HomeMy WebLinkAboutStaff Report 4.B 02/05/2018A.
DATE:
TO:
FROM:
SUBJECT:
Agenda Item #4.B
February 5, 2018
Honorable Mayor and Members of the City Council through City Manager
Corey Garberolio, Acting Finance Director 0 X /
Resolution Authorizing Interfund Loans from the Wastewater Utility, Water
Utility and Risk Internal Service Funds, in an Aggregate Amount Not to Exceed,
$6,750,330, to Pay Down a Portion of the City's Ca1PERS Unfunded Liability.
RECOMMENDATION
It is recommended that the City Council Adopt a Resolution Authorizing Interfund Loans from
the Wastewater Utility, Water Utility and Risk Internal Service Funds, in an Aggregate Amount
Not to Exceed $6,750, 330, to Pay Down a Portion of the City's Ca1PERS Unfunded Liability.
BACKGROUND
John Bartel of Bartel and Associates is recognized statewide as an expert on public pensions.
Over the past two years, Mr. Bartel has addressed the City Council several times regarding the
City's Ca1PERS pension liability. The presentations highlighted how the current pension
situation evolved, what the City has done to address it, what the projections are for future
pension cost increases, and alternatives for reducing PERS liability going forward.
There are several reasons why cities are in the current pension dilemma:
CaIPERS investment losses. Ca1PERS has traditionally assumed an annual rate of
return of 7.5% on investments. During 2008 and 2009, investment losses were 5.1%
and 24% respectively.
2. CaIPERS Contribution Policy. Ca1PERS has historically not required agencies to
contribute the full cost of the plan. This has led to underfunding of the plan.
3. Demographics - Large retiree liability compared to active employee enrollment.
Declining active population and increased retirees leading to larger payments from the
plan compared to active contributions to the plan.
The City has taken steps over the years to reduce the impact of increasing PERS contribution
rates. The City has offered benefits that are reasonable but not considered excessive, has paid
only the employer portion of the contribution rate (requiring employees to pay the employee
portion of the contribution rate), implemented a "second tier" in 2012 with lesser benefits than
the first tier, and most recently negotiated increased employee contribution rates. The City
Council has also granted compensation increases that are not "Pecs- able ". All of these steps
factor into limiting the City's PERS liability and its exposure to rate increases.
Beginning on June 30, 2016, the City's PERS rates for both the Safety and Miscellaneous plans
are projected to increase over the next 14 years. The reasons for this increase are discussed
above. The PERS rate for the Miscellaneous plan is currently 19.8% and is expected to increase
to 29.5% by 2031. This represents an annual increase of approximately $350,000. The PERS
rate for the Safety plan is currently 49.4% and is expected to increase to 75.2% by 2031, an
increase of approximately $850,000 annually. Total combined increases for both Safety and
Miscellaneous plans are estimated to be approximately $1.2 million annually for the next 14
years.
DISCUSSION
On December 18, 2017, Mr. Bartel presented options to the City Council for paying down the
PERS unfunded liability. In addition to the presentation, Bartel also provided detailed analysis of
the options to enable staff to analyze and provide a recommendation based on the scenario that
provides maximum savings during the time period of rising PERS costs.
After thorough analysis of all payment options, interfund borrowing and applying the funds to
specific amortizations to pay down the unfunded liability is the most beneficial and provides the
greatest overall savings. The maximized savings are expected to lessen the burden on the budget
for the period between FY 2018/19 through 2030/31, the period during which PERS costs are
expected to escalate. This option would also allow for lower rates than external borrowing and
would pay the lending funds more than they currently earn as part of the City's pooled
investments.
A total borrowing of $6,750,330 is proposed from the funds listed below to the Employee
Benefits Fund, which would be used to pay down the City's unfunded pension liability, focusing
payments on specific obligations. Those obligations were selected for the effect of the
retirement of that debt on the City's PERS rates going forward, and to fit within the funds on
hand which can prudently be used for this purpose. These are highlighted in Attachment 2, the
City's current Ca1PERS obligations schedule. Loans from the following funds are proposed:
Wastewater Utility $4,050,198
Water Utility $1,350,066
Risk Fund $1,350,066
These funds have the most sufficient revenue and reserves to fund planned projects, and still
have capacity to support the recommended loan. Estimated balances in these funds as of June
30, 2018 are $24.3 million Wastewater Utility Fund, $6.9 million in the Water Utility fund, and
$4.2 million in the Risk Internal Service Fund. The interfund loan amount of $6,750,330 will be
paid directly to PERS during FY 2017/18 to pay down the amortizations highlighted on
Attachment 2. In addition to interfund loan sources, one amortization is proposed to be paid
down using reserves accumulated in the Employee Benefit fund, which were originally intended
2
for Other Post - Employment Benefits (OPEB). A total of $739,954 in funds required for the
recommended transaction will come from this source. Appropriations to implement the loan will
be included with the mid -year budget adjustments going to Council this month. Pay -downs will
be included in the updated actuarial calculation and be reflected in the contribution rates
beginning in FY 2018/19.
In July, 2009 the City adopted an amended Interfund Loan Policy. Both short term and long
term loans are covered in the policy. In order to put a loan into place, a formal loan agreement,
in the form of a promissory note, between the funds which contains terms for repaying the loan
with interest, must be approved by Council. These loans will be reported annually in the
Comprehensive Annual Financial Report.
FINANCIAL IMPACTS
The total amount of obligations being paid down is $7,490,284. The pay down funding is derived
from the proposed loan of $6,750,330 as well as reserves accumulated in the Employee Benefit
Fund of $739,954. The proposed loan is structured to provide $6,750,330 for the payoff of
certain PERS amortizations, with annual debt service payments of approximately $534,926, to
the Wastewater, Water and Risk Funds, over a 15 -year period, at an interest rate of 1.75 %. This
interest rate is 0.30% more than the fund would have earned over the past 12 years by investing
in the City's pooled account, and is significantly more than the rate the portfolio is currently
earning. The interest rate paid is also significantly less than the rate that would be paid should the
City do an external borrowing. That external rate is currently in the 4.25% to 4.5% range.
Estimated savings in PERS costs as a result of this borrowing to pay down the unfunded PERS
liability is approximately $2,494,000 over the life of the loan. An additional savings of $409,000
will be realized from the amortization pay -down using Employee Benefit fund reserves. Total
savings will be $2,903,000, an estimated annual savings of approximately $204,624.
ATTACHMENT
1. Resolution
2. Schedule of PERS Obligations
3
ATTACHMENT 1
RESOLUTION AUTHORIZING THE ESTABLISHMENT OF INTERFUND LOANS
FROM THE WASTEWATER UTILITY, WATER UTILITY AND RISK INTERNAL
SERVICE FUNDS TO THE EMPLOYEE BENEFIT FUND, IN AN AGGREGATE
AMOUNT NOT TO EXCEED $6,750,330 FOR THE PAY DOWN OF THE PERS
UNFUNDED LIABILITY
WHEREAS, the City Council desires to pay down the PERS unfunded liability for the
purpose of generating PERS savings for both the Miscellaneous and Safety Ca1PERS plans; and
WHEREAS, adequate funding does not currently exist in the Employee Benefit Fund
for the pay down of the PERS unfunded liability; -and
WHEREAS, it is the policy of the City Council that interfund loans greater than one
year may be approved, provided that such loans are repaid in fifteen (15) years or less, and that
interest should be paid on such loans; and
NOW, THEREFORE, BE IT RESOLVED that the City Council hereby approves
interfund loans from the Wastewater Utility, Water Utility and Risk Internal Service Fund to the
Employee Benefit Fund.
1. The interfand loans shall be formalized pursuant to a Promissory Note, attached
and incorporated herein as Exhibit A.
2. The loan amounts shall not exceed the following unless authorized by the City
Council:
Wastewater Utility $4,050,198
Water Utility $1,350,066
Risk Fund $1,350,066
3. Interest shall be charged at the rate of 1.75% per annum, and shall accrue annually.
4. The first loan payment, including interest, shall be made during FY 18 -19, and
every year thereafter, in 15 equal installments, such that the entire principal and
interest shall be repaid on or before June 30, 2033, unless extended by the City
Council.
5. Payment of the full amount of principal advanced and any interest otherwise
unpaid shall be made no later than June 30, 2033, unless extended by the City.
Council.
6. The City Manager and Finance Director /City Treasurer are hereby authorized to
execute the Promissory Note and any associated documents that may be
subsequently needed.
S
EXHIBIT A
CITY OF PETALUMA, CA
PROMISSORY NOTE FOR INTERFUND LOAN
This Promissory Note (Note) for an interfund loan is executed as of February 5, 2018 by the City
Treasurer of the City of Petaluma, acting as custodian of the funds of the City of Petaluma, and
the City Manager of the City, acting for the City Council in implementation of the directives and
authority of Resolution Number 2018- , adopted on February 5, 2018.
1. The Treasurer shall transfer to the Employee Benefit Fund, from the Wastewater
Enterprise Fund, $4,050,198; Water Enterprise Fund, $1,350,066; and the Risk
Internal Service Fund, $1,350,066 for the pay down of the PERS unfunded liability.
2. Interest shall accrue annually, compounding monthly, beginning March 1, 2018, on the
principal sum at the rate of 1.75 % per annum.
3. Payment of principal and all interest accrued shall begin on June 30, 2019, and shall be
made in 15 equal annual installments such that the entire principal and accrued
interest shall be fully repaid on or before June 30, 2033.
4. The full sum of the interfund loan including all principal and interest otherwise
remaining unpaid ,pursuant to this Promissory Note is due and payable no later than
June 30, 2033. The full sum or any partial payment of principal may be prepaid with
no penalty.
5. This Note is subject to the terms of the City of Petaluma Resolution Number 2018-
Executed as of the date first above written
CITY OF PETALUMA, CA
By:
City Treasurer
City Manager
Approved as to form this day of , 2018.
City Attorney
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