The URL can be used to link to this page

Home My WebLink AboutFinance Committee Agenda - October 13, 2016CITY OF NEWPORT BEACH FINANCE COMMITTEE AGENDA - Final 100 Civic Center Drive - Crystal Cove Conference Room, Bay 2D Thursday, October 13, 2016 - 4:00 PM Finance Committee Members: Tony Petros, Chair / Council Member Diane Dixon, Mayor Keith Curry, Council Member Patti Gorczyca, Committee Member William C. O’Neill, Committee Member Larry Tucker, Committee Member John Warner, Committee Member Staff Members: Dave Kiff, City Manager Dan Matusiewicz, Finance Director / Treasurer Steve Montano, Deputy Director, Finance Marlene Burns, Administrative Specialist to the Finance Director The Finance Committee meeting is subject to the Ralph M. Brown Act. Among other things, the Brown Act requires that the Finance Committee agenda be posted at least seventy-two (72) hours in advance of each regular meeting and that the public be allowed to comment on agenda items before the Committee and items not on the agenda but are within the subject matter jurisdiction of the Finance Committee. The Chair may limit public comments to a reasonable amount of time, generally three (3) minutes per person. The City of Newport Beach’s goal is to comply with the Americans with Disabilities Act (ADA) in all respects. If, as an attendee or a participant at this meeting, you will need special assistance beyond what is normally provided, we will attempt to accommodate you in every reasonable manner. Please contact Dan Matusiewicz, Finance Director, at least forty-eight (48) hours prior to the meeting to inform us of your particular needs and to determine if accommodation is feasible at (949) 644-3123 or dmatusiewicz@newportbeachca.gov. NOTICE REGARDING PRESENTATIONS REQUIRING USE OF CITY EQUIPMENT Any presentation requiring the use of the City of Newport Beach’s equipment must be submitted to the Finance Department 24 hours prior to the scheduled meeting. I.CALL MEETING TO ORDER II.ROLL CALL III.PUBLIC COMMENTS Public comments are invited on agenda items. Speakers must limit comments to three (3) minutes. Before speaking, we invite, but do not require, you to state your name for the record. The [Board/Committee/Commission] has the discretion to extend or shorten the speakers’ time limit on agenda items, provided the time limit adjustment is applied equally to all speakers. As a courtesy, please turn cell phones off or set them in the silent mode. IV.CONSENT CALENDAR MINUTES OF SEPTEMBER 15, 2016A. Recommended Action: Approve and file. DRAFT MINUTES 091516 October 13, 2016 Page 2 Finance Committee Meeting V.CURRENT BUSINESS PRELIMINARY FISCAL YEAR 2017-2018 PENSION FUNDING RECOMMENDATION A. Summary: At this meeting staff will present a status update and primer on the City’s Pension and OPEB liabilities. A consulting actuary will be present should the Committee have specific questions for an actuary. Based on a review of the most current valuations, staff has prepared preliminary pension funding recommendations prior to the input and comment from our consulting actuary. Recommended Actions: 1)Receive and file staff recommendations. 2)Direct consulting actuary to comment on staff recommendations at a subsequent meeting. 3)Provide the consulting actuary direction as to Committee expectations for the November 10, 2016, Finance Committee meeting. STAFF REPORT ATTACHMENT A BUDGET AMENDMENTSB. Summary: Receive and file a staff report on the budget amendments for the last quarter of Fiscal Year 2015-2016 and for the first quarter of Fiscal Year 2016-2017. Recommended Action: Receive and file. STAFF REPORT ATTACHMENT A ATTACHMENT B VI.FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM) VII.ADJOURNMENT Finance Committee Meeting Minutes September 15, 2016 Page 1 of 8 CITY OF NEWPORT BEACH FINANCE COMMITTEE SEPTEMBER 15, 2016 MEETING I. CALL MEETING TO ORDER The meeting was called to order at 4:00 p.m. in the Crystal Cove Conference Room, Bay 2D, 100 Civic Center Drive, Newport Beach, California 92660. II. ROLL CALL PRESENT: Council Member Tony Petros (Chair), Council Member Keith Curry, Mayor Diane Dixon, Committee Member Patti Gorczyca, Committee Member William C. O’Neill, Committee Member Larry Tucker (arrived at 4:01 p.m.), and Committee Member John Warner STAFF PRESENT: City Manager Dave Kiff, Finance Director/Treasurer Dan Matusiewicz, Deputy Finance Director Steve Montano, Municipal Operations Director George Murdoch, Budget Manager Susan Giangrande, and Administrative Specialist to the Finance Director Marlene Burns MEMBER OF THE PUBLIC: Jim Mosher III. PUBLIC COMMENTS Jim Mosher discussed the fee schedule adopted by the City Council and questioned the basis for the rate schedule for facility rentals. Chair Petros suggested staff look into Mr. Mosher’s concerns. Committee Member Tucker arrived at 4:01 p.m. Chair Petros closed public comments. IV. CONSENT CALENDAR A. MINUTES OF MAY 12, 2016 Recommended Action: Approve and file. Committee Member Gorczyca noted corrections to the minutes, which Finance Director/Treasurer Matusiewicz would verify. MOTION Committee Member Curry moved and Chair Petros Gorczyca seconded a motion to approve the May 12, 2016, Finance Committee Minutes, as amended. The motion carried 6-1, Mayor Dixon abstaining. B. MINUTES OF JUNE 2, 2016 Recommended Action: Approve and file. Committee Member Gorczyca noted corrections to the minutes. Finance Committee Meeting Minutes September 15, 2016 Page 2 of 8 MOTION Committee Member Tucker moved and Committee Member Gorczyca seconded a motion to approve the June 2, 2016, Finance Committee Minutes, as amended. The motion carried unanimously. C. MINUTES OF JUNE 16, 2016 Recommended Action: Approve and file. Committee Member Tucker and Committee Member Gorczyca noted corrections to the minutes. MOTION Committee Member Warner moved and Committee Member Gorczyca seconded a motion to approve the June 16, 2016, Finance Committee Minutes, as amended. The motion carried unanimously. V. CURRENT BUSINESS A. ANNUAL INVESTMENT PORTFOLIO PERFORMANCE REVIEW Summary: Staff and/or one or more investment advisors will describe the performance of the City's investment portfolio. Recommended Action: Receive and file. Finance Director/Treasurer Matusiewicz presented a PowerPoint, discussed market volatility and value of the portfolio. In response to Committee Member Warner, Finance Director/Treasurer Matusiewicz confirmed that when, yield would go up, price volatility would also go up. Finance Director/Treasurer Matusiewicz stated the City was in compliance with all 29 investment policy rules. Committee Member Warner requested a comparison of sister cities. Committee Member Gorczyca also requested a comparison of the City’s investment portfolio performance with that of the Orange County investment pool. City Manager Kiff clarified that Committee Member Warner was requesting a comparison of the City’s investment portfolio performance with that of 4-5 other cities. Committee Member O’Neill congratulated staff on the returns. B. INVESTMENT ADVISOR RECOMMENDATION Summary: Staff will summarize the results of our recent investment advisor RFQ and make recommendations for the contracting of investment advisory services. Recommended Action: With Finance Committee concurrence of staff’s recommendation to retain the services of Chandler Asset Management (Chandler) as the sole investment manager, staff will proceed with the recommended action and bring the new investment advisor contract to the City Council for approval. Finance Committee Meeting Minutes September 15, 2016 Page 3 of 8 Finance Director/Treasurer Dan Matusiewicz discussed the portfolio and interview process. He explained the decision to select Chandler over PFM and the opportunity to focus more on strategies and a more comprehensive investment program. Mayor Dixon expressed concern with “putting all the eggs in one basket.” She stated she had reviewed the funds of the other cities managed by Chandler and the City of Newport Beach would be the largest amount. She suggested second firm for a check and balance. She questions the calculation of fees. Finance Director/Treasurer Dan Matusiewicz explained it was a tiered structure. He stated the bids were submitted in $25 million increments. Mayor Dixon stated her preference would be to have two firms. Committee Member Gorczyca expressed concern with the small firm. She asked if Chandler had firms with over $100 million. Finance Director/Treasurer Dan Matusiewicz stated multiple advisors were recommended when the portfolio was over $500 million. He stated he was hesitant to let go of multiple advisors but recommended moving down to one investment advisor and to focus on investment strategy and a comprehensive investment program. Deputy Finance Director Montano explained that the City could still maintain a diversification of asset classes. Finance Director/Treasurer Dan Matusiewicz stated the assets were registered in the City’s name and held by a custodial bank to eliminate the likelihood of embezzlement. Council Member Curry stated he shared Mayor Dixon’s concerns. He discussed the City’s experience with PFM. He discussed the advantage of two different advisors. He indicated support for two advisors. Committee Member Gorczyca indicated support for two different points of views, built in competition and built in benchmarks and the importance of diversification. In response to Chair Petros, Finance Director/Treasurer Dan Matusiewicz stated there was no regulatory scheme that two advisors were necessary. Chair Petros concurred with the other members. Jim Mosher stated he felt two was better than one, but Finance Director/Treasurer Matusiewicz’s experience should be considered. He asked how much was spent on the consultant advising the City on the matter. Deputy Finance Director Montano stated the consultant agreement was approximately $20,000. Chair Petros suggested proceeding with a recommendation for two advisors, but was also compelled by Finance Director/Treasurer Matusiewicz’s expertise. Committee Member Gorczyca questioned the recommendation that two advisors were not necessary until a $500 million portfolio, which is rare for a municipality. MOTION Committee Member O’Neill moved and Committee Member Gorczyca seconded a motion to recommend the City Council enter into five-year contracts with Chandler and PFM based on the terms of the RFPs provided to staff. Chair Petros suggested Finance Director/Treasurer Matusiewicz include his argument for a single advisor when it was presented to the City Council. Committee Member Warner questioned how responsive the Council would be to Finance Director/Treasurer Matusiewicz’s argument. Finance Committee Meeting Minutes September 15, 2016 Page 4 of 8 City Manager Kiff thanked the Committee for its openness. The motion carried 6-1, Council Member Curry abstaining. C. INVESTMENT PORTFOLIO RECOMMENDATIONS Summary: Staff will present a proposal to further segment the investment portfolio to better align assets with related objectives. Recommended Action: Staff recommends the Finance Committee direct staff to return with a proposed segmentation of the investment portfolio including a long-term segment, proposed investment strategies, and an appropriate risk analysis of the proposal. Finance Director/Treasurer Matusiewicz presented the portfolio strategy recommendations. He stated his recommendation was easier with one investment advisor. He explained the current strategy. He stated the proposed strategy was to refine cash flow forecasts and to continue to ladder out maturities when there was an opportunity to beat LAIF yields. He suggested maintaining a medium portfolio with a 1-5 year strategy that would allow for a higher coupon rate on bonds; however, cautioned to expect greater market volatility with a 1- 5 year strategy. Chair Petros asked if Finance Director/Treasurer Matusiewicz was introducing a concept and requesting concurrence that would be followed by a host of policies to reflect the concept. Finance Director/Treasurer Matusiewicz stated the next step would be to perform a risk analysis so that the risk and benefits could be weighed, then look at amending policies. Council Member Curry asked about the origin of the idea of going out ten years. Finance Director/Treasurer Matusiewicz stated the government code allowed deployment of a 1-10 year strategy which seemed appropriate given the equally long-term nature of some of the City’s holdings. Council Member Curry stated the Council had to adopt findings indicating it was aware it was doing something it probably should not be doing. He discussed the bond activity for the prior week. He stated rates would go up and prices would go down and a longer portfolio would not benefit. He indicated opposition to the proposed ten-year maturity. Committee Member Tucker stated it was not the business of the City to reach for yield. He stated a five-year term was not as costly. Chair Petros asked if the short, medium and long-term was a good approach. Committee Member Tucker stated it was a change from 1 to 3 to 1 to 5 and should be reviewed. Committee Member O’Neill asked if a laddered strategy makes sense when the City has a one-year budget. Finance Director/Treasurer Matusiewicz discussed the cash flow periods and potential need for liquidity during dry periods. He explained the 1 to 36-month term provided an opportunity to outperform LAIF yields while ensuring liquidity during the months that cash flow is most needed. He further stated investment advisors were managing to a specific benchmark and duration, which is not necessarily aligned with the City’s liquidity needs. In response to Committee Member Tucker, Finance Director/Treasurer Matusiewicz discussed efforts to refine the current short-term matching investment maturities to cash flows and limiting the amount that was deposited into LAIF. Committee Member O’Neill discussed the F-1 Council Policy and questioned whether it was really being changed. Finance Committee Meeting Minutes September 15, 2016 Page 5 of 8 Committee Member Gorczyca concurred with Council Member Curry and discussed the requirement for legislative approval and requirement to wait 90 days after the option was taken. She stated government rarely went beyond the five-year term. Finance Director/Treasurer Matusiewicz stated the funds would not likely be liquidated; therefore, the yield would be higher and would outperform the 1 to 5-year portfolio. Mayor Dixon asked if other cities were taking similar risks. Finance Director/Treasurer Dan Matusiewicz stated water districts usually followed the strategy, which was designed for long term assets. Committee Member Curry discussed purchases of treasury and payment of premiums. He stated a higher yield would be obtained but the purchase prices were higher. Chair Petros stated the Committee seemed reluctant to extend the term even though current laws allowed for the strategy. He stated he would like to see the risk analysis. Council Member Curry stated the risk was spread over a rising rate but the price volatility was the same. He stated if rates were going to rise, long term was not the appropriate path. Finance Director/Treasurer Dan Matusiewicz discussed trigger points and risk simulation by an investment advisor. He stated the City Council would have to approve the process but the implementation triggers would be determined by staff and advisors, which could be reviewed by the Committee. Committee Member Tucker questioned whether it was worth it. MOTION Council Member Curry moved and Committee Member Gorczyca seconded a motion to request Finance Director/Treasurer Matusiewicz to return with recommendations for investment policy changes consistent with a maximum maturity of five years. The motion carried unanimously. Chair Petros commended Finance Director/Treasurer Matusiewicz for his creative efforts. D. IMPLEMENTATION OF FINANCE SUBCOMMITTEE RECOMMENDATIONS Summary: During the June 16, 2016, Finance Committee meeting, the Committee reviewed the Subcommittee’s 16 recommendations to improve the City’s general business practices. The Subcommittee members proposed, and the Committee as a whole assigned, each of the recommendations according to one of the following categories: 1) Incorporate into existing or new City Council policy; 2.) Create new or update General Plan policies; 3.) Action items only, no policy required; and 4.) Comment only - no policy or action required. Recommended Action: Staff recommends that the Finance Committee make recommendation(s) to the City Manager as to the next steps related to the report. Deputy Finance Director Montano presented the staff report. Committee Member Tucker stated it was a business persons review of the City’s budgeting. He suggested the City Council consider the matter at a study session to determine if it was prepared to take it to the next step. Chair Petros reiterated that there was no further action until the Council provided guidance. Committee Member Tucker stated the committee had come up with recommendations and was ready to go to the Council. Finance Committee Meeting Minutes September 15, 2016 Page 6 of 8 Chair Petros asked if enterprise funds were indexed by CPI. Municipal Operations Director Murdoch stated they were property related and could not be increased. Mayor Dixon asked if more emphatic language could be included to increase fees. Municipal Operations Director Murdoch stated master plans were generally done every five years and that was the best time to review the revenue. Mayor Dixon stated it was necessary to bridge the gap so there was not a five or six-year delay. Committee Member O’Neill stated the subcommittee recommended at least every three years for rate review. Municipal Operations Director Murdoch discussed using the reserves to offset regular rate increases; however, when reserves approach minimum Council policy level, it is a good trigger to study rates. In response to Mayor Dixon, Municipal Operations Director Murdoch discussed the 2009 Wastewater Master Plan and reserve policy. Committee Member Tucker suggested updating at least every five years. Municipal Operations Director Murdoch stated major master plan was done every 20 years with updates every 5 years. He suggested a master plan study followed by a rate study every five years. In response to Committee Member Gorczyca, Municipal Operations Director Murdoch stated multi-year scheduled rate increases were utilized. MOTION Committee Member Tucker moved and Committee Member Gorczyca seconded a motion to advance the subcommittee’s recommendations to the City Council. The motion carried unanimously. E. COMMITTEE DISCUSSION OF FUTURE PENSION OPEB AGENDA ITEMS Summary: Provide staff further direction concerning Pension Primer presentation and Pension OPEB management strategy discussions at the October and November Finance Committee meetings. Recommended Action: Provide staff direction. Finance Director/Treasurer Matusiewicz referred to the work plan and proposed schedule. Committee Member Tucker suggested the primer process to ensure the Committee understood the issues. He stated the Council might want a recommendation on the options. He stated it was necessary to deal with the issue. Mayor Dixon clarified that an actuary would be presented to the Committee on October 13, 2016. She presented an article the additional material, Item No. E2, by Malanga (2016) entitled, “Covering Up the Pension Crisis”. Malanga, S. (2016, August 25). Covering Up the Pension Crisis. The Wall Street Journal. Retrieved September 16, 2016, from http://www.wsj.com/articles/covering-up-the-pension-crisis-1472184758 Finance Committee Meeting Minutes September 15, 2016 Page 7 of 8 Committee Member Gorczyca distributed the article, Item No. 5E3, by Fellner (2016) entitled “CalPERS $100k Club Up 11% in Orange County as Newport Beach Experiences State’s Largest Rate Hike” regarding Newport Beach’s pension liability increase. She stated it was important to have the actuarial on board. Fellner, R. (2016, August 8). CalPERS $100k Club Up 11% in Orange County as Newport Beach Experiences State's Largest Rate Hike. Retrieved September 9, 2016, from https://voiceofoc.org/2016/08/calpers-100k-club-up-11-in-orange-county-as-newport-beach-experiences-states-largest-rate-hike/ City Manager Kiff explained the City having the largest rate hike. Council Member Curry discussed the Sanitation District paying off its liability but $37 million was back on the books. Committee Member Warner presented the additional material, Item No. 5E4, the document entitled, “City of Anaheim Steps taken to Address Pension and Other Post-Employment Benefits Costs”. City Manager Kiff stated the City was higher than necessary for the share of the pension cost. Mayor Dixon asked the funded level. City Manager Kiff stated the City was at 69 percent. F. QUARTERLY ERP UPDATE Summary: Staff will provide the Committee with a progress report on the Enterprise Resource Plan project to receive and file. Recommended Action: Receive and file. Deputy Finance Director Montano discussed implementation of two of four phases. He stated they were currently involved in implementation of the utility billing system, which was extended by four months. He stated the work order process was suspended. He stated all worked was anticipated to be completed in February 2017. In response to Mayor Dixon, Deputy Finance Director Montano explained that staff could continue with the current work order solution or develop a work around within Tyler. Committee Member Gorczyca asked if there would be a discount for not using a portion. Deputy Finance Director Montano stated a credit could be received for not using the software. VI. FINANCE COMMITTEE ANNOUNCEMENTS ON MATTERS WHICH MEMBERS WOULD LIKE PLACED ON A FUTURE AGENDA FOR DISCUSSION, ACTION OR REPORT (NON-DISCUSSION ITEM) None. VII. ADJOURNMENT The Finance Committee adjourned at 5:33 p.m. to the next regular meeting of the Finance Committee on October 13, 2016, at 4:00 p.m. Filed with these minutes are copies of all materials distributed at the meeting. Finance Committee Meeting Minutes September 15, 2016 Page 8 of 8 The agenda for the Regular Meeting was posted on September 8, 2016, at 5:34 p.m., in the binder and on the City Hall Electronic Board located in the entrance of the Council Chambers at 100 Civic Center Drive. Attest: ___________________________________ _____________________ Tony Petros, Chair Date Finance Committee Chair CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5A October 13, 2016 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE FROM: Finance Department Dan Matusiewicz, Finance Director (949) 644-3123 or danm@newportbeachca.gov SUBJECT: PRELIMINARY FISCAL YEAR 2017-2018 PENSION FUNDING RECOMMENDATION SUMMARY: Each year, staff analyzes the most recent CalPERS actuarial valuations and evaluates opportunities to more efficiently amortize the City’s unfunded pension liability compared to the default minimum contribution schedules proposed by PERS. Staff has also engaged an actuary to review and comment on staff’s recommendations. Based on a review of the most current actuarial valuations, but prior to consulting with the actuary, staff’s preliminary recommendations are to: 1) The City should estimate and start paying on the 2016 investment experience loss in 2017-2018, one year ahead of schedule. 2) The 2015 and 2016 experience losses should be amortized over 20 years versus the default 30-year schedule. 3) Make discretionary payments in an amount and manner to accomplish recommendations 1 and 2 and not perform a “Fresh Start”. 4) The City should continue to let the 2014 experience gain ($71 million credit) continue to amortize over the remaining 29-year schedule to provide rate relief when and if needed in the future. 5) After considering all budget objectives, consider budgeting for the unfunded pension liability on a level-payment amortization basis rather than a level-percent-of-pay amortization basis. If recommendations 1-4 are approved, these actions would cost an additional $5 million over the default payment schedule for the first year, but save $69 million over 30 years. This would result in a net present value savings of approximately $25 million and the 2015 and 2016 losses would be paid off more than 10 years sooner than the default option (See Attachment A – Alt 1 columns). If recommendation 5 is approved in addition to recommendations 1-4, the cost would be $7.3 million more than the default minimum during the first year resulting in $143 million savings over 30 years or $68 million on a net present value basis (See Attachment A - Alt 2 columns). Neither plan commits the City to the proposed payment schedules. The City can revert to the default payment schedule at any time. RECOMMENDED ACTION: 1) Receive and file staff recommendations. 2) Direct consulting actuary to comment on staff recommendations at a subsequent meeting. 3) Provide consulting actuary direction as to Committee expectations for the November 10, 2016, Finance Committee meeting. Preliminary Fiscal Year 2017-2018 Pension Funding Recommendation October 13, 2016 Page 2 DISCUSSION: The most recent actuarial report presents the results of the June 30, 2015, California Public Employees’ Retirement System (CalPERS) valuation of both the Miscellaneous and the Public Safety Plans for the City of Newport Beach. This report sets the Fiscal Year 2017-2018 required contribution rates. Net of investment returns, annual contributions and benefit payments, the City’s unfunded pension liability increased $23.1 million from $252.6 million to $275.7 million, resulting in an overall funded ratio of 67.5 percent. The components of the unfunded liability are displayed in the following table. It is the City’s policy (See Reserve Policy F-2) to: 1) amortize the unfunded actuarial liability in accordance with the actuary’s funding recommendations; and 2) make effort at maintaining its UAL within a range that is considered acceptable to actuarial standards. Policy F-2 further prescribes that the City Council shall consider increasing the annual CalPERS contribution should the UAL status fall below acceptable actuarial standards. Not included in this valuation is the 2016 experience loss. CalPERS expected investment return continues to be 7.5 percent, but the fund only earned 0.6 percent during 2016 resulting in an experience loss of 6.9 percent. This loss can be reasonably estimated at $39.5 million by multiplying the June 30, 2015, MVA of $572.7 million times 6.9 percent. Ignoring what might happen on the liability side of the equation, our unfunded liability at June 30, 2016, will likely reach $315 million. If we do not address the 2016 investment loss during our 2016-17 budget or 2017-2018 budget, the $39.5 million dollar experience loss will grow 15.6 percent (1.0752) to 45.6 million. It would be beneficial to initiate a payment plan before the 2016 results would impact our contribution rates in Fiscal Year 2018- 2019. Together the 2015 and 2016 experience losses total $68.5 million as indicated by the table below. By default, these losses would be amortized (paid-off) over 30 years. How liabilities are amortized can make significant difference in the net economic savings/cost of particular payment plans. Our previous efforts to accelerate payment schedules in 2015, 2014 and years prior have already made a noticeable difference relative to many of our neighboring cities who may have chosen to stick with the default plan. The table on the next page compares this City’s amortization efficiency (interest as a percent of principal) relative to surrounding larger cities based on the June 30, 2015, actuarial valuations. Miscellaneous Public Safety Total Accrued Liability $356,419,112 $491,953,837 $848,372,949 Less Market Value of Assets (MVA)$255,215,749 $317,483,254 $572,699,003 Unfunded Liability $101,203,363 $174,470,583 $275,673,946 Funded Ratio (MVA/Accrued Liability)71.6%64.5%67.5% Preliminary Fiscal Year 2017-2018 Pension Funding Recommendation October 13, 2016 Page 3 From the table above, we can conclude that the City of Newport Beach’s default amortization schedule is already 13 percent more efficient than Irvine’s payment schedule and 54 percent more efficient than Huntington Beach’s payment schedule. Unfortunately, staff expects further experience losses to continue to roll-in. Consensus analysis by the investment community believes that CalPERS will continue to have difficulty achieving a 7.5 percent investment return. CalPERS is also under great pressure to reduce its assumed discount rate sooner rather than later. Staff has modeled the impact of both lower investment returns and a permanent reduction of the discount rate. While the timing and extent of further losses are uncertain, staff believes the City has significant exposure to its pension obligations. If experience losses are persistent, there could be a point where it could be difficult for the City just to keep up with the interest on its pension obligations. For this reason, it is particularly important for the City to continue to make headway in paying down its unfunded pension liability. RECOMMENDATIONS Alternative 1 Consistent with the California Actuarial Advisory Panel (CAAP), the Government Finance Officers Association (GFOA) has recommended as a best practice that the amortization of an unfunded pension liability not exceed 25 years but ideally fall in the 15-20 year range. This is also consistent with staff’s view because level-percent-of-pay amortization schedules greater than 20 years negatively amortize and become exponentially more expensive. Staff recommends the following: 1) The City should start paying on the 2016 experience loss in 2017-2018, one-year ahead of schedule. 2) The 2015 and 2016 experience losses should be amortized over 20 years versus the default 30-year schedule. 3) The City should not execute another fresh start but rather make additional discretionary payments equal to the difference between the proposed and default schedules. 4) The City should continue to let the 2014 experience gain ($71 million credit) continue to amortize over the remaining 29-year schedule to provide rate relief when and if needed. The bulk of our remaining unfunded liability ($244 million) will continue to amortize over its current 17- year schedule. This alternative would require $5 million more in contributions over the first year, save $69 million over thirty years with an approximate net present value of $25 million. This alternative will also improve the amortization efficiency ratio from the default schedule (with the impending 2016 experience loss) of 1.89 percent to 1.67 percent. Since a Fresh Start is not proposed, the City will not be committed to the proposed payment schedule. The City can stop making discretionary payments at any time. No special action is required. See Schedule A – Alt 1 columns. Preliminary Fiscal Year 2017-2018 Pension Funding Recommendation October 13, 2016 Page 4 Alternative 2 One of many CalPERS actuarial assumptions is that payroll will grow 3 percent per year. In an effort to maintain contribution rates level, the payments in their amortization schedule are then designed to also grow by 3 percent per year and this is why they are referred to as a level-percent-of-pay amortization schedule. While this logic works well for maintaining the contribution as a percent of payroll level, in absolute dollars, the payments grow by 3 percent per year. This may be palatable when we are not expecting continuous experience losses. However, if our base unfunded liability payment is growing by 3 percent per year and we are hit with additional experience losses, it makes it more challenging to keep up with the growth of both the base payment as well as an experience loss in the budget each year. The benefit of a level payment plan, is that once it is accommodated by a balanced budget, we generally do not have to worry about it again except to the extent there are new losses. Since we are expecting new losses, it may serve the City well to work towards accommodating the additional up-front cash flow requirement of a level payment schedule. In addition to leveling out the budget challenge each year, the level payment plan is significantly more efficient in that it is 30-40 percent more cost effective. Therefore, staff also recommends that the City work towards amortizing its unfunded pension liability over a level payment amortization schedule. Combined with the recommendations in Alternative 1, the level payment alternative would initially cost $7.3 more than the default option, but save $143 million over 30 years with an approximate net present value of $68 million. It also further improves our amortization efficiency ratio . Again, the City would not become obligated to maintain this payment schedule and could revert to the minimum contribution required by the default schedule. See Schedule A - Alt 2 columns. Contribution/Rate Smoothing From a cash flow perspective, staff recommends using “Additional Discretionary Payments (ADP)” as opposed to the fresh start payment method. This will allow the City to contribute any desired amount above the minimum payment. The City’s actuary, credit rating agencies and staff believe that electing to pay the unfunded liability on a discretionary basis is the preferred method because the City preserves its budget flexibility in the event of an economic downturn. As an added benefit to embracing a payment schedule in excess of the required minimum contribution, the City, at its option, can graduate the actual payment down as necessary to meet its budgetary requirements. By maintaining the 2014 credit balance ($70 million and growing) with PERS, the City may use this credit at any time to reduce its required payment to CalPERS. Funding Staff proposes that the incremental cost of the first year could come from the Fiscal Year 2016-2017 operating surplus, per City Council Policy F-5 (General Fund Surplus Utilization) and future contributions could come from future anticipated revenue growth and future operating surpluses until the incremental cost can be fully absorbed into the operating budget. Prepared by: Submitted by: /s/ Steve Montano /s/ Dan Matusiewicz Steve Montano Dan Matusiewicz Deputy Finance Director Finance Director Attachment: A. Preliminary Funding Recommendations Schedule ATTACHMENT A Preliminary Funding Recommendations Schedule Sch. Val Pmt FYE FYE Alternative 2 - Level Pmt. Plan Pmt Over Pmt Over 2014 Base 2014 Credit 2015 Loss 2016 Loss Total 2014 Base 2014 Credit 2015 Loss 2016 Loss Total Default Default 1 2015 2018 26,500,897 (1,950,558) 406,782 24,957,121 26,500,897 (1,950,558) 2,183,731 3,177,327 29,911,398 (4,954,276) 32,204,184 (7,247,063) 2 2016 2019 27,295,924 (3,013,612) 837,971 636,258 25,756,541 27,295,924 (3,013,612) 2,249,243 3,272,647 29,804,202 (4,047,661) 32,204,184 (6,447,643) 3 2017 2020 28,114,802 (4,138,693) 1,294,665 1,310,691 26,581,464 28,114,802 (4,138,693) 2,316,721 3,370,827 29,663,655 (3,082,191) 32,204,184 (5,622,720) 4 2018 2021 28,958,246 (5,328,568) 1,778,007 2,025,017 27,432,702 28,958,246 (5,328,568) 2,386,222 3,471,951 29,487,851 (2,055,149) 32,204,184 (4,771,482) 5 2019 2022 29,826,993 (5,488,425) 2,289,184 2,781,024 29,408,776 29,826,993 (5,488,425) 2,457,809 3,576,110 30,372,487 (963,711) 32,204,184 (2,795,408) 6 2020 2023 30,721,803 (5,653,078) 2,357,860 3,580,568 31,007,153 30,721,803 (5,653,078) 2,531,543 3,683,393 31,283,661 (276,508) 32,204,184 (1,197,031) 7 2021 2024 31,643,457 (5,822,670) 2,428,596 3,687,985 31,937,368 31,643,457 (5,822,670) 2,607,489 3,793,895 32,222,171 (284,803) 32,204,184 (266,816) 8 2022 2025 32,592,761 (5,997,350) 2,501,453 3,798,625 32,895,489 32,592,761 (5,997,350) 2,685,714 3,907,712 33,188,836 (293,348) 32,204,184 691,305 9 2023 2026 33,570,543 (6,177,271) 2,576,497 3,912,584 33,882,354 33,570,543 (6,177,271) 2,766,285 4,024,943 34,184,501 (302,148) 32,204,184 1,678,169 10 2024 2027 34,577,660 (6,362,589) 2,653,792 4,029,961 34,898,824 34,577,660 (6,362,589) 2,849,274 4,145,691 35,210,037 (311,212) 32,204,184 2,694,640 11 2025 2028 35,614,989 (6,553,466) 2,733,406 4,150,860 35,945,789 35,614,989 (6,553,466) 2,934,752 4,270,062 36,266,338 (320,549) 32,204,184 3,741,605 12 2026 2029 36,683,439 (6,750,070) 2,815,408 4,275,386 37,024,163 36,683,439 (6,750,070) 3,022,795 4,398,164 37,354,328 (330,165) 32,204,184 4,819,978 13 2027 2030 37,783,942 (6,952,572) 2,899,870 4,403,647 38,134,887 37,783,942 (6,952,572) 3,113,479 4,530,109 38,474,958 (340,070) 32,204,184 5,930,703 14 2028 2031 38,917,461 (7,161,150) 2,986,866 4,535,757 39,278,934 38,917,461 (7,161,150) 3,206,883 4,666,012 39,629,206 (350,272) 32,204,184 7,074,750 15 2029 2032 40,084,984 (7,375,984) 3,076,472 4,671,830 40,457,302 40,084,984 (7,375,984) 3,303,090 4,805,993 40,818,082 (360,780) 32,204,184 8,253,118 16 2030 2033 41,287,534 (7,597,264) 3,168,766 4,811,984 41,671,021 41,287,534 (7,597,264) 3,402,182 4,950,172 42,042,625 (371,604) 32,204,184 9,466,837 17 2031 2034 42,526,160 (7,825,181) 3,263,829 4,956,344 42,921,152 42,526,160 (7,825,181) 3,504,248 5,098,678 43,303,904 (382,752) 32,204,184 10,716,968 18 2032 2035 (8,059,937) 3,361,744 5,105,034 406,842 (8,059,937) 3,609,375 5,251,638 801,076 (394,235) (8,059,937) 8,466,778 19 2033 2036 (8,301,735) 3,462,597 5,258,185 419,047 (8,301,735) 3,717,656 5,409,187 825,108 (406,062) (8,301,735) 8,720,782 20 2034 2037 (8,550,787) 3,566,474 5,415,931 431,618 (8,550,787) 3,829,186 5,571,463 849,862 (418,243) (8,550,787) 8,982,405 21 2035 2038 (8,807,311) 3,673,469 5,578,409 444,567 (8,807,311) - - (8,807,311) 9,251,877 (8,807,311) 9,251,877 22 2036 2039 (9,071,530) 3,783,673 5,745,761 457,904 (9,071,530) (9,071,530) 9,529,434 (9,071,530) 9,529,434 23 2037 2040 (9,343,676) 3,897,183 5,918,134 471,641 (9,343,676) (9,343,676) 9,815,317 (9,343,676) 9,815,317 24 2038 2041 (9,623,986) 4,014,098 6,095,678 485,790 (9,623,986) (9,623,986) 10,109,776 (9,623,986) 10,109,776 25 2039 2042 (9,912,706) 4,134,521 6,278,548 500,364 (9,912,706) (9,912,706) 10,413,070 (9,912,706) 10,413,070 26 2040 2043 (8,168,070) 4,258,557 6,466,905 2,557,392 (8,168,070) (8,168,070) 10,725,462 (8,168,070) 10,725,462 27 2041 2044 (6,309,834) 3,509,051 6,660,912 3,860,129 (6,309,834) (6,309,834) 10,169,963 (6,309,834) 10,169,963 28 2042 2045 (4,332,752) 2,710,742 5,488,591 3,866,581 (4,332,752) (4,332,752) 8,199,333 (4,332,752) 8,199,333 29 2043 2046 (2,231,368) 1,861,376 4,239,937 3,869,945 (2,231,368) (2,231,368) 6,101,313 (2,231,368) 6,101,313 30 2044 2047 958,609 2,911,423 3,870,032 - 3,870,032 - 3,870,032 31 1,499,383 1,499,383 - 1,499,383 1,499,383 Total Payments 597,332,274 527,893,055 454,757,441 30 Year Savings over default 69,439,219 142,574,833 PV savings over default 25,208,615 67,893,237 Amortization Efficiency Ratio (AER)189.6%167.6%144.3% Percent Interest Paid 47.3%40.3%30.7% Preliminary Funding Recommendations Default - Amortizing 2015 & 2016 Losses Over 30 Years Alternative 1 - Amortize 2015 & 2016 Losses Over 20 Yrs CITY OF NEWPORT BEACH FINANCE COMMITTEE STAFF REPORT Agenda Item No. 5B October 13, 2016 TO: HONORABLE CHAIR AND MEMBERS OF THE COMMITTEE FROM: Finance Department Dan Matusiewicz, Finance Director (949)644-3123 or danm@newportbeachca.gov SUBJECT: BUDGET AMENDMENTS EXECUTIVE SUMMARY The purpose of this memorandum is to report on the budget amendments for the last quarter of Fiscal Year 2015-2016 and for the first quarter of Fiscal Year 2016-2017. All budget amendments are in compliance with City Council Policy F-3, Budget Adoption and Administration. DISCUSSION The Finance Committee requested that staff provide a quarterly report of budget amendments. City Council Policy F-3, Budget Adoption and Administration, identifies how appropriations can be transferred, amended or reduced. Please find the list of budget amendments for the quarter ending June 30, 2016, as Attachment A and for the quarter ending September 30, 2016, as Attachment B. Prepared by: Submitted by: /s/ Susan Giangrande /s/ Dan Matusiewicz Susan Giangrande Dan Matusiewicz Budget Manager Finance Director Attachments: A.Budget Amendments Fiscal Year 2015-16 Quarter Ending June 30, 2016B.Budget Amendments Fiscal Year 2016-17 Quarter Ending September 30, 2016 ATTACHMENT A Budget Amendments Fiscal Year 2015-2016 Quarter Ending June 30, 2016 Date Amount Amendment Type Department Explanation04/12/16 266,732.19 Council Fire To purchase a rescue ambulance from the Equipment Fund. 05/10/16 161,000.00 Council Finance Funding for the contract with Turbo Data Systems for a parking permit and citation prcessing system. 05/10/16 1,169,000.00 Council Public Works To record Southern California Edison rebate revenues and expenditures for a streetlight LED retrofit project. 05/10/16 115,000.00 Council Public Works To appropriate funding for the initial work associated with Assessment Districts #114 and #114b. 05/24/16 116,380.00 Council Community Development To transfer funding for a professional services agreement to develop a revitalization master plan for Mariners' Mile. 05/24/16 593,000.00 Council Public Works To transfer funding to the Cameo Shores Pavement Reconstruction project. 06/14/16 308,504.40 Council Fire To record revenues and expenditures related to the City's participation in CalOptima, a County Organized Health System. 06/28/16 612,100.00 Council Public Works To increase expenditure appropriations for the Newport Heights Sewer Improvement project. 06/30/16 16,865.00 City Manager Finance To transfer appropriations between objects for the purchase of reporting software. 06/30/16 4,973.13 City Manager Fire To increase expenditure appropriations for the Community Emergency Response Team program funded by donations. City of Newport BeachBudget AmendmentsFiscal Year 2015-16 Quarter Ending June 30, 2016 ATTACHMENT B Budget Amendments Fiscal Year 2016-2017 Quarter Ending September 30, 2016 Date Amount Amendment Type Department Explanation 07/01/16 8,968.00 City Manager City Manager To transfer expenditure approprations to provide full funding for the FY 2016-17 Special Event Program. 07/05/16 1,500.00 City Manager Municipal Operations To increase revenue and expenditures for the purchase and installation of a bench funded by a donation. 07/12/16 48,191.00 Council Police To increase revenue and expenditures for ABC Grant.07/12/16 22,352.00 Council Recreaton & Sr Services To increase revenue for additional OCTA funding of OASIS transportation program. 07/12/16 125,320.00 City Manager Community Development To transfer expenditure approprations for the Balboa Village Façade Improvement Program from the CDBG Fund as the use of CDBG/Federal funds would have required business owners to pay prevailing wages. 07/26/16 255,000.00 Council Public Works To increase expenditure appropriations for funding of the City Radio Tower rehabilitation project. 07/26/16 800,000.00 Council Community Development To increase expenditure appropriations from the General Fund Affordable Housing Reserve to provide funding for the Seaview Lutheran Plaza Affordable Housing Grant. 08/09/16 250,000.00 Council Police To increase revenue and expenditures due to receipt of a State of California Office of Traffic Safety Grant to provide a Driving Under the Influence (DUI) Enforcement and Awareness Program, Traffic Safety Enforcement, and DUI Sobriety Checkpoints. 08/24/16 24,660.50 City Manager Library To transfer appropriations for Civic Center sculpture artist honorariums from Fiscal Year 2015-16 to Fiscal Year 2016-17. Contracts were not encumbered.09/08/16 3,200.00 City Manager Police To increase expenditure appropriations to provide additional funding for matron pay. City of Newport BeachBudget Amendments Fiscal Year 2016-17 Quarter Ending September 30, 2016 October 13, 2016, Finance Committee Agenda Comments These comments on items on the Newport Beach City Council Finance Committee agenda are submitted by: Jim Mosher ( jimmosher@yahoo.com ), 2210 Private Road, Newport Beach 92660 (949-548-6229) Item IV.A. MINUTES OF SEPTEMBER 15, 2016 Changes to the draft minutes passages shown in italics are suggested in strikeout underline format. Page 1, MOTION: “Committee Member Curry moved and Chair Petros Gorczyca seconded a motion to approve the May 12, 2016, Finance Committee Minutes, as amended.” [I assume the second was either by Chair Petros or Committee Member Gorczyca, rather than by “Chair Petros Gorczyca”] Page 3, paragraph 2, sentences 3 & 4: “She suggested keeping a second firm for a check and balance. She questions questioned the calculation of fees.” Page 3, paragraph before MOTION: “Committee Member Gorczyca questioned the recommendation that two advisors were not necessary until a portfolio exceeds $500 million portfolio, which is rare for a municipality.” Page 3, Item C, first full paragraph, sentence 4: “He stated the proposed strategy was to refine cash flow forecasts and to continue to ladder out maturities when there was an opportunity to beat LAIF [Local Agency Investment Fund] yields.” Page 5, paragraph 3 from end: “Committee Member Tucker stated it was a business persons person’s review of the City’s budgeting.” [or “ persons’ ” ?] Page 6, paragraph 2 from end, sentence 2: “She presented an article the as additional material, Item No. 5E2, by Malanga (2016) entitled, “Covering Up the Pension Crisis”.” Page 7, paragraph 1, last sentence: “She stated it was important to have the actuarial actuary on board.” Page 7, paragraph 2 before Item F: “City Manager Kiff stated the City was higher than necessary for the share of the pension cost.” [Was this meant to be “required” or “desirable”? Also, it’s unclear if this is referring to employer or employee share.] Page 7, Item F, first full paragraph, last sentence: “He stated all worked work was anticipated to be completed in February 2017.” Page 7, Item F, full paragraph 2: “In response to Mayor Dixon, Deputy Finance Director Montano explained that staff could continue with the current work order solution or develop a work around workaround within Tyler.” [or “work-around”] Page 8, signature annotation: “Tony Petros, Chair” [redundant since the following line is “Finance Committee Chair”. Alternatively: “Tony Petros, Chair … Finance Committee”] Item No. 4A1 Draft Minutes of September 15, 2016 Correspondence October 13, 2017 Pension & OPEB Primer Dan Matusiewicz, Finance Director City of Newport Beach Item No. 5A1 Preliminary Fiscal Year 2017-2018 Pension Funding Recommendation Staff Presentation October 13, 2016 Discussion roadmap •Review Terminology •Examination of Amortization Bases & Efficiency •Current Plan Status •Preliminary Staff Recommendations 2 Terminology •Normal Cost (NC) •Projected Benefits •Present Value of Projected Benefits (PVB) •Actuarial Accrued Liability (AAL) •Market Value of Assets (MVA) •Unfunded Actuarial Accrued Liability (UAAL ) •AAL-MVA = UAAL •Same as UAL, Unfunded Pension Liability •Gains/Losses vs. Change in Actuarial Assumptions •Amortization Schedules – 3 Primary Types 3 Terminology $- $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55Age (years) Interest Principal Actuarial Accrued Liability (AAL) at Age 49 Projected Benefit (Normal Cost) 7.5% Discount Rate Discount Rate Keeps Normal Cost Low – Perhaps Artificially Low Example 49 year old employee who started at age 25 4 Change in Assumption … additional “normal cost” contributions are needed to fund the predefined benefit If the discount rate decreases… $- $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 Age (years) Interest Principal $- $10,000 $20,000 $30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000 $100,000 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55 Age (years) Interest Additional Principal Principal 5 Change in Assumption $- $200,000 $400,000 $600,000 $800,000 $1,000,000 $1,200,000 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53 55Age Interest Principal Actuarial Accrued Liability (AAL) at Age 49 Projected Benefit (Normal Cost) 7.5% Discount Rate Change in Assumption changes the normal cost going forward And creates an unfunded liability for past service UAL Created *More Contributions required to make up for lower assumed investment earnings or other assumption change. 6 Examination Amortization Bases and Amortization Efficiency 7 $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Level Payment Amortization Amortization schedules $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Level % of Pay Amortization $- $1,000,000 $2,000,000 $3,000,000 $4,000,000 $5,000,000 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 Level % of Pay - 5Yr Phase-in (But can be simulated) 8 Other City Example 9 18 Yrs. 17 Yrs. 8 Yrs. 1 Yr Least Cost Effective Most Cost Effective 10 Example balance comparison NPV Savings $21 Million 10 Yrs. Sooner Negative amortization 11 Example payment comparison Yr 5 difference - $386K Yr 20 max difference - $600K Avg annual difference - $486K 12 Amortization Efficiency 13 City UAL Balance Total Payments AER* Interest as % of Principal Interest as % of Total Payments Newport Beach $ 272,977,868 $ 467,100,918 171% 71% 42% Irvine $ 115,178,121 $ 211,629,106 184% 84% 46% Anaheim $ 609,881,577 $ 1,303,628,563 214% 114% 53% Long Beach $ 963,327,181 $ 2,126,017,847 221% 121% 55% Santa Ana $ 527,005,976 $ 1,167,087,776 221% 121% 55% Costa Mesa $ 255,359,653 $ 566,799,114 222% 122% 55% Huntington Beach $ 359,407,114 $ 810,431,873 225% 125% 56% Amortization Efficiency Comparison *Amortization Efficiency Ratio (AER) 14 Newport’s Amortization Bases Minimum Level Level Level Balance Contribution % of pay % of pay Pmt Reason For Base Date Established Yrs 6/30/2015 6/30/2016 6/30/2017 2017-18 30 20 20 MISCELLANEOUS Forced Fresh Start Old Method 6/30/2013 17 117,227,554 118,054,038 118,168,306 9,927,464 9,927,464 17 9,927,464 12,080,996 2014 Investment Gain 6/30/2014 29 (26,269,946) (28,041,895) (29,736,104) (812,484) (812,484) 29 (812,484) (812,484) 2015 Investment Loss 6/30/2015 30 10,245,755 10,864,793 11,521,602 162,052 691,878 20 869,943 940,902 101,203,363 100,876,936 99,953,804 9,277,032 9,806,858 9,984,923 12,209,415 PUBLIC SAFETY Forced Fresh Start Old Method 6/30/2013 17 196,292,155 197,350,177 197,276,421 16,573,433 $16,573,433 17 16,573,433 20,168,655 2014 Investment Gain 6/30/2014 29 (36,371,839) (39,279,139) (41,652,269) (1,138,073) (1,138,073) 29 (1,138,073) (1,138,073) 2015 Investment Loss 6/30/2015 30 14,550,267 15,949,122 17,399,912 244,730 $1,044,874 20 1,313,788 $1,420,950 174,470,583 174,020,160 173,024,064 15,680,090 16,480,234 16,749,148 20,451,531 TOTAL Forced Fresh Start Old Method 6/30/2013 17 313,519,709 315,404,215 315,444,727 26,500,897 $26,500,897 17 26,500,897 32,249,651 2014 Investment Gain 6/30/2014 29 (62,641,785) (67,321,034) (71,388,373) (1,950,557) (1,950,557) 29 (1,950,557) (1,950,557) 2015 Investment Loss 6/30/2015 30 24,796,022 26,813,915 28,921,514 406,782 $1,736,752 20 2,183,731 2,361,852 275,673,946 274,897,096 272,977,868 24,957,122 26,287,092 26,734,071 32,660,946 Per Actuarial Valuations Illustrative Payment Diff AER 190% Interest 47% 15 Pension Plan Status 16 Census Data 17 Participant Data as of June 30, 2015 Misc Safety Total Active Members a) Counts 510 269 779 b) Average Attained Age 44.56 38.84 42.58 c) Average Entry Age to Rate Plan 32.18 27.48 30.56 d) Average Years of Service 12.38 11.36 12.03 e) Actuarial Accrued Liability $138,520,667 $117,569,806 $256,090,473 Transferred Members a) Counts 240 46 286 b) Average Attained Age 43.80 43.00 43.67 d) Average Years of Service 2.78 3.59 2.91 e) Actuarial Accrued Liability $12,960,386 $5,643,677 $18,604,063 Terminated Members a) Counts 296 40 336 b) Average Attained Age 44.12 43.61 44.06 d) Average Years of Service 2.96 3.74 3.05 e) Actuarial Accrued Liability $8,245,782 $3,237,248 $11,483,030 Retired Members and Beneficiaries a) Counts 605 424 1029 b) Average Attained Age 68.56 65.07 67.12 e) Average Annual Benefits $26,963 $63,407 $41,980 e) Actuarial Accrued Liability $196,662,277 $365,503,106 $562,165,383 PEPRA Employees 102 Misc. PEPRA employees, or 12.3% of all Misc. PERS employees. Formula: 2% @ 62 Employer Normal Cost: 5.5% vs. Classic Member 8.242% 22 Safety PEPRA employees, or 2.7% of all Safety PERS employees. Formula: 2.7% @ 57 Employer Normal Cost: 10.5% vs. Classic Member 17.913% 18 UAL Status 30% 70% UAL Attribution Active Members Separated Miscellaneous Public Safety Total Accrued Liability $356,419,112 $491,953,837 $848,372,949 Less Market Value of Assets (MVA) $255,215,749 $317,483,254 $572,699,003 Unfunded Liability $101,203,363 $174,470,583 $275,673,946 Funded Ratio (MVA/Accrued Liability) 71.6% 64.5% 67.5% 19 What’s the problem? Assets are currently underfunded and volatile. Liabilities are large relative to agency payrolls and budget. Projected 2016 Current Projection Accrued Pension Liability $891 million Market Value of Assets $576 million Unfunded Liability $315 million x 7.5% = $23.6 million just to keep up with the interest Funded Status 65% What if Fully Funded? Accrued Pension Liability $891 million ÷ $71.9 million = 12 times greater than expected payroll Market Value of Assets $891 million Expected asset volatility +/- ~12% = $107 million Unfunded Liability – Funded Status 100% 20 New Experience Losses 2015 & 2016 Investment Experience Losses Valuation Year Contribution FY Year Expected Return Actual Return Experience Loss MVA Experience Loss Two Year Interest Accumulation 2015 2017-18 7.5% 2.4% 5.1% 567,303,448 28,932,476 33,435,092 2016 2018-19 7.5% 0.6% 6.9% 572,699,003 39,516,231 45,665,945 68,448,707 79,101,037 21 Projected 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Accrued Pension Liability $501 $553 $617 $652 $693 $727 $755 $820 $848 $891 Market Value of Assets $499 $472 $354 $395 $467 $452 $497 $567 $573 $576 Unfunded Liability at Market Value $2 $82 $263 $257 $226 $275 $258 $253 $276 $315 CalPERS Rate of Investment Return 18.8%-2.9%-23.6%11.1%20.7%1.0%12.5%18.4%2.4%0.6% $(100) $- $100 $200 $300 $400 $500 $600 $700 $800 $900 $1,000 Mi l l i o n s Projected $315 What’s on the Horizon? •Risk Mitigation Strategy Adopted Nov 2015 – Expected to impact employers when investment returns exceed 4% of current discount rate •New Experience Study – 6/30/17 Val. •Strategic Asset Allocation Study – 6/30/17 Val. •State pressure to lower discount rate sooner rather than later 23 Potential Impact of Lowering Discount Rate to 6.5% MISCELLANEOUS SAFETY Total 7.5% Discount Rate 6.5% Discount Rate 7.5% Discount Rate 6.5% Discount Rate 7.5% Discount Rate 6.5% Discount Rate Plan's Total Normal Cost 16.016% 20.194% 26.966% 33.974% 20.748% 26.149% Accrued Liability 356,419,112 404,545,471 491,953,837 555,768,319 848,372,949 960,313,790 Market value of Assets 255,215,749 255,215,749 317,483,254 317,483,254 572,699,003 572,699,003 Unfunded Accrued Liability 101,203,363 149,329,722 174,470,583 238,285,065 275,673,946 387,614,787 Total Normal Cost 6,916,411 8,720,655 8,861,465 11,164,408 15,777,876 19,885,062 Estimated Increase in Normal Cost 1,804,244 2,302,943 4,107,186 Estimated Increase in UAL Payment* 3,348,599 4,440,167 7,788,766 Estimate Increase in UAL 48,126,359 63,814,482 111,940,841 *State Proposal - 20 Yr Amortization, 6.5%, Level-%-of-Pay ** CalPERS Proposal - Flexible Glide Path 24 Retiree Insurance OPEB Plan Staus 25 Demographics 21% 79% UAAL Attribution Actives Retirees Miscellaneous Safety Total No. of Active Employees 508 270 778 Average Age 44.6 39.0 42.7 Average Past Service 12.3 11.7 12.1 No. of Retired Employees* 302 262 564 Average Age 68.4 64.9 66.8 Average Retirement Age 57.5 51.3 54.7 *Counts exclude 103 retirees waiving coverage and not receiving any City Contribution 26 OPEB Status 7.0% Assumed Discount Rate 6/30/2015 Projected 6/30/2016 Remaining Years Actuarial Accrued Liability (AAL) 42,638,555 42,737,245 Less: Actuarial Value of Assets 14,890,926 16,695,850 Unfunded AAL 27,747,629 26,041,395 11 Funded Status 35% 39% Actuarial Determined Contribution (ADC) 2016-17 2017-18 3,582,661 3,827,337 6.5% Assumed Discount Rate 6/30/2015 6/30/2016 Remaining Years Actuarial Accrued Liability (AAL) 44,606,004 44,692,159 Less: Actuarial Value of Assets 14,890,926 16,131,814 Unfunded AAL 29,715,078 28,560,345 11 Funded Status 33% 36% Annual Required Contribution (ADC) 2016-17 2017-18 3,791,887 3,909,640 27 What to do? 28 Already Doing •Fewer Employees through attrition, layoffs, contracting and efficiency •Lower Benefit Tiers •Substantial increase in employee contributions •Aggressive UAL payment schedule •Other…. 29 Preliminary Staff Recommendations 1)Start paying on 2016 experience in 2017-18 or sooner 2)Amortize 2015 & 2016 Experience Losses no longer than 20 Years 3)Make discretionary payments to preserve budget flexibility 4)Leave 2014 Experience Gain ($71 million credit) as a rainy day fund 5)Incorporate a level payment on UAL into the 2017/18 budget 6)Consider the creation of a Pension & OPEB Funding Policy 30 Sch. Val Pmt FYE FYE Pmt Over Pmt Over 2014 Base 2014 Credit 2015 Loss 2016 Loss Total 2014 Base 2014 Credit 2015 Loss 2016 Loss Total Default Default 2015 2018 26,500,897 -1,950,558 406,782 24,957,121 26,500,897 -1,950,558 2,183,731 3,177,327 29,911,398 -4,954,276 32,204,184 -7,247,063 2016 2019 27,295,924 -3,013,612 837,971 636,258 25,756,541 27,295,924 -3,013,612 2,249,243 3,272,647 29,804,202 -4,047,661 32,204,184 -6,447,643 2017 2020 28,114,802 -4,138,693 1,294,665 1,310,691 26,581,464 28,114,802 -4,138,693 2,316,721 3,370,827 29,663,655 -3,082,191 32,204,184 -5,622,720 2018 2021 28,958,246 -5,328,568 1,778,007 2,025,017 27,432,702 28,958,246 -5,328,568 2,386,222 3,471,951 29,487,851 -2,055,149 32,204,184 -4,771,482 2019 2022 29,826,993 -5,488,425 2,289,184 2,781,024 29,408,776 29,826,993 -5,488,425 2,457,809 3,576,110 30,372,487 -963,711 32,204,184 -2,795,408 2020 2023 30,721,803 -5,653,078 2,357,860 3,580,568 31,007,153 30,721,803 -5,653,078 2,531,543 3,683,393 31,283,661 -276,508 32,204,184 -1,197,031 2021 2024 31,643,457 -5,822,670 2,428,596 3,687,985 31,937,368 31,643,457 -5,822,670 2,607,489 3,793,895 32,222,171 -284,803 32,204,184 -266,816 2022 2025 32,592,761 -5,997,350 2,501,453 3,798,625 32,895,489 32,592,761 -5,997,350 2,685,714 3,907,712 33,188,836 -293,348 32,204,184 691,305 2023 2026 33,570,543 -6,177,271 2,576,497 3,912,584 33,882,354 33,570,543 -6,177,271 2,766,285 4,024,943 34,184,501 -302,148 32,204,184 1,678,169 2024 2027 34,577,660 -6,362,589 2,653,792 4,029,961 34,898,824 34,577,660 -6,362,589 2,849,274 4,145,691 35,210,037 -311,212 32,204,184 2,694,640 2025 2028 35,614,989 -6,553,466 2,733,406 4,150,860 35,945,789 35,614,989 -6,553,466 2,934,752 4,270,062 36,266,338 -320,549 32,204,184 3,741,605 2026 2029 36,683,439 -6,750,070 2,815,408 4,275,386 37,024,163 36,683,439 -6,750,070 3,022,795 4,398,164 37,354,328 -330,165 32,204,184 4,819,978 2027 2030 37,783,942 -6,952,572 2,899,870 4,403,647 38,134,887 37,783,942 -6,952,572 3,113,479 4,530,109 38,474,958 -340,070 32,204,184 5,930,703 2028 2031 38,917,461 -7,161,150 2,986,866 4,535,757 39,278,934 38,917,461 -7,161,150 3,206,883 4,666,012 39,629,206 -350,272 32,204,184 7,074,750 2029 2032 40,084,984 -7,375,984 3,076,472 4,671,830 40,457,302 40,084,984 -7,375,984 3,303,090 4,805,993 40,818,082 -360,780 32,204,184 8,253,118 2030 2033 41,287,534 -7,597,264 3,168,766 4,811,984 41,671,021 41,287,534 -7,597,264 3,402,182 4,950,172 42,042,625 -371,604 32,204,184 9,466,837 2031 2034 42,526,160 -7,825,181 3,263,829 4,956,344 42,921,152 42,526,160 -7,825,181 3,504,248 5,098,678 43,303,904 -382,752 32,204,184 10,716,968 2032 2035 -8,059,937 3,361,744 5,105,034 406,842 -8,059,937 3,609,375 5,251,638 801,076 -394,235 -8,059,937 8,466,778 2033 2036 -8,301,735 3,462,597 5,258,185 419,047 -8,301,735 3,717,656 5,409,187 825,108 -406,062 -8,301,735 8,720,782 2034 2037 -8,550,787 3,566,474 5,415,931 431,618 -8,550,787 3,829,186 5,571,463 849,862 -418,243 -8,550,787 8,982,405 2035 2038 -8,807,311 3,673,469 5,578,409 444,567 -8,807,311 - - -8,807,311 9,251,877 -8,807,311 9,251,877 2036 2039 -9,071,530 3,783,673 5,745,761 457,904 -9,071,530 -9,071,530 9,529,434 -9,071,530 9,529,434 2037 2040 -9,343,676 3,897,183 5,918,134 471,641 -9,343,676 -9,343,676 9,815,317 -9,343,676 9,815,317 2038 2041 -9,623,986 4,014,098 6,095,678 485,790 -9,623,986 -9,623,986 10,109,776 -9,623,986 10,109,776 2039 2042 -9,912,706 4,134,521 6,278,548 500,364 -9,912,706 -9,912,706 10,413,070 -9,912,706 10,413,070 2040 2043 -8,168,070 4,258,557 6,466,905 2,557,392 -8,168,070 -8,168,070 10,725,462 -8,168,070 10,725,462 2041 2044 -6,309,834 3,509,051 6,660,912 3,860,129 -6,309,834 -6,309,834 10,169,963 -6,309,834 10,169,963 2042 2045 -4,332,752 2,710,742 5,488,591 3,866,581 -4,332,752 -4,332,752 8,199,333 -4,332,752 8,199,333 2043 2046 -2,231,368 1,861,376 4,239,937 3,869,945 -2,231,368 -2,231,368 6,101,313 -2,231,368 6,101,313 2044 2047 958,609 2,911,423 3,870,032 - 3,870,032 - 3,870,032 1,499,383 1,499,383 - 1,499,383 1,499,383 597,332,274 527,893,055 69,439,219 454,757,441 142,574,833 25,208,615 67,893,237 189.60%167.60%144.30% 47.30%40.30%30.70% Amortization Efficiency Ratio (AER) Preliminary Funding Recommendations Default - Amortizing 2015 & 2016 Losses Over 30 Years Alternative 1 - Amortize 2015 & 2016 Losses Over 20 Yrs Alternative 2 - Level Pmt. Plan Total Payments PV savings over default 31 UAL Balance Comparison (100,000,000) (50,000,000) - 50,000,000 100,000,000 150,000,000 200,000,000 250,000,000 300,000,000 350,000,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Default Alt - 1 Alt - 2 UAL Bal 30+ Yrs UAL Bal 17 Yrs and $40 million credit UAL Bal 17 Yrs and $68 million credit 32 Payment Comparisons (20,000,000) (10,000,000) - 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 Default Alt 1 Alt 2 NPV$454 M AER 144% 31% Interest NPV $528 M AER 168% 40% Interest NPV $598 M AER 190% 47% Interest 33 Memorialize policies •Contribute no less then 100% of actuarially determined contribution (ADC) annually •Target funding at 100% of Actuarial Accrued Liability •Analyze schedule of amortization bases each and every year •Amortize ALL gains/losses no longer than a 20 year, closed period •Rate smoothing phase-in no longer than five years, zero if possible •Establish a rate smoothing reserve or strategy to avoid phase-in periods and provide economic relief during recessionary cycles •Dedicate a portion of surplus funds to accelerate payment on unfunded liabilities [GOOD STATEMENT] [DOING] [DOING] [RECOMMENDED/DOING] [DOING] [DISCUSSION/INPUT] [DONE] 34 Further Questions? Dan Matusiewicz, Finance Director City of Newport Beach danm@newportbeachca.gov 949.644.3126 35