussions Many agencies are organizing groups to participate in the webinars (live or recorded) and discuss the topics among themselves after the webinars. Some are summarizing their discussions and distributing them to managers throughout their organizations. Use the CSMFO Coaching Program as an effective way to enhance professional development in your agency. Here are some discussion starters for this session: a. What are our agency s unfunded liabilities? b. How might our agency benefit from a plan? c. What can we apply from the experiences of Huntington Beach and Saratoga? MORE RESOURCES--See the "Coaching Corner" at for valuable resources to boost your career. These include a Financial Management Skills Inventory, Resource Matrix, Coaches Gallery of 24 volunteer CSMFO Coaches willing to help you on a one-to-one basis, and an archive of digital recordings and materials from past webinars at Enjoy the resources to help you succeed in local government finance. Don Maruska, MBA, JD, Master Certified Coach Director, CSMFO Coaching Program; CSMFO@donmaruska.com Author How Great Decisions Get Made and Take Charge of Your Talent

3 Lori Ann Farrell, Director of Finance, Huntington Beach, CA Lori Ann Farrell has served as the Director of Finance at the City of Huntington Beach for the past 4 years, managing a budget of $334 million and a department of 36 employees. During the 4 years prior to her appointment at Huntington Beach, Lori Ann was the Chief Financial Officer for the City of Long Beach, where she managed a budget of $2.5 billion and directed 136 employees in five divisions. Lori Ann has her Masters of Public Administration and Bachelor of Arts from Columbia University. After her graduation from Columbia University, she worked under Mario Cuomo at the New York State Division of Budget, then as Director of Financial Compliance and Claiming for the NYC Administration for Children s Services under Mayor Rudolph Giuliani. She has served as a Financial Advisor for Citigroup/Smith Barney in Long Beach, and currently sits on the Port of Long Beach s Board of Directors. The City of Huntington Beach received CSMFO s Innovation Award in 2014 for its cutting-edge methods to reduce pension liabilities in California municipalities. In addition, the City received the Gold Hub of Innovation Award from the ACC-OC for using her approach. Mary Furey, Finance and Administrative Services Director, Saratoga, CA Mary Furey has served as the Finance and Administrative Services Director at the City of Saratoga for the last 8+ years, overseeing Finance, Information Technology, and Human Resources. Her 25+ year professional career spans several agencies/firms in Santa Clara, Santa Cruz, and Monterey counties. Prior to joining Saratoga, Mary was the Finance Manager at the Town of Los Gatos, a Senior Analyst at Santa Clara Valley Water District, a Controller at a private firm, and an Accountant at a CPA firm. Mary has a Bachelor of Science degree in Accounting and a Masters of Public Administration degree from San Jose State University, and is a Certified Public Accountant.

4 Reducing Unfunded Liabilities Coaching Program May 13, 2015

5 Coaching Program: 17 th year as member benefit Career Development Committee Program Committee 2

6 Overview of Session 1. Why you need a plan for unfunded liabilities. 2. Benefits of a plan. 3. How to develop a successful plan to reduce liabilities. Presenter: Lori Ann Farrell, Director of Finance, Huntington Beach Color Commentator: Mary Furey, Finance and Administrative Services Director, Saratoga Moderator: Don Maruska, Director, CSMFO Coaching Program 3

7 Polling Question #1 How many persons are participating at your location? 4

8 Reducing Unfunded Liabilities A Three-Pronged Approach CSMFO WEBINAR - MAY 13, 2015

9 Population 200,000 Charter City City Manager/City Council Annual Budget $344 Million Total Liabilities - $348 Million Full Time Employees Full Service City (i.e. Police, Fire, etc.) 6

10 There are plans that can be implemented that can make a significant difference to the City and the Taxpayer. The simpler the plan the easier it is to understand. Market the plan at every opportunity - Get the word out! 7

11 Local government coffers are benefiting from the economic recovery. Property tax, sales tax, hotel tax, permitting and parking revenue are experiencing gains; many are exceeding pre-recession levels. Personnel costs comprise 70 percent of Huntington Beach s budget. Fixed cost increases related to the existing payroll base will largely consume projected revenue increases; specifically for pensions. Projected revenue increases will primarily assist in funding increasing pension costs. 8

12 Most cities are experiencing increases in annual revenue streams. An improved economy naturally leads to discussions about restoring benefits, restoring staffing levels or increasing compensation. A plan helps to highlight that benefits already promised are not adequately funded, before creating new ones. Promotes responsible discussions about employee compensation, contract adjustments and long-term financial planning. It s the right thing to do for the taxpayers AND the employees. 9

13 Builds a financially resilient government over the long-term. Improves ongoing financial sustainability. Provides time to effect change and adapt to changing conditions. Adds transparency and encourages public involvement. Creates methods to determine the costs/benefits of decisions over the longterm. Implements a tool for leaders to balance competing demands for enhanced services versus increased compensation. 10

14 Phase One Begin the discussion before the next fiscal year s budget is developed. Hire an independent actuary to run scenarios, explain the problem and make recommendations. Phase Two Build the recommendations into the Proposed Budget. Make sure the recommendations are reasonable and user friendly. Phase Three Implement the recommendations. Report on the progress of the Plan on an annual or semi-annual basis. Get the word out! (e.g. press releases, awards, presentations, etc.) 11

15 Explaining the Problem

16 The City s CalPERS Unfunded Liability is $308.2 million*: Unfunded Liability (MV) % Funded Safety Plan $187.8 million 67.2% Miscellaneous Plan $120.4 million 73.0% Total $308.2 million 69.7% Higher rates starting in FY 15/16 and FY 16/17 and beyond FY 14/15 FY 15/16** FY 16/17 Safety Plan 39.1% 42.9% 46.1% Miscellaneous Plan 21.9% 24.8% 26.7% 13

17 Funding History The Funding History below shows the recent history of the actuarial accrued liability, The market value of assets, the funded ratio and the annual covered payroll. 14

18 Employer Contribution Rate History The table below provides a recent history of the employer contribution rates for your plan, as determined by the annual actuarial valuation. It does not account for prepayments or benefit changes made in the middle of the year. 15

19 $60.0 (In Millions) 89% $ $4.0 + $4.1 + $2.3 + $1.2 $40.0 $30.0 $ $1.0 $9.6 $ $2.4 $ $4.4 $ $3.8 $15.0 $16.7 $18.6 $19.6 $20.2 Misc Safety from Prior Year $10.0 $16.5 $16.7 $18.1 $20.6 $22.7 $25.0 $27.2 $28.5 $29.1 $- FY 13/14 FY 14/15 FY 15/16 FY 16/17 FY 17/18 FY 18/19 FY 19/20 FY 20/21 FY 21/22 $26.1 $27.1 $29.5 $33.9 $37.7 $41.7 $45.8 $48.1 $49.3 *Amounts will be updated for FY 2014/15 Mid-Year Presentation. Does not include the impact of recently negotiated contracts. 16

20 The table below shows the estimated projected contribution rates and the estimated increases for your plan under the five difference scenarios. 17

21 Polling Question #2 Which unfunded liabilities does your agency currently have? [check all that apply] 18

22 A Three-Pronged Approach

23 The City of Huntington Beach has developed an award-winning, 3-pronged approach to reduce unfunded liabilities: CalPERS One Equals Five The 25 to 10 Plan for Retiree Medical The 16 to 10 Plan for Retiree Supplemental 20

24 These plans will save taxpayers a total of $70.3 million over the long-term and help ensure greater financial sustainability. These plans will eliminate the City s unfunded liabilities in its Retiree Medical and Supplemental Pension Plans in 10 years. The City s unfunded liability for its Safety PERS Plan will be paid off five years early. 21

25 One Equals Five Plan

26 The One Equals Five Plan for Safety UL: Provides an additional $1 million payment to PERS annually. Reduces amortization period from 30 years to 25 years. Saves taxpayers an estimated $53.7 million over long term. Provides more predictable budgeting (and flexibility) while still creating long-term savings. New City Council Financial Policies memorializes the policy. *For discussion purposes. Final results will be based on actual market conditions and actuarial changes. 23

27 The FY 2012/13 Budget ended with a surplus of $500K. The FY 2014/15 Adopted Budget included a $500K surplus. These funds created a $1M+ Plan to fund the One Equals Five Plan. 24

28 25

29 250, , ,000 Unfunded Liability 100,000 50,000 $54M Savings Year 20 Year 25 Year 30 0 FY 14/15 FY 16/17 FY 18/19 FY 20/21 FY 22/23 FY 24/25 FY 26/27 FY 28/29 FY 30/31 FY 32/33 FY 34/35 FY 36/37 FY 38/39 FY 40/41 FY 42/43 FY 44/45 Years to Eliminate Unfunded Liability Current Amort +$1 Million/Yr *For discussion purposes, final results will be based on actual market conditions and actuarial changes. 26

30 250, , ,000 Unfunded Liability 100,000 50,000 $85M Savings Year 20 Year 25 Year 30 0 FY 14/15 FY 16/17 FY 18/19 FY 20/21 FY 22/23 FY 24/25 FY 26/27 FY 28/29 FY 30/31 FY 32/33 FY 34/35 FY 36/37 FY 38/39 FY 40/41 FY 42/43 FY 44/45 Years to Eliminate Unfunded Liability Current Amort 5 Yr Amort *For discussion purposes, final results will be based on actual market conditions and actuarial changes. 27

31 Polling Question #3 Has your agency brought the UAL to Council s attention through one or more of the following? 28

32 The 25 to 10 Plan Retiree Medical

33 As of FY 2012/13, the City s Retiree Medical Plan had an unfunded liability of $10.6 million, and a 47.5 percent funded status. A plan was recommended to reduce the amortization period from 25 to 10 years. The City Council unanimously approved this plan and added $700k in additional contributions to the plan annually. The new 25 to 10 Plan reduces the amortization of the unfunded liability from 25 years to 10 years. The plan immediately shaves off 15 years of payments saving the taxpayers an estimated $9.2 million over the long-term. The City also selected the CERBT Plan with PERS - Strategy 3 (earns 6.39%). 30

34 31

35 25 to 10 Plan Retiree Medical OPEB Savings 12,000,000 $10,553,000 10,553,000 10,000,000 8,864,520 Unfunded Liability 8,000,000 6,000,000 4,000,000 6,753,920 4,643,320 2,532,720 2,000,000 0 Early Prepayment = $9.2 Million Taxpayer FY FY FY FY FY FY Year 10 Year 25 Years to Eliminate Unfunded Liability 25-Year Amortization Expedited "25 to 10" Plan 32

36 The 16 to 10 Plan Retiree Supplemental

37 The City also administers a Supplemental Pension Plan. The plan was 42.9 percent funded with a UL of $36.7 million. Finance recommended an additional $1.4 million payment annually. This additional contribution eliminates the unfunded liability in 10 years, versus the original amortization of 16 years. The 16 to 10 Plan is projected to save taxpayers a net $7.4 million over the long term. 34

38 35

39 The 16 to 10 Plan Supplemental Retirement Plan Supplemental Pension Plan Savings 40,000,000 35,000,000 $37,000,000 30,000,000 $29,600,000 Unfunded Liability 25,000,000 20,000,000 15,000,000 $22,200,000 $14,800,000 10,000,000 5,000,000 0 $7,400,000 Early Prepayment = $7.4 Million Savings $0 FY FY FY FY FY FY Year 10 Year 16 Years to Eliminate Unfunded Liability 16-Year Amortization Expedited "16 to 10" Plan 36

40 The CalPERS One Equals Five Plan will save $53.7 million. The 16 to 10 Plan for Retiree Supplemental will save $7.4M. The 25 to 10 Plan for Retiree Medical will save $9.2M. Total Taxpayer Savings for Three Pronged Approach = $70.3M. Great News! - Based on increased contributions into the 25 to 10 Plan for Retiree Medical and Capital market gains: As of 9/30/14, the Plan s Unfunded Liability for Miscellaneous employees was reduced from $10.6M to $3.1M. Resulting in the unfunded liability for this plan being completely paid off for the Miscellaneous portion (9 years ahead of schedule). 37

41 Type of Liability Amount (000) % Funded Plan to Eliminate Liability Timeline Retiree Medical (Misc) 2, % Payoff as of 9/30/14 Now Retiree Medical (Safety) 8, % 25 to 10 Plan 10 years 11,619 Retiree Supplemental 18, % 16 to 10 Plan 10 years CalPERS (Safety) 187, % 1=5 Plan 25 years CalPERS (Misc) 120, % Standard PERS Plan 30 years 308, % Workers Compensation 10, % 10 in 10 Plan 10 years GRAND TOTAL 348,351 38

42 Actions Taken to Reduce Unfunded Liabilities Total Taxpayers Savings* Retiree Supplemental 16 to 10 Plan 7,400,000 Retiree Medical 25 to 10 Plan 9,200,000 Subtotal $16,600,000 PERS 1 = 5 Safety Plan 53,680,116 Total $70,366,722 * Actual performance will be based on market conditions and actuarial changes during the amortization period. 39

43 Save taxpayers millions of dollars. Help the City Council address a complicated topic. Show both the public and employees that unfunded liabilities are being addressed. Help set local trends. Improve the City s credit rating (AAA from Fitch). Free up revenue for other high priority items. Create a culture of fiscal responsibility. Reinforce the need to perform cost/benefit analyses on all proposals Do the right thing! 40

44 Presented to City of Huntington Beach 2014 Budgeting & Finance CITY OF HUNTINGTON BEACH FOR THE YEAR ENDED SEPTEMBER 30, 2012 CITY OF HUNTINGTON BEACH FISCAL YEAR 2013/

45 Polling Question #4 Has your agency developed a plan to fund your unfunded liabilities? 42

46 CITY OF SARATOGA Reducing the UAL Hakone Gardens

47 A Different Set of Circumstances Small City Population 30,800 GF Budget ~$18 million Contract City Structure Utilities, Library, Fire separate agencies Sheriff Services County contract Minimal City staff Lower Pension Benefits Tier 1 No Retiree Benefits

48 2014 Valuation Report CalPERS Liabilities City staff Pooled Miscellaneous Plan Sheriff services - SCC Public Safety Plan City s UAL Bases / Amount $7.7 million at Reason for Base SIDE FUND SHARE OF PRE-2013 POOL UAL ASSET (GAIN)/LOSS NON-ASSET (GAIN)/LOSS Date Established Amortization Period Balance 6/30/13 Expected Payment Balance 6/30/14 Expected Payment Balance 6/30/15 Amounts for FY Scheduled Payment for Payment as Percentage of Payroll 06/30/13 0 $0 $0 $0 $0 $0 $ % 06/30/13 22 $3,182,123 $ $3,307,295 $ $3,381,194 $240, % 06/30/13 30 $3,791,145 $0 $4,075,481 $0 $4,381,142 $61, % 06/30/13 30 ($36,444) $0 ($39,177) $0 ($42,115) ($592) (0.011%) TOTAL $6,936,824 $109,457 $7,343,599 $167,963 $7,720,221 $301, %

49 Pension/UAL Payment Schedule Pension Plan FY 2015/16 FY 2016/17 FY 2017/18 FY 2018/19 FY 2019/20 FY 2020/21 Tier I 9.353% 9.700% 9.700% 9.700% 9.700% 9.700% Plus UAL $301,733 $362,702 $427,057 $494,947 $566,527 $571,207 Tier II 7.510% 8.000% 8.000% 8.000% 8.000% 8.000% Plus UAL $3 $36 $71 $108 $147 $188 Tier III 6.730% 6.730% 6.730% 6.730% 6.730% 6.730% Plus UAL n/a n/a n/a n/a n/a n/a

50 Unfunded Accrued Liability 3 Options: CalPERS 30 year Payment Plan $7.7 million principal and $10.5 million interest City funds Full UAL Payment $7.7 million City funds or bond Partial UAL Payment $3.3 million City funds

51 Saratoga s Strategy Partial UAL Payment Pre-2013 Pool UAL Base - $3.3 million Used $500,000 from CIP Reserve Used $930,000 from Working Capital Reserve Borrowed $1 million from Fiscal Stabilization Reserve $950,000 Balance from current fiscal year Net Operations Saved $3.6 million in interest Immediate payment saved additional $86,575 SIDE FUND Reason for Base SHARE OF PRE-2013 POOL UAL ASSET (GAIN)/LOSS NON-ASSET (GAIN)/LOSS Date Established Amortization Period Balance 6/30/13 Expected Payment Balance 6/30/14 Expected Payment Balance 6/30/15 Amounts for FY Scheduled Payment for Payment as Percentage of Payroll 06/30/13 0 $0 $0 $0 $0 $0 $ % 06/30/13 22 $3,182,123 $109,457 $3,307,295 $167,963 $3,381,194 $240, % 06/30/13 30 $3,791,145 $0 $4,075,481 $0 $4,381,142 $61, % 06/30/13 30 ($36,444) $0 ($39,177) $0 ($42,115) ($592) (0.011%) TOTAL $6,936,824 $109,457 $7,343,599 $167,963 $7,720,221 $301, %

52 Saratoga s Strategy Make future payments on our own terms: $500,000 annual payment Principal reduction reduces future required payment amounts o o Short term pain, long term gain Reduces payment plan to 15 years Preparation for: o o Future financial impacts from Public Safety UAL pass-through Future economic downturns Investment earnings Council bragging rights

53 Polling Question #5 If your Council has approved a plan to address the UAL, what does it do? 50

54 Post-Webinar Discussion Questions a. What are our agency s unfunded liabilities? b. How might our agency benefit from a plan? c. What can we apply from the experiences of Huntington Beach and Saratoga? 51

55 Polling Question #6 How was the webinar of value for you and your agency? 52

56 Contacts for today s webinar Lori Ann Farrell, Director of Finance, Huntington Beach LoriAnn.Farrell@surfcity-hb.org Mary Furey, Finance and Administrative Services Director, Saratoga mfurey@saratoga.ca.us Moderator: Don Maruska, Director, CSMFO Coaching Program CSMFO@donmaruska.com 53

57 Resources and Feedback A digital audio recording of the session and an Agenda packet with PDF of the PPT with polling results and other materials will become available in ~ 24 hours at the Agendas & Archives tab of Other coaching resources, including volunteer one-to-one coaches are available at Please complete the follow up survey, including suggested topics for 2015 webinars. 54

58 IJ ()J ;b s IV/,.+,.) l~t',j Dept. ID FN Page 1 of3 Meeting Date: CITY OF HUNTINGTON BEACH REQUEST FOR" CITY COUNCIL ACTION MEETING DATE: 2/17/2015 SUBMITTED TO: SUBMITTED BY: PREPARED BY: SUBJECT: Honorable Mayor and City Council Members Fred A. Wilson, City Manager Lori Ann Farrell, Director of Finance Fiscal Year 2013/14 Year-End Budget Adjustments and Preliminary Unaudited General Fund Balance Designations Statement of Issue: At the January 23, 2015, Strategic Planning Session, the Finance Department provided an update regarding the preliminary, unaudited Fiscal Year 2013/14 General Fund Budget performance for the year ended September 30, City Council authorization is requested to allocate the currently estimated available General Fund Balance of $5.9 million in order to finalize the City's Comprehensive Annual Financial Report {CAFR), subject to final certification by the City's independent, external auditors. Financial Impact: This action approves the following: 1) The deposit of $1.0 million into the City's Economic Uncertainties Reserve; 2) The transfer of $1.0 million into the Workers' Compensation Fund; 3) The deposit and appropriation of $1.0 million for the "CaiPERS 1=5" Plan; 4) The transfer and appropriation of $2.7 million to the Retiree Medical Insurance Fund (comprised of $2.0 million from estimated year-end available fund balance and $698,000 from existing General Fund reserves); and, 5) The creation of a CaiPERS Rate Increase Reserve with the remaining Fund Balance {currently estimated at $900,000) to help mitigate the fiscal impact of future projected pension rate increases. Recommended Action: A) Approve the assignment of preliminary FY 2013/14 year-end General Fund Balances in the amounts and for the purposes indicated in Attachment 1; and, B) Approve FY 2013/14 year-end inter-fund transfers and FY 2014/15 appropriations as indicated in Attachment 2 to payoff and/or reduce the City's Workers' Compensation, Pension and Retiree Medical unfunded liabilities. Alternative Action(s): Do not approve the recommended action and direct staff accordingly. Analysis: For Fiscal Year 2013/14, which ended on September 30, 2014, preliminary, unaudited figures reflect a total of approximately $202.2 million in recurring General Fund revenue and $1.9 million in one-time revenue for a total of $204.1 million in total estimated General Fund revenue. Of this amount, $198.2 million is needed to fund actual General Fund expenditures {$194.5 million), a required set-aside for the Cityview replacement project ($0.7 million), and increased encumbrances for public safety vehicles, equipment, and the LED Street Lighting Project ($3.0 million). ltein

59 Dept. ID FN Page 2 of 3 Meeting Date: 2/17/2015 General fund Balance Designations After accounting for actual expenditures, required set-asides, and increased encumbrances, there is a preliminary, unaudited available fund balance of $5.9 million, or 2.9 percent of the General Fund. At the City Council's Strategic Planning Retreat on January 23, 2015, several recommendations were made regarding the allocation of this available Fund Balance as follows: 1. Economic Uncertainties Reserve The City's Financial Policies have a stated goal of saving up to two months of General Fund budgeted operating expenditures, currently estimated at $35.0 million, in the Economic Uncertainties Reserve. Currently, this reserve has a balance of $24.0 million, or $11.0 million less than the stated goal. The deposit of an additional $1.0 million will help the City move closer to its stated goal by increasing the existing reserve level. This action may also assist in helping the City maintain its high credit ratings (i.e. AAA from the Fitch Rating Agency and a AA+ from Standard & Poors). 2. "10 in 10" Plan to Eliminate Worker's Compensation Liability On January 20, 2015, the City Council authorized the transfer of $1.3 million from various Funds citywide to fund actual operating and claims costs incurred in the Self Insurance Workers' Compensation Fund and to account for an increase in the final, actual unfunded liability of the Workers' Compensation program. While this transfer balanced the Fund's budget for the fiscal year, and allowed for the transparent reporting of the Fund's outstanding liabilities, the Fund still contains a significant negative Fund Balance. As one of the City Council's Strategic Planning Goals is to "Strengthen Economic and Financial Sustainability" staff recommends the implementation of a 10-year plan to reduce the Fund's $10.5 million unfunded liability, or a "10 in 10" plan. The transfer of $1,054,000 from the General Fund (Fund 100) to the Workers' Compensation Fund (Fund 551) represents one year's worth of the proposed payoff plan. 3. CaiPERS Safety Pension Plan In FY 2013/14, the City Council authorized an award-winning strategy to reduce the City's $187.8 million unfunded liability in the Safety Pension Plan. This strategy, the "1=5" plan proposes the annual deposit of an additional $1.0 million into the Safety Plan's coffers in order to expedite the payment of the Plan's unfunded liability. As per Bartel Associates, the City's independent actuaries, this plan would allow the City to payoff the liability in 25 years, instead of the original 30 years, saving taxpayers $54 million over the long-term. Staff recommends the deposit of $1.0 million into the CaiPERS 1=5 reserve for the fiscal year ended September 30, 2014, and the subsequent appropriation of these funds in the FY 2014/15 Revised Budget to make the payment to CaiPERS and expedite taxpayer savings. 4. Retiree Medical Unfunded Liability In FY 2013/14, the Adopted Budget also contained a new program to eliminate the City's unfunded liabilities for its Retiree Medical program in 10 years, versus the original 25 years, thereby shaving off 15 years of payments and saving taxpayers $9.2 million over the longterm. We are pleased to report that the City's efforts have yielded very positive results, making a complete payoff of the Miscellaneous employees' portion of the plan a viable option. City Council authorization is requested to transfer $2,698,000 from the General Fund (Fund 100) to the Retiree Medical Insurance Fund (Fund 702) to eliminate the Miscellaneous portion of the unfunded liability and continue the 10-year paydown of the Safety employees' unfunded liability estimated at $11 million, subject to stock market performance. This payment is comprised of $2,000,000 from estimated available General Fund balances and $698,000 from the existing Retiree Medical Unfunded Liability Reserve. Item 4.-2

60 Dept. ID FN Page 3 of 3 Meeting Date: 2/17/ CaiPERS Rate Increases The CaiPERS Board of Administration has implemented numerous changes to its actuarial methodologies and practices in order to improve the funded status of the pension plans for its member agencies statewide. In order to accomplish this goal, localities will experience significant increases in their future Employer contribution rates starting in FY 2015/16 and FY 2016/17 and into the foreseeable future. While the City has built these projected rate increases into its Long Term Financial Plan projections, more still needs to be done to prepare for these increased pension costs. Staff recommends the creation of a CaiPERS Rate Increase Reserve with the remaining year end General Fund balance, currently estimated at $900,000, to help shield the City's budget from the increased volatility that will likely result from the Board's most recent changes. Lastly, please note that the preliminary, unaudited $5.9 million available General Fund Balance that is the basis for these recommendations is an estimate and is still subject to potential change. It is recommended that any required reductions to this number (or additions), be reflected in the CaiPERS Rate Increase Reserve to help ensure the implementation of the above recommendations aimed at reducing the City's unfunded liabilities. The City's final audited figures for the fiscal year ended September 30, 2014, will be available on or before March 31, 2015, pursuant to Generally Accepted Accounting Principles and Governmental Accounting Standards Board requirements. Environmental Status: Not Applicable. Strategic Plan Goal: Improve Quality of Life. Enhance and Maintain Infrastructure. Strengthen Economic and Financial Sustainability. Enhance and Maintain Public Safety. Attachment(s): 1. Recommended FY 2013/14 General Fund Balance Designations and Transfers. 2. Fiscal Year 2013/14 and Fiscal Year 2014/15 Budget Adjustments by Fund. Item 4.-3

61 ATTACHMENT 1 Recommended FY 2013/14 General Fund Balance Designations* (in thousands) FY 2012/13 FY 2013/114 Year over Year Fund Balance Category Audited Recommended Change Economic Uncertainties 24,011 25,011 1,000 Litigation Reserve ' - Redevelopment Dissolution 1,323 1,323 - Equipment Replacement 8,295 8, Retiree Medical Unfunded Liability** (698) CaiPERS Rate lncreasea General Plan Maintenance Capital Improvement Reserve (CIR) 7,136 7,136 - Senior Center ~,4; ,000 "',' 2,000 - CaiPERS "One Equals Five Plan" < 500 1,500 1,000 Other Fund Balance/EncumbrancesAA 8,924 11,892 2,968 To~LFund Balance: 54, ,372 5,865 Notes: * These recommended fund balance designations may be subject to change upon further review and certification.. by the City's external independent auditors. ** Retiree Medical Unfunded Liability Reserve balance of $69Bk will be expended to help payoff/reduce unfunded liabilities in the Retiree Medica/Insurance Fund (Fund 702) as of September30, A Any required adjustments, either positive or negative, will be made to the Ca/PERS Rate Increase Reserve. AA Other Fund Balance - includes Pre-paid Insurance, Encumbrances, Non-Spendable and Other Restricted Items which may also be subject to further change as per auditor review and GAAP rules Item 4.-4

62 ATTACHMENT 2 Fiscal Year 2013/14 YearaEnd Budget Adjustments by Fund TRANSFERS OUT Fund No Fund Name Appropriation 100 General Fund $ (1,054,000) 100 General Fund $ (2,000,000) 100 General Fund Retiree Medical Reserve $ (698,000) $ (3, 752,000) Dept Non-Departmental Non-Departmental Non-Departmental TRANSFERS IN Fundi No Fund Name Appropriation 551 Workers' Compensation $ 1,054, Retiree Medical Insurance Fund $ 2,000, Retiree Medical Insurance Fund $ 698,000 $ 3,752,000 Dept Human Resources Finance Finance Fiscal Year 2014/15 Revised Budget Adjll.llstments by Fund Fund No Fund Name Appropriation Dept 100 General Fund $ 1,000,000 Non-Departmentai/CaiPERS Payment Item 4.-5 HB

63 CITY OF HUNTINGTON BEACH REQUEST FOR. CITY COUNCIL ACTION 1_, FrJ'l'l.A-&Z.t, I -;..0 fy}. {l)l"til :S;r>'( ;ej,._) <t Dept. ID FN Page 1 of 3 ~,.» /-?) c2 -It'-d) of MEETING DATE: 2/18/2014 SUBMITTED TO: SUBMITTED BY: PREPARED BY: SUBJECT: Honorable Mayor and City Council Members Fred A. Wilson, City Manager Lori Ann Farrell, Director of Finance Fiscal Year 2012/13 Year-End Budget Adjustments and Preliminary Unaudited General Fund Designations Statement.of Issue: At the January 31, 2014, Strategic Planning Session, the Finance Department provided an update regarding the preliminary, unaudited Fiscal Year 2012/13 Year-End General Fund Budget performance results for the year ended September 30, City Council authorization is requested to create a Worker~ Compen~ation Internal Service~ Fund to properly track and monitor expenses for a net-neutral impact; implement the recommended year-end estimated Fund Balance allocation of $1.8 million; and designate remaining FY 2012/13 General Fund Balances in order to finalize the City's Comprehensive Annual Financial Report (CAFR), subject to final certification by the City's independent, external auditors. Financial Impact: This action will result in an additional $1.0 million deposit into the Infrastructure Fund to help finance the Senior Center Project, and the transfer of appropriations and expenses from the General Fund to a new discrete Workers' Compensation Internal Services Fund for a netneutral fiscal impact, subject to final approval and certification by the City's independent, external auditors. In addition, the deposit of an estimated $800,000 into the Workers' Compensation Internal Services Fund is recommended to begin a six-year plan to properly fund long-term workers' compensation liabilities. Lastly, this action also authorizes the reallocation of existing General Fund Balances to items identified in Attachment 1 for a neutral fiscal impact. Recommended Action: A) Approve the creation of a new Workers' Compensation Internal Services Fund and transfer actua.l appropriations and expenses incurred in FY 2012/13, currently totaling $5.8 million, from the General Fund to the Workers' Compensation Internal Services Fund {551) for a net-neutral budget impact. B) Approve the assignment of the FY 2012/13 General Fund estimated year-end fund balance of $1.8 million as follows: 1. Transfer $1.0 million to the lnfrastructt~re Fund (Fund 314) for the Senior Center Project; and, 2. Deposit $800,000 to the Workers' Compensation Internal Services Fund (Fund 551 ). C) Approve the allocation of General Fund Balance designations as indicated in Attachment 1. Item 3."" 1

64 Dept. ID FN Page 2 of 3 Meeting Date: 2/18/2014 Alternative Action(s): Do not approve staffs recommendation and provide alternative direction. Analysis: Workers' Compensation Internal Services Fund California Workers' Compensation Law provides benefits to employees for work-related illness or injury. Benefits may include payment for medical treatment, salary continuation, Total Temporary Disability {TID) benefits, and permanent disability benefits. The City is setf-insured for its workers' compensation program and is liable for all costs up to $1 million per claim. All costs are paid for by the City as the employer. These costs are currently paid out of the General Fund budget; however, all Funds contribute into the General Fund to cover these costs via workers' compensation rates. As discussed at the January 31, 2014, Strategic Planning Session, actual workers' compensation expenses have been growing significantly from $4.5 million in FY 2004/05 to the FY 2012/13 actual cost of $5.8 million - a 24% increase. As a result, City Council approval is requested to create a separate Workers' Compensation Internal Services Fund and the transfer of FY 2012/13 appropriations and expenses totaling $5.8 million from the General Fund to the new Fund. This will provide proper tracking, planning, and transparency of all expenses. Further, this action is fiscally neutral, yet more transparent as all costs are discretely and separately accounted for within a separate fund in the City's financial statements. General Fund Year-End Fund Balance Allocations For FY 2012/13, which ended on September 30, 2013, preliminary, unaudited figures reflect a total of approximately $194.8 million in recurring General Fund revenue and $3.9 million in one-time revenue for a total of $198.7 million. Of this amount, a significant portion is needed to support the approximate $196.9 million in General Fund expenditures, liabilities and costs incurred through September 30, This results in a preliminary, unaudited remaining year-end fund balance of $1.8 million, or 0.91%, {less than one percent) of the General Fund. It is recommended that $1.0 million of the available $1.8 million in estimated year-end fund balance be deposited into the Infrastructure Fund to help finance the Senior Center Project. Construction costs for the Senior Center are currently estimated at $21.5 million. The FY 2013/14 Adopted Budget includes an appropriation of $1.5 million in the Infrastructure Fund. A potential bond issue is a viable option to finance up to $15 million towards this project. This action would increase funding in the Infrastructure Fund to a total of $2.5 million for the Senior Center project, resulting in a projected funding gap of $4.0 million. Further, this action assists the City in complying with the Charter mandate that 15 percent of General Fund revenue be spent on its infrastructure. While the City has done an extraordinary job of reducing overall expenditures, an area of particular concern is the City's total workers' compensation claims exposure. The City is self-insured in its workers' compensation program and has a liability of total outstanding claims {comprised of shortand long-term claims currently estimated at $10.9 million). While the City budgets for costs that are likely to be paid out in a single fiscal year, it currently does not have a concrete plan for funding the remaining outstanding long-term claims. As one of the Strategic Planning Goals is to "Improve the City's Long-Term Financial Sustainability," it is strongly recommended that the City begin a six-year plan to address the outstanding, unfunded workers' compensation liabilities and deposit the remaining $800,000 of remaining year-end fund balance into the Workers' Compensation Internal Services Fund to begin addressing this cost Item 3.-2

65 Dept. ID FN Page 3 of 3 Meeting Date: 2/18/2014 FY 2012/13 General Fund Balance Designations In FY 2012/13, the City was able to pay off the PARS liabilities associated with the City's Early Retirement Incentive Program two years ahead of schedule. This payment was made from a combination of one-time revenue and citywide vacancy savings in FY 2012/13. As such, a PARS Obligation Reserve of $4.7 million that was previously set aside for this purpose is now available for redistribution to other high-priority needs. As these funds are one-time in nature, it is strongly recommended that these funds be reallocated to fund other one-time needs, such as capital needs. Staff recommends the allocation of $2.0 million for the Senior Center Project bringing total hard dollars identified for the project to $4.5 million; $1.0 million for the Countywide 800 MHz lnteroperability Project currently estimated to cost the City $11.0 million; an additional $1,160,000 into the Capital Improvement Reserve to help finance the acquisition of open space/parks; and $500,000 to partially fund the proposed CaiPERS "One Equals Five Plan" in order to reduce the City's unfunded pension liabilities. Environmental Status: Not Applicable. Strategic Plan Goal: Improve Long-Term Financial Sustainability Improve the City's Infrastructure Enhance Economic Development Enhance and Maintain Public Safety Develop, Retain and Attract Quality Staff Enhance Quality of Life Attachment(&): 1. Recommended FY 2012/13 General Fund Balance Designations Item

66 1,667 Attachment No. 1 Recommended FY 2012/13 General Fund Balance Designation (in thousands) ~ ; FY 2011/12 FY 2012/13 Fund Balance Category Audited Recommended Economic Uncertainties 24,011 y 24,011,, Litigation Reserve 900 ' 900 Budget Stabilization 3,100 PARS Obligation* 4,701 I>., - Equipment Replacement 6,913 8,295 Retiree Medical Unfunded 698 ' ; 698 '},' ''-; General Plan Maintenance Q Capital Improvement Reserve (CIR) 5,97o it ; 7;136 Senior Center - 2,000 [i, ~- CaiPERS "One Equals Five Plan" Other Fund Balance** 7,819 ;; "8 899 Total Fund Balance: 54,435 ;< 54,826 *The PARS Obligation expense was paid from a combination of one-time revenue and vacancy savings in FY 2012/13. **Includes Pre-paid Insurance, Encumbrances, Non-Spendable and Other Restricted Items. Please note these recommended fund balance designations may be subject to change upon further review and certification by the City's external independent auditors. HB -35- Item 3.- 4

67 Dept. ID FN Page 1 of 4 Meeting Date: 9/2/2014 ~flt-z; CITY OF HUNTINGTON BEACH REQUEST FOR. CITY COUNCIL ACTION MEETING DATE: 9/2/2014 SUBMITTED TO: SUBMITTED BY: PREPARED BY: SUBJECT: Honorable Mayor and City Council Members Fred A Wilson, City Manager Lori Ann Farrell, Director of Finance Public Hearing to consider adopting Resolution No to adopt a Budget for the City for Fiscal Year 2014/2015 and Resolution No establishing the Gann Appropriation Limit; and, approve updated Financial Policies to include an additional Budgeting policy and a Water and Sewer Service Reserve Policy Statement of Issue: The City Charter of the City of Huntington Beach requires a Public Hearing prior to the adoption of the City's annual budget. The City Charter further requires adoption of the annual budget by September 30, 2014 for Fiscal Year 2014/15. Financial Impact: The total Fiscal Year (FY) 2014/15 Proposed Budget is a structurally balanced budget that addresses current financial challenges while still funding core public services. The All Funds Proposed Budget equals $342.3 million, including a General Fund Proposed Budget of $209.9 million. Individual departmental and fund level appropriations are contained in the attachments herein. Funding for two additional police officers and four and ~ non-sworn positions are also included in the FY 2014/15 Proposed Budget Recommended Action: A) Open the Public Hearing on the Proposed Fiscal Year 2014/15 Budget appropriations totaling $342,253,604 as outlined in the Proposed Budget document and related Exhibits; B) Adopt Resolution Number , "A Resolution of the City Council of the City of Huntington Beach Adopting a Budget for the City for Fiscal Year 2014/15;" C) Authorize the Professional Services included in the FY 2014/15 Proposed Budget to be representative of the services projected to be utilized by departments in FY 2014/15; D) Adopt Resolution Number , "A Resolution of the City Council of the City of Huntington Beach Establishing the Gann Appropriation Limit for Fiscal Year 2014/15" of $753,008,825; and, E) Approve an amendment to the City's Financial Policies to include an additional Budgeting Policy to fund the "One Equals Five" Plan to reduce the CaiPERS Safety Plan's unfunded liability, and to include new reserve policies for the Water and Sewer Service Funds. Alternative Action(s): Continue the Public Hearing until September 15, 2014 and instruct City staff regarding changes to be incorporated in the budget. HB Item

68 Dept. ID FN Page 2 of 4 Meeting Date: 9/2/2014 Analysis: The City Charter requires that the City Manager submit the FY 2014/15 Proposed Budget to the City Council at least 30 days before the start of a new Fiscal Year. The City Manager submitted the Proposed Budget to the City Council on July 21, 2014, ten weeks in advance of the Fiscal Year start. The Five-Year Capital Improvement Program was discussed at a Study Session held on August 4, 2014, and the Long-Term Financial Plan was discussed at a Study Session held on August 18, 2014, providing additional opportunities for public input and discourse prior to formal budget adoption. Overview The theme of next year's budget, "Building the Foundation for the Next 100 Years - The Strategic Plan" highlights the City's major achievements over the past century to commemorate the centennial celebration of Huntington Beach's "100 Years of Surfing." It also focuses on the Strategic Plan goals as a solid foundation for the next 100 years - to ensure continued fiscal sustainability and quality of life for Surf City residents. The FY 2014/15 Proposed Budget is structurally balanced and totals $342.3 million in All Funds, reflecting a 9.1 percent increase from the FY 2013/14 Adopted All Funds Budget of $313.8 million. The General Fund portion of the Proposed FY 2014/15 Budget totals $209.9 million, representing a 8.5 percent increase from the FY 2013/14 Adopted Budget of $193.5 million. The overall increase to the FY 2014/15 Proposed Budget in All Funds is primarily due to greater spending in the Capital Improvement Projects {CIP), including a new, state-of-the-art, Senior Center to replace the existing aged facility, increased Federal and State grant funding, and the new Workers' Compensation Internal Services Fund. The City's CIP alone is increasing by $14.3 million year-over-year, including spending related to the new Senior Center. The All Funds Budget contains over 50 distinct funds, including Enterprise Funds (Water, Refuse, Sewer and Drainage), Special Revenue Funds (mostly Federal, State and County grants) and the General Fund. General Fund revenue in FY 2014/15 continues to exceed pre-recession levels. General Fund revenue is expected to increase from the adopted $193.5 million in the current year to $207.0 million in FY 2014/15, reflecting a 7.0 percent increase, excluding one-time revenues. General Fund revenue consists of numerous sources, such as taxes and fees. Major sources of revenue include Property Tax, Sales Tax, Utility Users' Tax and Transient Occupancy Tax among others. The FY 2014/15 Proposed Budget restores funding for two Police Officer positions, bringing the total number of funded sworn positions in the Police Department from 212 to 214 FTEs. This reflects an increase of seven sworn Police officer positions since FY 2012/13. The FY 2014/15 Proposed Budget reflects a 0.5 percent increase in staffing of 4 ~ FTEs including two Senior Permit Technicians, one Property Officer, one Utilities Supervisor, one Field Services Representative and the reduction of ~ FTE of an Administrative Secretary, bringing the total personnel count on the City's Table of Organization to from This minimal increase is still positions, or 15 percent, below the all-time high of 1,143 in FY 2008/09. New Senior Center The centerpiece of the FY 2014/15 CIP Budget is the development of a new, state-of-the-art Senior Center. With a total budget of $21.5 million across several Funds, the Senior Center is the linchpin of the FY 2014/15 capital improvement plan. The new Senior Center will be funded by a combination of sources, namely, the General Fund, Infrastructure Fund, the Donation Fund and an anticipated $15 million bond (2014 Series A Lease Revenue Bond) backed by the General Fund as presented to the City Council on August 18, Item HB -306-

69 Dept. ID FN Page 3 of 4 Meeting Date: 9/2/2014 Funding for Public Safety Public Safety expenses comprised of the Police and Fire Departments' budgets, total 53 percent of the Proposed FY 2014/15 General Fund Budget, at 32 percent and 21 percent respectively. With over half of the General Fund Budget committed to public safety, the City has dedicated the greatest share of its resources to this vital component of local government services. The FY 2014/15 Proposed Budget adds $3.9 million in spending for public safety including costs associated with two additional Police Officers, a Property Room Officer, a Senior Permit Technician and a Part Time Nurse; equipment replacement and repairs; Fire Station improvements; medical supplies, software and technology upgrades; Lifeguard Tower replacements; and, a brand new Fire Truck, to name a few. Revisions to the General Fund Proposed Budget The FY 2014/15 Proposed Budget presented to the City Council on July 21, 2014 totaled $208.9 million. Based on feedback provided during the study sessions, the Proposed Budget for the General Fund has been adjusted to address numerous items as outlined in Exhibit A-1 (Attachment 2). First, an increase in appropriation of $1.0 million has been added to fund Year One of the proposed "One Equals Five" plan to reduce the City's public safety pension unfunded liabilities by approximately $53.7 million in the long-term. Further, the General Fund Budget for unemployment benefits has been reduced by $36,233 due to lower than anticipated spending. Those funds have been transferred to the Community Services Department to fund the Program Coordinator position for Project Self Sufficiency for a net neutral effect. Also, an additional appropriation of $200,000 in the Huntington Beach Public Financing Authority Fund (HBPFA) is needed to cover a portion of the Senior Center debt payment. In addition, the current year FY 2013/14 adopted budget includes $1.2 million for the Utility Billing System Replacement. However, these funds have not been expended, nor is it anticipated they will be encumbered by September 30, As a result, the $1.2 million in budget appropriations will lapse on September 30, 2014, per City Charter Section 605. Staff is requesting new identical appropriations be added to the FY 2014/15 Proposed Budget as they will be needed for the implementation of a new utility billing system next year. Professional Services As established by Administrative Regulation Number 228, each department has submitted a list of professional services which are generally contained in their Proposed Budgets (Attachment 3). Professional services contracts are subject to compliance with Administrative Regulation Number 228 and Municipal Code Chapter Gann Appropriation Limit In November 1979, the California voters approved Article 13B of the State of California Constitution, which allows the City's spending of tax proceeds to increase only by factors from the base year of In June 1990, Proposition 111 was passed which changed the way the limit is calculated and is outlined as follows: The City may increase its limit annually in two ways: By a percentage equal to the increase from the preceding year in county or city population (whichever is greater). By an amount equal to the change in per capita personal income in California or the change in the assessment roll the preceding year due to the addition of local non-residential new construction (whichever is greater). The proposed appropriation limit for FY 2014/15 (Attachment 4) was calculated as follows: FY 2012/13 Appropriation Limit Multiplied by percentage grown in State Per Capita Personal Income Multiplied by change in county population Proposed FY 2013/14 Appropriation Limit HB $ 733,663, $ 753, Item

70 Dept. ID FN Page 4 of 4 Meeting Date: 9/2/2014 Appropriations of revenues controlled by the Gann Limit are primarily in the General Fund. The General Fund proposed appropriation for FY 2014/15 of $209.9 million is expected to be significantly below this appropriation limit. Examples of proceeds of taxes governed by the Gann Appropriation limit are: property taxes, sales taxes, utility taxes, state subventions, fines, forfeitures, interest revenue on regulatory licenses, user charges, and user fees to the extent that those proceeds exceed the costs reasonably borne by that entity in providing the regulation, product, or service. Donations and Grant Awards On February, 18, 2013, the City Council approved Resolution Number authorizing the City Manager and/or Finance Director to appropriate certain grant funding and donations received during the fiscal year for City services and supplies. This action is critical to ensure monies from donations and grants are expended within a specific timeframe to avoid lapses in funding. Subsequently, City Council approved Resolution Number on September 3, 2013, authorizing the City Manager and/or Finance Director to appropriate donations and grants received during the fiscal year up to $100,000 per source or grantor. Donations and grant awards with matching requirements, or exceeding $100,000 from a single source or grantor, still require City Council approval. Updated Financial Policies Also included for review and adoption are the updated Financial Policies (Attachment 5), including an amendment to the Budgeting section of the policies to include language relating to the implementation of the "One Equals Five" plan for Safety unfunded liabilities. The "One Equals Five" Safety plan may reduce the amortization period from 30 years to 24 years (based on actual market conditions and actuarial changes) and is estimated to save taxpayers $53.7 million over the longterm. The financial policies have also been updated to include new reserve policies for the Water and Sewer Service Funds based on recommendations provided by external financial advisors. Public Hearing The City Charter requires that a public hearing be conducted on the City budget prior to adoption. Public Hearing notices have been published per City Charter requirements (Attachment 1 ). At the close of this hearing, all legal requirements for budget adoption will have been met. Environmental Status: Not Applicable. Strategic Plan Goal: Enhance and Maintain Public Safety. Enhance Quality of Life. Enhance Economic Development. Improve the City's Infrastructure. Develop, Retain and Attract Quality Staff. Improve Long Term Financial Sustainability. Attachment(s): 1. Public Hearing Notice 2. Resolution Number , "A Resolution of the City Council of the City of Huntington Beach Adopting a Budget for the City for Fiscal Year 2014/2015" 3. Professional Services included in the Fiscal Year 2014/15 Budget 4. Resolution Number , "A Resolution of the City Council of the City of Huntington Beach Establishing the Appropriation Limit for Fiscal Year 2014/2015" 5. City of Huntington Beach Financial Policies Item HB -308-

71

72 City of Huntington Beach Adopted Budget FY 2014/15 Unfunded Liabilities Overview CITY S UNFUNDED LIABILITIES To help meet the goal to Improve Long-Term Financial Sustainability, the City developed an innovative, multi-pronged approach to significantly reduce the City s retirement and Other Post Employment Benefit (OPEB) unfunded liabilities over the next 10 years. Fiscal Year 2013/14 marked the inaugural year of the City s award-winning three-pronged approach to reduce its unfunded liabilities. The FY 2014/15 Adopted Budget continues funding for the 25 to 10 and 16 to 10 Plans for the Retiree Medical and Retiree Supplemental Plans, respectively, so that the unfunded liabilities for these plans will be completely paid off in 10 years. On September 2, 2014, the City Council approved an amendment to the City s Financial Policies to include an additional $1 million annual payment to reduce the CalPERS Safety Plan s unfunded liability. These plans result in an estimated taxpayers savings of $71.4 million by shaving off up to 15 years of payments. Estimated Taxpayers' Actions Taken to Reduce Unfunded Liabilities Savings* PARS Pre-Payment $ 59, % Discount Rate Change - Year 1 Implementation 1,027,000 Retiree Supplemental "16 to 10" Plan 7,400,000 Retiree Medical "25 to 10" Plan 9,200,000 PERS "1= 5" Safety Plan 53,680,116 Total $ 71,366,722 *Based on actuarial valuations completed by Bartel Associates. The value of the City s unfunded liabilities as of June 30, 2013 totals $329.3 million. The City s CalPERS, Retiree Medical and Retiree Supplemental Plans are 68.8 percent, 83.0 percent and 69.3 percent funded, respectively. To address this challenge, staff developed a unique plan for the pre-payment of the City s unfunded liabilities several years ahead of schedule. The City plans to completely eliminate the unfunded liabilities for two out of three of the City s retiree benefit plans by The City s unique three-pronged approach addresses the unfunded liabilities for the City s: 1) California Public Employees Retirement (CalPERS) Pension Plan; 2) Retiree Medical Plan; and, 3) Supplemental Pension Plan. The One Equals Five Plan, the 25 to 10 Plan, and the 16 to 10 Plan, respectively, will reduce the unfunded liabilities for each of the City s retiree benefit plans over the next several years. At the center of each plan is the expedited pre-payment of unfunded liabilities through significant reductions in each plan s amortization period. This strategy results in the complete elimination of the unfunded liabilities for the City s OPEB and Supplemental Pension Plans in 10 years; and, a $53.7 million decline in the CalPERS unfunded liability as well. CalPERS RETIREMENT PLAN NORMAL Plan Description The City contributes to the Miscellaneous Plan and the Safety Plan of the City of Huntington Beach, which are agent multiple-employer defined benefit plans administered by the California Public Employees Retirement System (CalPERS). These retirement plans provide retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. CalPERS acts as a common investment and administrative agent for participating public entities within California. Benefit provisions and all other requirements are established by state statute and City ordinance. Copies of CalPERS annual financial report may be obtained from their executive office: 400 P Street, Sacramento, CA, or on their website: 437

73 City of Huntington Beach Adopted Budget FY 2014/15 Unfunded Liabilities Employer and Employee Contribution Obligations The City makes two types of contributions for covered employees. The first contribution represents the amount the City is required to make (the employer rate). The second represents an amount, which is made by the employee, but is partially reimbursed to the employee by the City (the member rate). The member rate is set by contract and state law. The employer rate is an actuarially established rate, set by CalPERS, and changes from year to year. The employer rate for Fiscal Year is as follows: 10/1/1/2014-6/30/2015 7/1/2015-9/30/2016* Miscellaneous % % Safety % % Based on Annual Valuation Report as of June 30, 2013 *The estimate for assumes no future contract amendments and no liability gains or losses. The member rates are as follows: Rate Miscellaneous 8.000% Safety 9.000% Annual Pension Cost The City s annual pension cost of $28,915,878 is estimated to equal the City s required and actual contributions. The required contributions for the October June 2014 and July - September 2014 periods are determined by the June 30, 2012 and 2013 actuarial valuations, respectively, using the entry age normal actuarial cost method. CalPERS conducted an actuarial valuation using the entry-age actuarial cost method using a level percent of payroll to determine the City s funded status as of June 30, On April 17, 2013, the CalPERS Board of Administration approved a recommendation to change the CalPERS amortization and smoothing policies. Beginning with the June 30, 2013 valuations that set the rates, CalPERS will no longer use an actuarial value of assets and will employ an amortization and rate smoothing policy that will pay for all gains and losses over a fixed 30-year period with the increase or decreases in the rate phased in over a 5-year period. 438

74 City of Huntington Beach Adopted Budget FY 2014/15 Unfunded Liabilities Trend Information Miscellaneous Annual Pension Percentage Fiscal Year Cost (in thousands) of APC Funded Net Pension Obligation 9/30/2012 $ 8, % $ - 9/30/2013 $ 9, % $ - 9/30/2014 $ 10, % $ - Safety Annual Pension Percentage Fiscal Year Cost (in thousands) of APC Funded Net Pension Obligation 9/30/2012 $ 15, % $ - 9/30/2013 $ 16, % $ - 9/30/2014 $ 16, % $ - Funded Status and Funding Progress Below is the funding progress based on the June 30, 2013 actuarial valuations for the miscellaneous and the safety plans (in thousands): Entry Age Normal Plan Acturial Accrued Liability (AAL) Actuarial Value of Assets Unfunded Liability (UL)* Funded Ratio Covered Payroll UL as a Percentage of Covered Payroll Safety $ 572,118 $ 383,417 $ (187,796) 67.2% $ 37, % Miscellaneous 446, ,735 (120,430) 73.0% 41, % Total $ 1,018,595 $ 707,152 $ (308,226) 79.1% $ 78,541 *The unfunded liability reflected on this chart is the Actuarial Unfunded Liability as of the FY 2013/14 pre-audit % The schedule of funding progress presented as Required Supplementary Information (RSI) presents multi-year trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. One Equals Five Plan The City implemented a unique One Equals Five Plan for reducing the $308.2 million unfunded liability for the City s CalPERS pension plans. Based on an analysis conducted by the City s independent actuary, each additional $1 million contributed to the City s pension plans will reduce the amortization period by 5 years, saving taxpayer $53.7 million. 439

75 City of Huntington Beach Adopted Budget FY 2014/15 Unfunded Liabilities One Equals Five Safety Plan As part of the FY 2014/15 Adopted Budget, staff proposed and the City Council approved a revision to the City s Financial Policies allowing for additional General Fund revenue of $1 million for direct payment to CalPERS each fiscal year end, to significantly reduce the City s unfunded CalPERS liabilities. This unique proposal will yield millions of tax dollar savings annually and improve the funded status of the plans, thereby promoting their financial sustainability. These contributions will be in addition to the existing employer contributions deposited into the plans on a bi-weekly basis. 250, ,000 Unfunded Liability 150, ,000 50,000 0 Year 20 Year 25 $54M* Savings Year 30 FY 14/15 FY 16/17 FY 18/19 FY 20/21 FY 22/23 FY 24/25 FY 26/27 FY 28/29 FY 30/31 FY 32/33 FY 34/35 FY 36/37 FY 38/39 FY 40/41 FY 42/43 FY 44/45 Years to Eliminate Unfunded Liability Current Amort +$1 Million/Yr *Estimate only, final results will be based on actual market conditions and actuarial changes. 440

76 City of Huntington Beach Adopted Budget FY 2014/15 Unfunded Liabilities RETIREMENT PLAN SUPPLEMENTAL Plan Description The City administers a supplemental single-employer defined benefit retirement plan for all employees hired prior to 1997 (exact dates are different for various associations). The supplemental plan will pay the retiree an additional amount to his or her CalPERS retirement benefit for life. The amount will cease upon the employee s death. Benefit provisions are established and may be amended through negotiations between the City and employee bargaining associations during each bargaining period, which are then approved through resolutions of the City Council. The amount that is computed as a factor of an employee s normal retirement allowance is computed at retirement and remains constant for his or her life. Of the 943 active employees reported on the September 30, 2013 data, only 267 were eligible for plan benefits. No separately prepared financial statements are prepared for this plan and it is not included in the financial report of any other pension plan. Prior to fiscal year , the City had prefunded these benefits and recorded the amounts in a fiduciary fund. In fiscal year , the City established the Supplemental Employee Retirement Plan and Trust, and transferred funds to an irrevocable trust from the prefunded amounts. The plan and trust are reported as a pension trust fund in the City s financial statements. Below is the plan participants data as of September 30, 2013*: Retirees and beneficiaries receiving benefits 676 Active Plan Members 267 Total Plan Participants 943 *Actuarial valuation as of September 30, 2013 provides the most recent information available. Effective in 1998 (exact dates are different for various associations), new City employees are ineligible to participate in the Supplemental Employee Retirement Plan. Employer Obligations and Funding Status and Progress The City annually transfers amounts from the various City funds to the pension trust fund. The City is required to contribute the actuarially determined rate of 6.2% of total payroll for all permanent employees for the year ended September 30, Administrative costs of this plan are financed through investment earnings. Annual required contribution $ 3,634 Interest on net pension obligation 216 contribution (486) Annual pension cost 3,364 Contributions made (3,634) Decrease in net pension obligation (270) Net Pension Obligation - Beginning of Yea 3,199 Net Pension Obligation - End of Year $ 2,

77 City of Huntington Beach Adopted Budget FY 2014/15 Unfunded Liabilities Annual Pension Cost and Net Pension Obligation The City s estimated annual pension cost and net pension obligation for this plan fiscal year 2014/15 were (in thousands): The annual required contribution was determined as part of an independent actuarial valuation as of September 30, 2013 using the Entry Age Normal Actuarial Cost Method, which is a projected benefit fullcost method which takes into account those benefits that are expected to be earned in the future as well as those already accrued. The actuarial assumptions used were: Rate of return on present and future assets 5.5% per annum Projected salary increases for covered employees due to inflation aggregate increases of 3.25% per annum Projected salary increases due to merit 0% Inflation rate 3.00% Postemployment benefit increases 0% Amortization of unfunded liability level percentage of pay ending in 2027 (closed) Actuarial value of assets market value Trend Information Below is the required three-year trend information (dollar amounts in thousands): Fiscal Year Annual Pension Cost Percentage of APC Funded Net Pension Obligation 9/30/2012 $ 4, % $ 3,613 9/30/2013 $ 4, % $ 3,452 9/30/2014 $ 4, % $ 3,199 Funded Status and Funding Progress Below is the funding progress as of September 30, 2013, the most recent actuarial valuation date (dollar amounts in thousands): Entry Age Normal Acrued Liability 57,865 $ 36,302 Actuarial Value of Assets Unfunded Liability Funded Ratio Covered Payroll $ $ 21, % 27,173 UAAL as a Percentage of Covered Payroll $ 79.4% The schedule of funding progress presented as Required Supplementary Information presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. Accounting for Plan Since the City is required to adopt GASB Statement Nos. 27 and 50 for the supplemental pension plan, the difference between the ARC and the amount of pension cost funded for the years must be recorded as a liability in the government-wide financial statements. The amount of this liability is estimated at $2,929,000. Contributions are recognized when due and payable. Benefits are recognized when due and payable under plan provisions. 442

78 City of Huntington Beach Adopted Budget FY 2014/15 Unfunded Liabilities 16 to 10 Plan (Supplemental Pension) As part of the FY 2013/14 Adopted Budget, the City will contribute an additional $1.1 million to eliminate this liability in 10 years, versus the original amortization of 16 years. The 16 to 10 Plan is projected to save taxpayers $7.4 million in the long term. 40,000,000 35,000,000 37,000,000 Unfunded Liability 30,000,000 25,000,000 20,000,000 15,000,000 10,000,000 5,000, ,600,000 22,200,000 14,800,000 7,400,000 Early Prepayment = $7.4 M FY FY FY FY FY FY Year 10 Year 16 Years to Eliminate Unfunded Liability 16-Year Amortization Expedited "16 to 10" Plan POSTEMPLOYMENT MEDICAL INSURANCE Plan Description The City agreed, via contract, with each employee association to provide postemployment medical insurance to retirees. These Other Postemployment Benefits (OPEB) are based on years of service and are available to all retirees who meet all three of the following criteria: At the time of retirement, the employee is employed by the City. At the time of retirement, the employee has a minimum of ten years of service credit or is granted a service connected disability retirement. Following official separation from the City, CalPERS grants a retirement allowance. The City s obligation to provide the benefits to a retiree ceases when either of the following occurs: During any period the retiree is eligible to receive health insurance at the expense of another employer; and/or The retiree becomes eligible to enroll automatically or voluntarily in Medicare. 443

79 City of Huntington Beach Adopted Budget FY 2014/15 Unfunded Liabilities The subsidy a retiree is entitled to receive is based on the retiree s years of service credit and is limited to $344 per month after 25 years of service. If a retiree dies, the benefits that would be payable for his or her insurance, are provided to the spouse or family for 18 months. The retiree may use the subsidy for any of the medical insurance plans that the City s active employees may enroll in. Accounting and Funding The City utilizes the California Employers Retiree Benefit Trust (CERBT), an agent multiple-employer plan, for the postemployment medical insurance benefit. Benefits paid from the CERBT were $752,000 for fiscal year The assets of the CERBT are excluded from the accompanying financial statements since they are in an irrevocable trust administered by CalPERS. Copies of CalPERS annual financial report may be obtained from their executive office: 400 P Street, Sacramento, CA, or on their website: The City s policy is to make 100% of each year s ARC. Actuarial assumptions for the June 30, 2013 valuation were: Entry age normal 30 year amortization of unfunded liabilities Discount rate 6.25% The medical trend rate represents the long-term expected growth of medical benefits paid by the plan, due to non-age-related factors such as general medical inflation, utilization, new technology, and the like. The following table sets forth the inflation trend assumption used for the valuation: Year Annual Rate Year Annual Rate 2013/ % 2017/ % 2014/ % 2018/ % 2015/ % 2019/ % 2016/ % 2020/ % The City s estimated contributions for FY 2014/15, annually required contribution (ARC), Net OPEB asset (NOA), and Annual OPEB Cost (AOC) were computed as follows (in thousands): Employer Contribution Direct Contributions - City health plan contributions $ 1,540 Implicit subsidy 283 Total Employer Contributions $ 1,823 Development of Annual OPEB Cost (AOC) Amortization of Actuarially Accrued Liability $ 832 Normal Cost 717 Total Annual Required Contribution (ARC) 1,549 Interest on Net OPEB Assets (NOA) (558) Adjustment to the Annual Required Contribution (ARC) 1,299 Total Annual OPEB Cost (AOC) $ 2,290 Development of Net OPEB Asset (NOA) Net OPEB Asset (NOA), beginning of year $ (8,924) Annual OPEB Cost (AOC) 2,290 Employer Contribution (1,540) Net OPEB Asset (NOA), end of year $ (8,175) *Actuarial valuation as of June 30, 2013 provides the most recent information available. 444

80 City of Huntington Beach Adopted Budget FY 2014/15 Unfunded Liabilities The City s estimated contributions of $2,250,560 are greater than the annual required contribution. The Annual OPEB Cost is reported as expenses in the non-departmental governmental activities program. Other Disclosures Three-year trend information is disclosed below (in thousands): Fiscal year Annual OPEB Cost (AOC) Actual Contribution Percentage of AOC Contributed Net OPEB Asset (NOA) 9/30/2012 $ 1,438 $ 2, % $ (9,359) 9/30/2013 $ 2,801 $ 3, % $ (9,591) 9/30/2014 $ 2,999 $ 2, % $ (8,924) Funded Status and Funding Progress As of June 30, 2013, the most recent actuarial valuation date, the plan was 66.3% funded. The actuarial accrued liability for benefits was $17.4 million, and the actuarial value of assets was $11.5 million, resulting in an unfunded accrued liability (UAAL) of $5.9 million. The covered payroll (annual payroll of active employees covered by the plan) was $81.7 million, and the ratio of the UAAL to the covered payroll was 1.9%. The annual required contribution was determined as part of an independent actuarial valuation as of June 30, Actuarial valuations of an ongoing plan involve estimates of the value of reported amounts and assumptions about the probability of occurrence of events far into the future. Examples include assumptions about future employment, mortality, and the healthcare cost trend. Amounts determined regarding the funded status of the plan and the annual required contributions of the City are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. The schedule of funding progress, presented as Required Supplementary Information presents multiyear trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the City and plan members) and include the types of benefits provided at the time of each valuation. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term volatility in actuarial accrued liabilities and the actuarial value of assets, consistent with the long-term perspective of the calculations. 445

81 City of Huntington Beach Adopted Budget FY 2014/15 Unfunded Liabilities Overview 25 to 10 Plan (Retiree Medical) For the last three years, the City exceeded each Annually Required Contribution (ARC) payment to expedite paying down this unfunded liability. Although the City s policy has generally been to make 100 percent of each year s ARC, the City has paid above amounts required into the Plan over the last four years. In addition, to further expedite the prepayment of this unfunded liability, additional funds will be deposited into the plan annually to reduce the amortization period of the unfunded liability from the current 25-year schedule to a 10-year schedule. The City Council unanimously approved this plan and the FY 2014/15 Adopted Budget reflected an estimated $1.0 million in additional contributions to the plan annually. 12,000,000 Unfunded Liability 10,000,000 8,000,000 6,000,000 4,000,000 2,000, ,553,000 8,864,520 6,753,920 4,643,320 2,532,720 Early Prepayment = $9.2 M - FY FY FY FY FY FY Year 10 Year 25 Years to Eliminate Unfunded Liability 25-Year Amortization Expedited "25 to 10" Plan The new 25 to 10 Plan reduces the amortization of the unfunded liability from 25 years to 10 years, immediately shaving off 15 years of payments and saving the taxpayers an estimated $9.2 million over the long term. 446

82

83 City of Huntington Beach Financial Policies DRAFT - Adopted Budget - FY 2014/15 FINANCIAL REPORTING AND ACCOUNTING STANDARDS o The City's accounting system will be maintained in accordance with generally accepted accounting practices and the standards of the Government Accounting Standards Board (GASB) and the Government Finance Officers Association (GFOA). o The annual financial report will be prepared within six months of the close of the previous fiscal year. The City will use generally accepted accounting principles in preparing the annual financial statements and will attempt to qualify for the Government Finance Officers Association's Excellence in Financial Reporting Program. o The City will strive for an unqualified audit opinion. An unqualified opinion is rendered without reservation by the independent auditor that financial statements are fairly presented. o The City will contract for an annual audit by a qualified independent certified public accounting firm. The independent audit firm will be selected through a competitive process at least once every five years. The contract period will be for an initial period of three years, with two one-year options. BUDGETING o The budget will be prepared consistent with the standards developed by the Government Finance Officers Association and California Society of Municipal Finance Officers (CSMFO). In addition, a summary version will be provided to the public in a user-friendly format. o The City will maintain a balanced operating budget for all funds with estimated revenues being equal to, or greater than, estimated expenditures, and with periodic City Council reviews and necessary adjustments to maintain balance. o On-going revenues will support on-going expenditures. Revenues from onetime or limited duration sources will not be used to balance the annual operating budget. o Support function appropriations will be placed in the department in which they are managed. o The annual budget will include an additional appropriation up to $1 million each year to reduce the CaiPERS unfunded liability for the Safety CaiPERS pension plan. GENERAL FUND BALANCE o There is an established Economic Uncertainties Reserve commitment in the General Fund. The monetary goal of this commitment is equal to the value of two months of the General Fund expenditure adopted budget amount. Item HB -336-

84 City of Huntington Beach Financial Policies DRAFT - Adopted Budget - FY 2014/15 GENERAL FUND BALANCE (CONTINUED) o o o o Appropriations from the Economic Uncertainties Reserve commitment can only be made by formal City Council action. Generally, appropriations and access to these funds will be reserved for emergency situations. Examples of such emergencies include, but are not limited to: An unplanned, major event such as a catastrophic disaster requiring expenditures over 5% of the General Fund adopted budget Budgeted revenue taken by another government entity Drop in projected/actual revenue of more than 5% of the General Fund adopted revenue budget Should the Economic Uncertainties Reserve commitment be used and its level falls below the minimum amount of two months of General Fund expenditures adopted budget, the goal is to replenish the fund within three fiscal years. In addition to the Economic Uncertainties Reserve, there are three permanent reserves established for the purpose of smoothing annual operating budgets, providing flexibility and the ability to take advantage of favorable financial/business conditions, and providing a source to fund unforeseen expenditures. Appropriations from these reserves can only be made by formal City Council action. These permanent reserves are: Equipment Replacement Reserve for the acquisition of rolling stock, other movable assets, pumps, engines, and any equipment needed to sustain city infrastructure. Planned appropriations from this fund are identified during the annual budget process. The replenishment of this Reserve is outlined below. Capital Projects Reserve for the construction of city infrastructure. Planned appropriations from this fund are identified during the annual budget process in concert with the Capital Improvement Plan. The replenishment of this Reserve is outlined below. Litigation Reserve for unforeseen litigation losses exceeding the amount budgeted in the current year. The monetary goal for this Reserve is generally set at the city's self insured limit. This fund will be replenished each year through the annual budget process. Allocation of the audited General Fund unassigned fund balance (or increases in the Economic Uncertainties Reserve) will be done as follows if, and until, the Economic Uncertainties Reserve commitment is fully funded (i.e., two months of General Fund expenditures): 50% to Economic Uncertainties Reserve commitment 25% for Infrastructure Fund 25% to Capital Improvement Reserve (CIR) commitment HB Item

85 City of Huntington Beach Financial Policies DRAFT - Adopted Budget FY 2014/15 GENERAL FUND BALANCE (CONTINUED) Once the Economic Uncertainties Reserve commitment attains full funding, unassigned fund balance will be divided as follows: 50% for Infrastructure Fund 25% to Capital Improvement Reserve (CIR) commitment 25% to Equipment Replacement commitment Any unassigned revenues received during the fiscal year will be added to the fund balance of the General Fund. FUND BALANCE CLASSIFICATION The City's fund balance is made up of the following components: Nonspendable fund balance typically includes inventories, prepaid items, and other items that, by definition cannot be appropriated. The restricted fund balance category includes amounts that can be spent only for the specific purposes stipulated by constitution, external resource providers, or through enabling legislation. The committed fund balance classification includes amounts that can be used only for the specific purposes determined by a formal action of the City Council. The City Council has authority to establish, modify, or rescind a fund balance commitment. Amounts in the assigned fund balance classification are intended to be used by the City for specific purposes but do not meet the criteria to be classified as restricted or committed. The City Manager or designee has the authority to establish, modify, or rescind a fund balance assignment. Unassigned fund balance is the residual classification for the City's funds and includes all spendable amounts not contained in the other classifications. The City considers restricted or unrestricted amounts to have been spent when an expenditure is incurred for purposes for which both restricted and unrestricted fund balance is available. The City's committed, assigned, or unassigned amounts are considered to have been spent when an expenditure is incurred for purposes for which amounts in any of those unrestricted fund balance classifications could be used APPROPRIATION AUTHORITY o The City Council is the appropriation authority for the City Budget. As required by state law, appropriations expire at the end of each fiscal year. Item HB -338-

86 City of Huntington Beach Financial Policies DRAFT - Adopted Budget - FY 2014/15 NON-DEPARTMENTAL BUDGET o The City shall maintain a non-departmental budget that is used for expenditures that do not apply to a specific department, are Citywide in nature, or shared by several departments. The Director of Finance and City Manager shall be responsible for administration of this budget. OPERATION OF THE CAPITAL IMPROVEMENT RESERVE (CIR) COMMITMENT o o The Capital Improvement Reserve (CIR) will only be used to budget for, and construct, capital improvement projects identified in the City's five-year Capital Improvement Plan (CIP). Savings from completed capital improvement projects will be retained for use on other infrastructure projects. ENTERPRISE FUNDS o An Enterprise Fund is a type of proprietary fund used to report an activity for which a fee is charged to external users for goods or services. The City will set users fees for each enterprise fund at a rate that fully recovers the direct and indirect costs of providing service. o o o o The City will adjust user fees as necessary to ensure that enterprise funds do not collect revenues at a rate in excess of the fund's operating, capital, and reserve requirements. Enterprise funds will be supported by their own rates and not subsidized by the General Fund. Enterprise funds will pay their share of overhead services provided by the General Fund. The City will maintain a reserve in the Water Fund equal to the sum of the following: Operations and Maintenance: Thirty-three percent (33%) of the adopted annual budget to ensure adequate working capital for operating expenses. Capital Improvement Program (CIP): One-hundred-fifty percent (150%) of the average annual planned Capital Improvement Program for the following five years. Emergency: an amount equal to the estimated cost, as determined by the City Engineer, to replace one groundwater well plus the additional cost of thirty (30) months of imported water needed to replace the production from the average City well. HB Item

87 City of Huntington Beach Financial Policies DRAFT- Adopted Budget- FY 2014/15 ENTERPRISE FUNDS (CONTINUED) o The City will maintain a reserve in the Sewer Service Fund equal to the sum of the following: Operations and Maintenance: Thirty-three percent (33%) of the adopted annual budget to ensure adequate working capital for operating expenses. Capital Improvement Program (CIP): One-hundred percent (1 00%) of the average annual planned Capital Improvement Program for the following five years. Emergency: an amount equal to the estimated cost, as determined by the City Engineer, to replace one sewer lift station. SPECIAL REVENUE FUNDS o o o A Special Revenue Fund is used to account for the proceeds of specific revenue sources that are restricted to expenditure for specified purposes. The City Council will establish which revenues require placement into a special revenue fund. The City Council will establish which expenditures will be expensed to each special revenue fund. DEBT ISSUANCE & MANAGEMENT o The City will not use long-term debt to pay for current operations. o The City will strive to construct capital and infrastructure improvements without incurring debt. Debt financing will be considered for capital and infrastructure improvements when one or more of the following circumstances exist: When the term of the debt does not extend beyond the useful life of the improvements. When project revenues or specific resources will be sufficient to service the long-term debt. When the cost of debt is less than the impact of the cost caused by delaying the project. CHARGES & USER FEES o o "User Fees" are fees for services that are exclusively provided by the City and cannot legally exceed the cost of the service provided nor the statutory limit (if lower). User Fees will be reviewed and/or revised periodically by the City Council. User Fees that do not recover all direct and indirect costs of service will be clearly identified and must be approved by the City Council. "Charges" are fees that have no statutory limit and typically are set at "market rates" since the public can choose to obtain these services from other sources. Charges will be reviewed and/or revised periodically by the City Council. Charges that do not recover all direct and indirect costs of service will be clearly identified and must be approved by the City Council. Item HB -340-

88 City of Huntington Beach Financial Policies DRAFT - Adopted Budget - FY 2014/15 CHARGES & USER FEES (CONTINUED) o o The City Council will be presented annually with a list of all User Fees and Charges indicating when they were last changed. Fees for infrastructure improvements required by new development will be reviewed annually to ensure that the fees recover development related expenditures. CAPITAL MANAGEMENT o o The City will prepare a five-year Capital Improvement Plan (CIP). The plan will be developed biannually and updated annually. The Capital Improvement Plan will include current operating maintenance expenditures, funding to support repair and rehabilitation of deteriorating infrastructure, and the construction of new infrastructure projects. Prior to planning the construction of new infrastructure, the improvement's future operating, maintenance, and replacement costs will be forecast and matched to available revenue sources in the operating budget. BASIS OF BUDGETING o Governmental, agency and expendable trust fund types, and pension trust funds use a modified accrual basis of accounting. These funds recognize revenue when it is susceptible to accrual. It must be measurable and available to finance current period expenditures. Examples include property taxes, sales tax, governmental grants and subventions, interest and charges for current service. Revenues not susceptible to accrual include certain licenses, permits, fines and forfeitures, and miscellaneous revenue. The City of Huntington Beach recognizes expenditures when it incurs a measurable liability, with the exception of interest on long-term debt, which is recognized when it is due. o o The City accounts for proprietary fund types and pension trust funds on the accrual basis, similar to private businesses, recognizing revenue when earned, regardless of the date of receipt, and recognizing expenses when they are incurred. The City selected under GASB Statement 20 (Governmental Accounting Standards Board), to apply all GASB pronouncements as well as an official statement of opinions of the Financial Accounting Board. The budget includes estimates for revenue that, along with the appropriations, comprise the budgetary fund balance. The appropriated budget covers substantially all fund type expenditures. The City Council adopts governmental fund budgets consistent with generally accepted accounting principles as legally required. There are no significant unbudgeted financial activities. Revenues for special revenue funds are budgeted by entitlements, grants, and estimates of future development and growth. Expenditures and transfers are budgeted based upon available financial resources. The City uses an encumbrance system as an aid in controlling expenditures. When the City issues a purchase order for goods or services, it records an encumbrance until the vendor delivers the goods or performs the service. At year-end, the City HB Item

89 City of Huntington Beach Financial Policies DRAFT- Adopted Budget- FY 2014/15 BASIS OF BUDGETING (CONTINUED) reports all outstanding encumbrances as reservations of fund balance in governmental fund types. The City then re-appropriates these encumbrances into the new fiscal year. FUND BALANCE DEFINITIONS AND PROJECTIONS o o o The City is reporting estimated changes in fund balances for all funds with adopted budgets for the current fiscal year. The City has chosen to report certain major funds individually and the others combined within the annual audit. Major funds used in the City's Comprehensive Annual Financial Report (CAFR), plus selected other funds are described. Within the budget document, all funds operated by the City are individually presented. For governmental funds, the fund balances represent the estimated effort of the adopted budget on the unassigned fund balance that will be reported in the CAFR for prior fiscal year completed. This amount represents the amount available for appropriation by the City Council. For fiduciary and enterprise funds, the fund balances reported represent the net working capital (current assets minus current liabilities) shown in these funds. This amount closely parallels the unrestricted net assets shown on the CAFR. o The estimated capitalized proprietary fund expenditures represent the estimated amount of expenditures that will be used for fixed assets. In enterprise funds, fixed assets are not recorded as expenditure in the year incurred, but are depreciated over their useful lives. Item HB -342-

90 SARATOGA CITY COUNCIL MEETING DATE: February 18, 2015 DEPARTMENT: PREPARED BY: Administrative Services Department Mary Furey, Administrative Services Director SUBJECT: CalPERS Unfunded Accrued Liability and Budget Adjustment Resolution RECOMMENDED ACTION: Review report and approve the attached budget adjustment resolution to appropriate funding for an approximate $3.3 million payment toward the City s share of the CalPERS Unfunded Accrued Liability, and authorize the Administrative Services Director to issue the payment. BACKGROUND: The CalPERS October 2014 Actuarial Valuation report included changes to the past practice of folding cost adjustments from revised amortization methods, actuarial assumptions, and investment gains and losses into the Employer Contribution Rates. With this year s actuarial report, CalPERS identified and separated the annual contribution for the unfunded cost of prior year service known as the Unfunded Accrued Liability (UAL) from the annual service cost, known at the Normal Cost contribution. With this change, the report now shows a breakdown of the City s total $37 million Accrued Liability (AL) at June 30, 2013, (actuarial valuation reports are based on prior year information) to include a $30 million funded portion, and a $6.9 million unfunded portion. The report also shows that the unfunded portion is expected to grow to $7.7 million by June 30, REPORT SUMMARY: CalPERS Pension Plan The California Public Employees Retirement System (CalPERS) administers pension benefits on behalf of more than 3,000 school, local agency and state employers, and 1.6 million members participating in the retirement system. CalPERS is the largest public pension fund in the U.S., managing the administration and investment of almost $300 Billion in assets as of February The CalPERS retirement plan is structured as a "defined benefit" plan, which means the pension plan provides benefits that are calculated using a defined formula, rather than accounting for individual member s contributions and earnings in a savings plan, such as occurs with a 401k. Retirement benefits are calculated using a member's years of service credit, age at retirement, and final compensation (average salary for a defined period of employment). Actuarial Valuation To determine the cost of providing these benefits, actuarial assumptions and fairly conservative investment risks are factored together to calculate the cost of the pension liability. Demographic assumptions include factors such as the member s life expectancy, age at retirement, rate of retirements, disabilities, terminations, and payroll inflation typically age, service, and gender related assumptions. Economic assumptions are based on salary growth rates, inflation rates, and the asset allocation mix s assumed rate of return known as the discount rate.

91 Every year CalPERS actuaries reassess each employer plan to determine its current valuation. The plan s Present Value of Benefits identifies the total funding needed for member s services accrued to date, and for the cost for the expected future years of service. Total funding need is comprised of the future Normal Cost employee/employer contribution payments and the plan s net assets known as the Accrued Liability. Normal Cost contribution payments represent the annual payments associated with one year of service accrual for years of service in the future. The Accrued Liability represents the value of benefits earned to date by members in the plan, and funded by prior payments and investment returns on the previously accumulated funding. Present Value of Benefits Future Normal Cost Contributions Accrued Liability CalPERS standards require that funds be accumulated to pay for these benefits during a member s service, meaning the intent is to pre-fund pension plan obligations through annual contributions and investment earnings to maintain 100% funded status. Over a member s career, funding is comprised of a growing percentage of accrued liability as previous payments accumulate and grow through the investment returns, as shown in the graph below. An employer plan includes the share of a member s Accrued Liability for the time an employee worked at the agency. If an employer plan s funded status is below 100%, there is an unfunded component within the Accrued Liability. A plan s funded status is determined through an assessment of assets versus Accrued Liability. The City of Saratoga s October 2014 Actuarial Valuation report shows a funded status of 81.3% at June 30, 2013 a recent improvement due to higher than assumed investment returns for the last two years. Plan underfunding can occur due to lower than anticipated investment returns, higher than anticipated retirements, actuarial assumption changes, or from a number of other factors. Market Value of Assets Accrued Liability = Funded Status % As part of CalPERS annual review, employer contribution rates are adjusted based on the plan s funded status. If the pension plan is less than 100% funded, employers must pay the Normal Cost employer contribution plus a payment toward the unfunded portion of the Accrued Liability. If the pension plan is greater than 100% funded, employers pay the Normal Cost contribution only. In the past, these UAL adjustment payments were included in the Employer rates, and were the cause of ongoing fluctuations in employer rates. While actuarial assumptions are designed to reduce rate volatility through long-term averaging and large member pools, the demographic and economic assumptions in place could not support the extraordinary investment losses that occurred during the recession years. In addition, with market losses significantly de-valuing the pension

92 plan s net assets during the recession years, CalPERS reassessed their rate of return assumption (discount rate), and in March 2012 reduced the discount rate from 7.75% to 7.5%. This change resulted in a large decrease in the Present Value of Benefits as a lower investment return assumption requires agencies to contribute more funding to pay for the pension benefits. Prior year actuarial assumption changes and gains/losses were combined into one average amortization period base titled Share of Pre-2013 Pool UAL as shown on line 2 in the chart below. The $3.3 million amount in the column titled Balance 6/30/15 represents the City s share of the pool s UAL at the end of this fiscal year, after incurring the annual interest cost of 7.5% less payments made toward the unfunded liability. As noted previously, payments toward any unfunded liability were rolled into the employer contribution rates in prior years, rather than stated as a separate dollar amount. Date Established Amortization Period Balance 6/30/13 Expected Payment 2013/14 Balance 6/30/14 Expected Payment 2014/15 Balance 6/30/15 Scheduled Payment for 2015/16 Payment as % of Payroll Base 1 SIDE FUND 06/30/13 $ - $ - $ - $ - $ - $ % 2 SHARE OF PRE-2013 POOL UAL 06/30/13 22 $ 3,182,123 $ 109,457 $ 3,307,295 $ 167,963 $ 3,381,194 $ 240, % 3 ASSET (GAIN)/LOSS 06/30/13 30 $ 3,791,145 $ - $ 4,075,481 $ - $ 4,381,142 $ 61, % 4 NON-ASSET (GAIN)/LOSS 06/30/13 30 $ (36,444) $ - $ (39,177) $ - $ (42,115) $ (592) (0.011%) 5 NON-ASSET (GAIN)/LOSS 06/30/14 30 $ - $ - $ - $ - tbd tbd tbd TOTAL $ 6,936,824 $ 109,457 $ 7,343,599 $ 167,963 $ 7,720,221 $ 301, % After an initial policy to smooth Employer Contribution Rates through the use of a rolling amortization period was deemed too slow to bring plans back to an acceptable funded status, CalPERS revised their funding approach for dealing with investment losses. In April of 2013, the CalPERS Board approved a change to the rate smoothing policy that amortizes investment gains and losses from a rolling period, to a fixed 30 year period. In the future, each fiscal year s annual gains and losses will be amortized over 30 years with a gradual ramp up during the first five years, hold steady for 20 years, and then a gradual ramp down during the last five year period. This amortization period change and the FY 2012/13 accumulated market gains and losses are accounted for in line #3 in the above schedule, the UAL base titled Asset (Gain)/Loss at 6/30/2013. In the column titled Balance 6/30/15, the line shows an almost $4.4 million dollar unfunded accrued liability base. Actuarial changes and historic investment losses have caused the funded status of pension plans across the State to drop significantly. As illustrated in the graph on the right, the Accrued Liability for pension benefits now includes a significant unfunded component. Per the above 2014 actuarial report schedule, Saratoga s June 30, 2013 Accrued Liability of $37 million is comprised of a $30 million funded portion and a $6.9 million unfunded portion. The unfunded portion is expected to grow to $7.7 million by June 30, Present Value of Benefits Future Normal Cost Contributions Accrued Liability Future Normal Cost Contributions Unfunded Liability Funded Liability Future Changes In 2014 CalPERS completed a 2 year asset liability management study incorporating actuarial assumptions and strategic asset allocation. In February 2014, the CalPERS Board adopted recommendations which resulted from this study, including slight changes in the asset mix to reduce volatility. The current economic assumptions remained unchanged, including the discount rate of 7.5%, the price inflation, wage inflation, and the payroll growth rates, however, the experience study on CalPERS demographic data for the years 1997 to 2011 revealed the CalPERS Board needed to change some of the demographic assumptions in the contribution rate calculations.

93 The data revealed that on average, men were living two years longer and women a year and a half longer. The study also showed there were lower rates of disability and higher rates of service retirements for certain groups, including police and fire members. And, members are serving longer, which has resulted in higher salary growth rates. With pensioners living longer and retiring with higher salaries, pension benefits were costing more than CalPERS had assumed or planned for. These new assumptions resulted in another reassessment and subsequently, another increase in the Unfunded Accrued Liability. The new assumptions will be included in the FY 2016/17 Normal Cost contribution rates. Any additional CalPERS assumption changes and Asset (Gains)/Losses will be amortized in the same manner and added to the schedule as a new amortization base in the years that follow. Scheduled Rate Increases Due to changes resulting from the State s Pension Reform Laws (PEPRA), all risk pools will be combined into either a Miscellaneous or Public Safety Pool in the future as a result of the declining member base from closed benefit plans. With the upcoming changes, and with an effort to increase transparency in contribution rates, CalPERS determined the UAL portion of employer payments would be shown separately and charged as dollar amounts rather than percentages. With the 30 year smoothing policy, the UAL payment totals $301,733. This is shown in the chart above in the pink column titled Scheduled Payment for FY 2015/16 on the TOTAL line. CalPERS also provided a 5 year projection which shows an increase as the UAL payments ramp up. This is illustrated in the following chart, along with the Normal Cost contribution rate by Tier category: Pension Plan Year 1 Year 2 Year 3 Year 4 Year 5 FY 2015/16 FY 2016/17 FY 2017/18 FY 2018/19 FY 2019/20 Tier I 9.35% 9.70% 9.70% 9.70% 9.70% Plus UAL $301,733 $362,702 $427,057 $494,947 $566,527 Tier II 7.51% 8.00% 8.00% 8.00% 8.00% Plus UAL $3 $36 $71 $108 $147 Tier III 6.73% 6.73% 6.73% 6.73% 6.73% Plus UAL n/a n/a n/a n/a n/a As the chart illustrates, the payments are increasingly painful the full UAL contribution payment at year 5 will, by itself, be equal to the normal cost contribution, and is more than the City s current contribution of just over $500,000 per year. Also, as shown in the chart, Tier II has a minimal UAL as the Tier II plan began with our first hire in July With only a few members in this tier to date, there is very little unfunded liability impact. Tier III does not have a UAL as this plan began in January 2013, and there are no reportable impacts to date. The above CalPERS UAL payments represents their minimum annual payment option. Benefits of Valuation Changes As noted above, CalPERS now separates the Normal Cost contribution from the unfunded liability contribution. This approach is intended to stabilize employer contribution rates, and will allow employers the opportunity to address payment toward the UAL as applicable to their circumstances. By breaking out the unfunded portion from the annual Normal Cost payment, agencies can now decide to pay down some or all of their UAL, at any point in the future, using methods of their choice. Payment could be made through the use of available funds, from reserves, or by borrowing/obtaining debt (i.e. bonds) at lower interest rates. Benefit of immediate payment The benefit of immediate payment is similar to paying off a 30 year mortgage loan principal reductions reduce interest costs. A difference to note however is that, unlike a mortgage, the UAL balance will change with the fluctuation of investment market returns. Future gains and losses on the funded portion of the liability will increase or decrease the unfunded accrued liability balances, and the unfunded liability will continue to grow in

94 alignment with CalPERS actuarial assumption of 7.5%. This investment growth is key as it contributes significantly toward funding the accumulated net present value of benefits. Excluding the funded liability impacts, the $7.7 million dollar UAL will grow to more than $18 million, costing the City approximately $10.4 million in discount rate interest over 30 years if payment is made in accordance with the CalPERS payment schedule. And, the future required annual payments is another consideration. Forecasted revenues do not support this amount of annual expense in future years, in combination with other expected cost increases. The City s assessment of cash flow and funding needs versus the cost of interest for the UAL debt will help to drive this decision. And, with LAIF interest earnings at historic lows of around one-quarter of 1% (.25%), and interest rates expected to grow slowly, the 7.5% discount rate cost appears very expensive, thereby some level of payoff appears most prudent, and urgent. Payment Funding Options Over the last few years, the City has developed financial policies and practices to ensure the City has sustainable working capital and emergency reserve funds, as well as ensuring proper funding for liabilities and infrastructure maintenance. With the City now in a healthier fiscal condition, Council could consider an option to utilize these reserves for a short period of time to reduce the cost of the UAL over the long term. In addition, a review of the FY 2014/15 General Fund budget for the mid-year status report shows that the revenue will be higher than anticipated, particularly in Property Tax revenues. With the anticipated increase in revenues, the General Fund is expected to end the year with approximately $1.2 million of revenues over expenditures. During the discussion of the Unfunded Accrued Liability at the Council Retreat meeting on January 23 rd, 2015, Council was presented with several options which would fund or partially fund the UAL. At the continuation of the Retreat on February 4 th, Council directed staff to partially fund the UAL debt with the payoff of the amortization base titled Share of Pre-2013 Pool UAL. This base is not subject to the 5 year gradual ramp up payment schedule. It has established payments of approximately $240,000 annual payments which grow by payroll growth assumption factors each year. Payoff of this base will reduce annual payments by $240,000 plus each year, thereby leaving only the gradually increasing UAL portion debt. This lump sum payoff will save the City approximately $3.6 million dollars in interest, and allow the City to both rebuild and repay borrowed funds from the Fiscal Stabilization Fund Balance Reserves without a 7.5% interest charge. At the February 4 th meeting, Council directed staff to bring back a resolution to amend the General Fund Operating Budget with an appropriation to fund the partial UAL payment in the amount not to exceed $3,380,000. The payoff amount is expected to be less than the amount shown in the Amortization Base schedule because the City is making payment before June 30, CalPERS will be submitting the exact payoff amount to staff prior to Thursday, February 19 th, the date payment will be made to CalPERS. Council directed the use of the following funding sources to fund a current year expenditure appropriation not to exceed $3,380,000 from the following sources: FY 2014/15 General Fund appropriation (approximate): $ 949,816 Capital Improvement Reserve: $ 500,000 Fiscal Stabilization Reserve: $1,000,000 Working Capital Reserve over $2 million base: $ 930,184 Total Appropriation (approximate): $3,380,000 Repayment of Reserve Borrowing With Council s approval to pay off the approximate $3.3 million Share of Pre-2013 Pool UAL amortization base, staff will bring the Fund Balance Reserve repayment discussion to the Finance Committee to develop options and recommendations. The repayment discussion will be brought back to Council at the Budget Study Session in April for further direction.

95 CONSEQUENCES OF NOT FOLLOWING RECOMMENDED ACTION: The City would not approve the resolution to make an immediate payment for a partial pay off of the City s share of the CalPERS Unfunded Accrued Liability. ATTACHMENTS: Attachment A: Budget Adjustment Resolution

96 Polling Results from Reducing Unfunded Liabilities webinar May 13, locations; 223 estimated participants in live audience