For City Council Meeting [August 14, 2018]
TO: Honorable Mayor and City Council
APPROVAL: Ahmad R. Ansari, Interim City Administrator
FROM: Robb R. Steel, Assistant CA/Development Services Director
Title
Request City Council to Establish an Ad Hoc Committee for the Purpose of Developing Implementation Strategy regarding the City’s Unfunded Pension and Other Post-Employment Benefit (OPEB) Liabilities and to Review and Recommend Potential Revisions to the Reserve Policy.
(ACTION)
Body
BACKGROUND:
On July 24, 2017, the City Council received several presentations related to the City’s budgetary challenges. Like many other cities in California, the growing obligations related to employee retirements present a significant financial burden of the City. According to one state report, Rialto had the highest pension burden of any city in San Bernardino County and the 13th highest in the State (pension payments as a % of payroll). According to Bartel & Associates, the City’s annual payments to CalPERS will grow from $11.4 million in FY18 to $24.9 million in FY29, an increase of $13.5 million. This averages out to a $1 million increase each year for the next 11 years, consuming 25% or more of the City’s projected revenue growth.
Employer contribution rates will increase from 35% of payroll to 50% of payroll for miscellaneous employees and from 50% to 80% of payroll for safety employees. Pension payments alone will grow from 16% of general fund revenues to 22% of general fund revenues, crowding out other essential services. The City’s last reported unfunded pension liability is $126 million, and the OPEB liability adds another $25 million in unfunded obligations for total debt to the employees of $151 million. The City’s pension obligations are currently 67% funded and its retiree medical care obligations are 37% funded. Experts in the field deem 80% funded as the minimally acceptable recommended funding level at any given point and time, and the City would need to contribute $50 million today to reach that target for pensions and $17 million for OPEB - a daunting challenge.
Over the last year, the City Council has asked staff to provide advice regarding the proper level of General Fund Reserves. The City Council adopted policy set a target General Fund Reserve requirement of 50% of operating expenditures. The Budget Advisory Committee considered this question and provided a recommendation to the City Council. The Interim Finance Director prepared a revised Reserve Policy for City Council consideration to modernize the policy. The reserves may be part of the solution for the unfunded liabilities; consequently, the City Council should concurrently consider both topics.
ANALYSIS/DISCUSSION:
During the Budget Advisory Committee process, City staff and consultants prepared various background reports and recommendations regarding the City’s post-employment obligations and burdens. The Budget Advisory Committee provided recommendations for City Council consideration, including budgetary and borrowing solutions. Budgetary solutions require some combination of new revenues or expenditure efficiencies to create funding for accelerating retirement of the debt. Borrowing solutions require issuance of debt at a lower rate than the cost of the current PERS program, creating annual cashflow savings (which the City could then use to accelerate debt repayment).
At this stage, staff believes it is appropriate to engage a select group of City Council members to review the various reports and recommendations to formulate a specific strategy for implementation. The solutions carry varying degrees of risk and reward, and most inflict some level of budgetary discomfort. The Committee would receive support from the City Treasurer, City Attorney, City Administrator, Assistant City Administrator, Human Resources Director, Finance Manager (and/or Director), and necessary consultants (Bartel & Associates for instance).
Scope of Duties
The scope of duties would include:
1. To the extent required, review the City’s actuarial reports for pensions and retiree medical care to establish the City’s post-employment retirement obligations.
2. Review the reports and recommendations submitted by the Budget Advisory Committee on topic.
3. Consider presentations from selected speakers addressing the current and projected funding status, and potential solutions.
4. Evaluate the strategies deployed by other communities in California confronting similar challenges.
5. Explore budgetary and borrowing options and input alternatives into City’s 10-Year Financial Model (and possibility other software programs such as GovInvest) to determine consequences of various actions to improve funding ratios.
6. Recommend specific actions for consideration by the City Council, as amendments to FY19 Budget or for future budgetary consideration.
7. Evaluate proposed revisions to the Reserve Policy for consideration by the City Council, including the targeted reserve requirement, the methodology for computing the annual reserve requirement, and other modernizations.
Under the Brown Act, a temporary advisory committee composed solely of less than a quorum of the legislative body that serves a limited or single purpose, that is not perpetual, and that will be dissolved once its specific task is completed is not subject to the Brown Act. This Ad Hoc Committee would meet this definition, with an anticipated term of less than 90 days to complete its work. Consequently, the City Council may choose to exempt the Ad Hoc Committee from the Brown Act requirements; however, staff does not anticipate any privileged subject matter that requires protected meetings and therefore suggests that the meetings be open and public.
ENVIRONMENTAL IMPACT:
The establishment of the Ad Hoc Committee is an administrative action of the legislative body and is not defined as a project. The proposed action is therefore exempt from California Environmental Quality Act (CEQA). CEQA does not apply to projects for which “it can be seen with certainty that there is no possibility that the activity in question may have a significant impact upon the environment” (Section 15061(b)(3) of the CEQA Guidelines).
GENERAL PLAN CONSISTENCY:
This action is consistent with Guiding Principle 3A in the General Plan:
Our City government will lead by example, and will operate in an open, transparent and responsive manner that meets the needs of the citizens and is a good place to do business.
LEGAL REVIEW:
The City Attorney reviewed and approved this staff report and the resolution.
FINANCIAL IMPACT:
Operating Budget Impact
The scope of work may require a nominal amount of expenditures to professional services, such as the City Attorney, the Bartel & Associates consultant, and others. These costs should not exceed $15,000. If incurred, the Bartel Costs will be paid out of General Fund Account No. 010-500-1148-2011 (City Administration Contract Services) and the City Attorney’s costs from Account No. 010-500-2150-2010 (Finance Legal Services). If other costs are incurred, staff will return for City Council action as appropriate.
Capital Improvement Budget Impact
No capital improvement budget impact.
Licensing
There is no licensing requirement directly associated with this request. Any vendors the City may engage as part of this assignment would purchase a business license.
RECOMMENDATION:
Staff recommends that the City Council establish an Ad Hoc Committee for the Purpose of Developing Implementation Strategy regarding the City’s Unfunded Pension and OPEB Liabilities.