Wednesday, June 7, 2023
5:30 PM
CITY OF HAYWARD
Hayward City Hall
777 B Street
Hayward, CA 94541
www.Hayward-CA.gov
Conference Room 2A & Zoom Platform
Council Budget and Finance Committee
Agenda
June 7, 2023Council Budget and Finance
Committee
Agenda
NOTICE: The Council Budget and Finance Committee will hold a hybrid meeting in Conference Room 2A and virtually via Zoom.
Public Participation
How to submit written Public Comment:
Send an email to [email protected] by 2:00 p.m. the day of the meeting. Please identify the Agenda Item Number in the subject line of your email. Emails will be compiled into one file, distributed to the Council Budget and Finance Committee and City staff, and published on the City's Meeting & Agenda Center under Documents Received After Published Agenda. https://hayward.legistar.com/Calendar.aspx When submitting written comments, indicate in the email if you want your comment read into the record.
Requests will be allowed provided the reading will not exceed three (3) minutes consistent with the time limit for speakers at Council Committee meetings. Email comments will become part of the record of Council Committee meetings.The Chair can limit the time for reading written comments.
Please click the link below to join the webinar:
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Password: Budget@607
Or join by phone:
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Meeting ID: 844 1819 6677
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CALL TO ORDER
ROLL CALL
PUBLIC COMMENTS:
Limited Only to Items on the Agenda and Submitted in Writing Prior to the Meeting.
MINUTES
Review and Approve the Council Budget and Finance
Committee May 3, 2023, Meeting Minutes
MIN 23-0671
Attachments: Attachment I Minutes
REPORTS/ACTION ITEMS
2 FY 2024 Budget Review (Oral Presentation)
June 7, 2023Council Budget and Finance
Committee
Agenda
Annual Review of City Issued DebtRPT 23-0523
Attachments: Attachment I Staff Report
Attachment II City Debt Summary
Review and Comment on the Annual City Benefit Liabilities and Funding Plan
RPT 23-0514
Attachments: Attachment I Staff Report
FUTURE AGENDA ITEMS
Review and Approve the FY 2024 Agenda Planning CalendarACT 23-0485 Attachments: Attachment I Agenda Planning Calendar
COMMITTEE MEMBER/STAFF ANNOUNCEMENTS
ADJOURNMENT
**Council Recess - July & August**
Next Meeting - 5:30 p.m., Wednesday, September 6, 2023
The City of Hayward's Open Data Portal was designed to allow the public to explore, visualize, and download publicly accessible data. The Open Data Portal allows a clear view of the City's financial performance. Access to the portal may be found at https://haywardca.opengov.com/CITY
CITY OF HAYWARD
Hayward City Hall
777 B Street
Hayward, CA 94541
www.Hayward-CA.gov
File #: MIN 23-067
DATE: June 7, 2023
TO: Council Budget and Finance Committee
FROM: Director of Finance
SUBJECT
Review and Approve the Council Budget and Finance Committee May 3, 2023, Meeting Minutes
RECOMMENDATION
That the Council Budget and Finance Committee (CBFC) reviews and approves the May 3, 2023, CBFC meeting minutes.
SUMMARY
The CBFC held a meeting on May 3, 2023, and the draft minutes are attached for the CBFC’s review and approval.
ATTACHMENTS
Attachment I 05/03/2023 CBFC Meeting Minutes
CITY OF HAYWARD Printed on 6/2/2023Page 1 of 1
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ATT ACHMENT I
COUNCIL BUDGET & FINANCE COMMITTEE MEETING
Meeting Minutes of May 3, 2023
Call to Order: 5:30 p.m.
Members Present: Mayor Salinas, Councilmember Syrop, Councilmember Bonilla Jr.
Members Absent: None
Staff: Kelly McAdoo, Regina Youngblood, Dustin Claussen, Nicole Gonzales, Chuck Finnie, Nicholas Mullins, Franchesca Hatfield, Crissy Mello Guests: Miranda Everett (FM3 Research), Bonnie Moss (Clifford Moss)
Public Comments: None
1. Approval of Meeting Minutes from April 5, 2023
Action: Minutes reviewed and unanimously approved.
2. Facilities Needs Assessment and Potential Funding Options
City Manager McAdoo, Assistant City Manager Claussen, and Director Gonzales provided an overview of current facility infrastructure needs, and potential funding options.
Chuck Finnie, Communications & Marketing Officer, Miranda Everett, FM3 Research, and Bonnie Moss of Clifford Moss provided an overview of a sample community survey and outreach strategies for exploring funding options to address facility infrastructure needs.
Action: The Committee received the presentation and provided feedback on the assessment needs and funding options.
3. Review and Approve the FY 2023/2024 Agenda Planning Calendar
Action: The Committee reviewed the calendar.
Committee Members/Staff Announcements: None.
Adjournment: The meeting was adjourned at 6:50 p.m.
CITY OF HAYWARD
Hayward City Hall
777 B Street
Hayward, CA 94541
www.Hayward-CA.gov
File #: RPT 23-052
DATE: June 7, 2023
TO: Council Budget and Finance Committee
FROM: Director of Finance
SUBJECT
Annual Review of City Issued Debt
RECOMMENDATION
That the Committee accepts this report on the status of City Issued Debt.
SUMMARY
This report provides an update of the City’s issued debt and includes the City’s most recent credit rating issued by Fitch Ratings in September 2022.
ATTACHMENTS
Attachment I Staff Report
Attachment II City Debt Summary
CITY OF HAYWARD Printed on 6/2/2023Page 1 of 1
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DATE: June 7, 2023
TO: Council Budget and Finance Committee
FROM: Director of Finance
SUBJECT: Annual Review of City-Issued Debt
RECOMMENDATION
That the Committee accepts this report on the status of City-Issued Debt.
SUMMARY
This report provides an update on the City’s issued debt and includes the City’s most recent credit rating by Fitch Ratings in September 2022.
BACKGROUND
The City of Hayward, like most cities and municipal agencies, incurs and manages debt as part of the normal course of business, leveraging different financing instruments to provide immediate access to funding for significant capital projects, equipment, and other specific projects. City staff prepares informational sections included in the City’s annual budget document and the annual financial statements that include sections summarizing the City’s debt. Throughout the year, this information comes in various forms to the Council and the Committee; however, this report is meant to provide a comprehensive summary of the entire portfolio.
DISCUSSION
The City uses debt to finance the cost of capital improvements through various debt instruments (see list below). Debt service payments are generally made on an installment basis, typically annually or semiannually. This document contains debt service information for the General Fund and all other funds, including anticipated debt issuances that will be issued prior to the end of the fiscal year as have been approved by Council during the FY 2023 budget process or separate resolution. Debt service payments of previously issued debt, as well as planned issuances, are budgeted and approved annually by the Council – these obligations are funded through identified tax and/or fee-supported revenues that include the General Fund, Enterprise Funds, and Internal Service Funds.
Debt Instruments – The City and Successor Agency of the Hayward Redevelopment Agency currently maintain the following types of debt:
Certificates of Participation
Revenue Bonds
Private Placement Bonds
California Energy Commission (CEC) Loan
Lease-Purchase Agreements
State Water Resources Control Board (SWRCB) Loan
Special Tax Bonds (CFD only) & Limited Obligation Improvement Bonds (LID only) Tax Allocation Bonds (Successor Agency only)
Loans Payable (Energy Efficient Loan)
City-Issued Long-Term Debt
Debt as of
6/30/2023
Certificates of Participation $59,769,643
Private Placement Bonds $2,670,608
Lease-Purchase Agreements $378,788
Special Tax Bonds (CFDs only) & Limited Obligation Improvement Bonds (LID only) $4,216,302
Internal Fund-to-Fund Loans $2,859,318
Tax Allocation Bonds (Successor Agency Only) $27,311,791 Total Government Activity Debt $97,206,450
State Water Resources Control Board (SWRCB) Loan $30,774,236 Revenue Bonds $1,350,000
Loans Payable (Energy Efficient Loan) $2,604,581
Total Business-Type Activity Debt $34,728,817
Total City-Issued Long-Term Debt $131,935,267
City-Issued Debt
Attachment II provides a basic summary of the debt the City currently maintains. The City’s Annual Comprehensive Financial Report (ACFR) and annual budget document both contain further detail on the various debt issuances with explanations of uses and sources of funds.
Hayward is a charter city and, as such, legally does not have a debt limit. A useful tool for comparison to peer agencies, who are subject to this limit, is to calculate what the legal debt limit and margin would be if Hayward were a general law city. This calculation and information are described below.
Debt Limit & Margin
The legal bonded debt limit for the City is $3.4 billion. The City does not have any bonded debt that is subject to this limitation – resulting in a legal bonded debt margin of the entire $3.4 billion. However, if the City’s debts were subject to this limit, the City has issued $80.3 million of outstanding debt, which is approximately $3.3 billion below the limit.
The City’s projected General Bonded Debt Outstanding as of June 30, 2023 will total $80.3 million and represents 0.36% of taxable property value or $495 per capita.
Debt Limit Computation (projected June 30, 2023) –
Total FY 2023 projected assessed valuation $ 22,385,452,432 Debt limit (15% of assessed value) $ 3,357,817,865
Amount of legal debt applicable to the debt limit $ 80,280,030 Legal debt margin (if Hayward were a general law city) $ 3,357,817,865 Amount above or (below) Legal Debt Margin ($ 3,277,537,835)
New Debt
While the City acted as a conduit for issuing debt for other agencies, it has not authorized or issued new debt of its own in FY 2023.
Credit Ratings
Credit ratings are opinions about credit risk; they are published by a rating agency that has analyzed the City’s ability and willingness to meet its financial obligations in accordance with the terms of the debt obligations. Credit ratings have a significant impact on the interest rate the City will pay when issuing debt. In October 2020, Fitch Ratings issued a rating of AA+ assigning a positive outlook primarily attributed to the City’s strong revenue growth prospects, moderate long-term liability, moderately-elevated fixed costs, and historically strong reserves. A critical component of the rating agency review is the City’s financial management status - i.e., appropriate reserve levels, plans to reduce liabilities, fiscal policies, etc. If the City fails to maintain these areas of fiscal control, the City could see a reduction in future ratings.
In September 2022, Fitch Ratings reviewed the rating of the City of Hayward and concluded that there should be no change to the existing rating or rating outlook. This credit rating issuance reaffirmed the City of Hayward has a rating of AA+ with a positive financial outlook.
NEXT STEPS
Staff will continue to actively monitor the City’s debt levels and report annually to the Committee and City Council the funding status.
Prepared by: Marichu Maramba, Accounting Manager
Recommended by: Nicole Gonzales, Director of Finance
Approved by:
___________________________________
Kelly McAdoo, City Manager
City of Hayward Debt Summary
Fund
Issuance
Date
Maturity
Date Original Debt Debt as of
6/30/2023
Total Debt as
of 6/30/2023
Annual P&I
(FY 2024)
General Fund 100 13,192,011$
16Refunding COP FY2016 FY2027 19,813,775$ 7,524,643$ 1,978,939$ 15Fire Station #7/Firehouse/Clinic FY2015 FY2025 5,500,000$ 2,670,608$ 452,854$ 15Fire Station #7 Loan from Water FY2016 FY2035 3,421,000$ 2,859,318$ 137,741$ 15Streetlight Conversion #05188 FY2015 FY2024 2,488,880$ 137,442$ 138,131$ Water Fund Transfer In
15Fire Station #7/Loan from Water 605 FY2016 FY2035 3,421,000$ 3, 167,508$ 137,741 $ Measure C Fund 101 52,245,000 $
15Library/Fire Stations/Streets FY 2016 FY2034 67,535,000 $ 52, 245,000$ 5,407,938 $ Debt Service Fund
16Refunding COP 300 FY2016 FY2027 19,813,775$ 12, 669,752$ 1,978,939 $ 15Fire Station #7/Firehouse/Clinic FY2015 FY2025 5,500,000 $ 3, 747,484$ 452,854 $ 15Streetlight Conversion #05188 FY2015 FY2024 2,488,880 $ 947,857$ 138,131$ 15Library/Fire Stations/Streets 301 FY 2016 FY2034 67,535,000$ 61, 865,000$ 5,407,938 $ Internal Service Fund - Fleet 735 378,788 $
14Equip Lease-Fire Truck FY2014 FY2024 824,000 $ 94,068 $ 96,226 $ 15 TDA Fire Truck Loan FY2015 FY2024 1,272,000 $ 284,720$ 147,594$ Water 620 1,350,000 $ 157,549$
13Water Refunding Bonds 605 FY2014 FY2025 7,245,000$ 1, 350,000$ 549,711 $ Sewer 610 18,832,145 $ -$
SWRCB Loan FY2006 FY2029 54,550,018 $ 16, 365,005$ 3,059,007 $ CEC Solar Energy Loan #7505 FY2011 FY2025 2,450,000 $ 419,728$ 217,810$ CEC Solar Energy Loan-Phase II FY2020 FY2038 2,150,955 $ 2, 047,411$ 131,271 $ Recycled Water 14,409,231$
SWRCB Loan-Recycled Water 630 FY2017 FY2049 27,058,436$ 14, 409,231$ 611,607 $ Total Governmental and Business Activity Debt 100,407,175 $ Fiduciary 810 4,216,302 $
13Community Facility District #1 FY2014 FY2033 7,076,294$ 4, 216,302$ 533,634$ Successor Agency of the Hayward
Redevelopment Agency
815
27,311,791$
RDA Repayment Agreement with Gen.Fund * FY2016 FY2022 11,156,841$ 5,226,791$ 800,000$ 16 RDA TABS FY2017 FY2036 35,270,000$ 22,085,000$ 3,229,625$ Special Assessment Districts 805 55,000$
LID 17 FY2000 FY2024 396,014$ 55,000$ 27,603$ * Outstanding balance according to State of California Department of Finance approved ROPS 20-21 Determination.
ATTACHMENT II
CITY OF HAYWARD
Hayward City Hall
777 B Street
Hayward, CA 94541
www.Hayward-CA.gov
File #: RPT 23-051
DATE: June 7, 2023
TO: Council Budget and Finance Committee
FROM: Director of Finance
SUBJECT
Review and Comment on the Annual City Benefit Liabilities and Funding Plan
RECOMMENDATION
That the Committee reviews and comments on the status of the City’s benefit liabilities and current policies regarding funding the City’s benefit liabilities.
SUMMARY
The City of Hayward actively manages its benefit liabilities and completes actuarial valuations for many of its long-term benefit liabilities. This report provides an overview of the balances and funding status of the City’s benefit liabilities.
ATTACHMENTS
Attachment I Staff Report
CITY OF HAYWARD Printed on 6/2/2023Page 1 of 1
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DATE: June 7, 2023
TO: Council Budget & Finance Committee Members
FROM: Director of Finance
SUBJECT: Review and Comment on the Annual City Benefit Liabilities and Funding Plan
RECOMMENDATION
That the Committee reviews and comments on the status of the City’s benefit liabilities and current policies regarding funding the City’s benefit liabilities.
SUMMARY
The City of Hayward actively manages its benefit liabilities and completes actuarial valuations for many of its long-term benefit liabilities. This report provides an overview of the balances and funding status of the City’s benefit liabilities.
BACKGROUND
The City of Hayward, like all cities and municipal agencies, manages unfunded benefit liabilities as part of its financial picture. In 2013, staff began providing the Council Budget & Finance Committee and the City Council with an annual review of the City’s benefit liabilities and funding plan for unfunded liabilities.
Unfunded liabilities are defined as identifiable obligations of an organization for which the organization does not have 100 percent of the funding (cash or other assets) set aside to cover the cost should all obligations become immediately and simultaneously due.
Generally, an organization operates based on policies that attempt to find a responsible balance between funding the appropriate portion of these obligations, the associated risk that the unfunded portion of the obligations presents to the organization, and responsible and realistic management of the organization’s resources.
Achieving this careful balance is considered the practical and responsible approach since payment demands of these obligations rarely, if ever, occur simultaneously. The alternative would be to fully fund the obligations, eliminating the liability for the present time, which can present challenges in meeting current operating expense obligations. In 2020, as recommended by the Committee and the Council, the City established a Section 115 irrevocable trust for the prepayment of retiree medical liabilities. Staff will continue to provide updates on the funding status of the City’s unfunded liabilities on an ongoing basis.
DISCUSSION
The City actively manages its benefit liabilities and completes external and independent actuarial valuations for benefit liabilities except for accrued leave payouts (analysis conducted by staff). These valuations consider the economic, demographic, and historical compositions of the benefit programs and establish amounts that the City should set aside each year to fund its benefit-related financial obligations. It is critical that the City continue to manage and address its benefit liabilities to ensure long-term fiscal stability. Actuarial valuations identify the Annual Required Contribution (ARC) an agency should make toward the funding of the benefit and the liabilities. This is essentially the minimum funding amount that should be responsibly made by any organization. The ARC is generally comprised of two elements: a portion of funding for current costs (sometimes referred to as “pay go”) and a portion of funding for future costs (the Unfunded Actuarial Liability or UAL).
As bond rating agencies review the City’s debt, they actively consider the level of the City’s unfunded benefit liabilities and the economic pressure this places on the City. Failure to meet the minimum recommended funding levels or implement a plan to achieve full funding of the ARC and/or a long-term plan to pay down the future liabilities could have a negative impact on future bond ratings – with a possible resultant increase in the cost of borrowing should the City seek to incur new debt or wish to finance existing debt.
Table 1 provides a summary of the City’s benefit liabilities and current levels of funding based on the most recent actuarial valuations. Each of these benefit liabilities is unique in its structure and the degree of funding varies depending on the benefit.
Table 1: Summary of Benefit Liabilities (in millions)
Acceptable or Best Practice levels of funding vary by liability type. In general, funding these liabilities at a level in the 75 – 80 percent range is considered adequate and sustainable.
(in millions)
Actuarial
Valuation
Date Accrued Liability
Value of
Assets
Funded
Ratio
Unfunded
Liability
Unfunded
Ratio
CalPERS Police Safety Plan 6/30/2021 469.15$ 316.09$ 67.4% 153.06$ 32.6% CalPERS Fire Safety Plan 6/30/2021 338.68$ 237.29$ 70.1% 101.40$ 29.9% CalPERS Miscellaneous Plan 6/30/2021 533.61$ 390.63$ 73.2% 142.98$ 26.8% Total Cal PERS 1,341.44$ 944.00$ 70.4% 397.44$ 29.6% OPEB - Retiree Medical Police Officers 6/30/2021 42.56$ 9.47$ 22.3% 33.09$ 77.7% OPEB - Retiree Medical Firefighters 6/30/2021 19.37$ 6.11$ 31.6% 13.26$ 68.4% OPEB - Retiree Medical Miscellaneous 6/30/2021 27.67$ 7.49$ 27.1% 20.17$ 72.9% Total OPEB-Retiree Medical 89.59$ 23.07$ 25.8% 66.52$ 74.2% Workers' Compensation 6/30/2022 13.79$ 32.88$ 238.4% (19.09)$ -138.4% Accrued Leave Payouts 6/30/2022 11.20$ -$ 0.0% 11.20$ 100% TOTAL 1,456.02$ 999.96$ 68.7% 456.07$ 31.3%
California Public Employee Retirement System (CalPERS)
Current annual cost: $51.3 million
Unfunded Liability: $397.4 million
Benefit Summary – CalPERS is a defined benefit pension plan funded by a combination of employee and employer contributions. The City’s retirement benefit plans represent the largest benefit liability and CalPERS retirement rates continue to be one of the most significant citywide budgetary pressures. This same budgetary stress is felt by the State of California and the over 2,000 public entities statewide that contract with the California Public Employees’ Retirement System (CalPERS) for pension benefits. When CalPERS performs its actuarial analysis, it uses data from previous fiscal years; for example, the employer rates for Fiscal Year 2024 are based on data as of June 30, 2022.
The City contributes to three plans: Police Safety Plan; Fire Safety Plan; and Miscellaneous Employee Plan (all non-sworn/professional employees). All full-time and part-time benefited employees are required to participate in CalPERS. The three plans are independent of one another with different contract plan amendments negotiated over the years through the collective bargaining process. Assets and liabilities of each plan are segregated with no cross-subsidization from one plan to another.
CalPERS Retirement Rates – The cost of the retirement plans is broken into Employee Contribution rates (fixed) and Employer Contribution rates (variable). Both rates are a percent of projected payroll. The Employee Contribution is fixed and is based on the pension plan formula (generally 9 percent for public safety plans and 7 percent or 8 percent for miscellaneous plans). The Public Employees’ Pension Reform Act of 2013 (PEPRA) introduced new benefit formulas effective January 1, 2013, that affect new employees to the City that have not previously been part of the CalPERS system. While there is little immediate financial benefit to the City with this “two-tiered” system, the long- term benefit of lower retiree costs will likely be significant.
Many of the City’s bargaining groups contribute beyond the CalPERS-defined Employee Contribution portion and “pick-up” a portion of the Employer Contribution: 6 percent for sworn police and fire personnel and 3-5 percent for all non-sworn personnel (pursuant to bargaining unit agreements). The Employer rates displayed in Table 1 represent the full employer cost according to and as assessed by CalPERS, this rate does not reflect the negotiated cost-sharing “pick-up” agreements, as these agreements do not affect the overall cost of CalPERS.
Over the last several years, the CalPERS Board of Administration has considered and adopted several rate methodology changes that directly impact the retirement rates that cities pay (employer contribution rates). Each of these changes is effective in different fiscal years, with varying phase-in schedules. While these changes significantly increase our current retirement costs, they are intended to stabilize the long-term sustainability of CalPERS retirement plans, helping cities in the long-run. Many of these changes should have been implemented long ago by CalPERS.
1. March 2012 Change (effective FY 2014, two-year phase-in through FY 2015): In March 2012, the CalPERS Board acted to reduce the assumed rate of investment return from
7.75 percent to 7.5 percent. The employer rate impact from this action was effective FY 2014, with a two-year phase-in, and a full rate impact by FY 2015. The actual rate impact resulting from this change ranged from 3 - 5 percent of payroll depending on the plan type.
2. April 2013 Change (effective FY 2016, five-year phase-in through FY 2020): On April 17, 2013, the CalPERS Board adopted significant rate methodology changes that directly impacted employer rates starting in FY 2016, phased in over five years, with the full impact being felt in FY 2020. The anticipated rate impact resulting from this change was approximately 2–5 percent of payroll beginning FY 2020. These actuarial changes were designed to boost funding levels and make employer rates more predictable in the long- run:
Shorter smoothing period1 and shorter amortization period for gains/losses Closed instead of rolling thirty-year amortization
Use market value of assets to determine rates2
3. February 2014 Change (effective FY 2017, five-year phase-in through FY 2021): On February 18, 2014, the CalPERS Board adopted additional rate methodology changes.
While the Board voted to retain its current long-term assumed rate of return at 7.5 percent, they did adopt actuarial changes to assumed mortality rates. The new mortality assumptions were expected to increase costs to local agencies an average of 6–9 percent of payroll for safety classifications and 3–5 percent of payroll for miscellaneous employees by the end of their five-year phase-in in FY2021. Some municipal officials believe these estimates may be low because of the continued decline in the local government workforce in many cities, reducing the number of active employees contributing to CalPERS.
4. November 2015 Funding Risk Mitigation Policy: On November 15, 2015, the CalPERS Board recently adopted a funding risk mitigation policy designed to incrementally lower the discount rate in years of good investment returns, help pay down the pension fund's unfunded liability, and provide greater predictability and less volatility in contribution rates for employers. The policy established a mechanism to reduce the
1 “Smoothing” and “Closed vs. Rolling Amortization” go hand in hand. Smoothing refers to the method by CalPERS plans to address the unpredictability of investment income and the impact that unpredictability has on employer rates. The revised “smoothing” plan determines the rate increase needed to reach a funding level of 100 percent in 30 years, phase in the rate increase over five years, and then to maintain those rates as steadily as possible or even lower them. In the past, CalPERS employed an amortization and smoothing policy that spread investment returns over a 15-year period with the actual gains and losses experienced by the investment pool paid for over a rolling 30-year period. With the current change, CalPERS will employ an amortization and smoothing policy that will pay for all gains and losses over a fixed 30-year period with the increases or decreases in the rate spread directly a five-year period.
2 CalPERS has traditionally used the actuarial value of their investments in their financial calculations and rate projections (i.e., the investment assets fluctuate in value from one day to the next, so the administrators calculate an average value for the assets, over a given period of time, or the “actuarial value”). In accordance with new FY 2015 GASB provisions, CalPERS will only use “market value,” which is using the actual value of the investment assets as determined by the market and adjusting the value up or down accordingly.
discount rate - or assumed rate of return - by a minimum of 0.05 percentage points to a maximum of 0.25 percentage points in years when investment returns outperform the existing discount rate, currently 7.5 percent, by at least four percentage points. The four-percentage point threshold is intended to offset increases to employer contribution rates that would otherwise increase when the discount rate is lowered, and help pay down CalPERS' unfunded liability.
CalPERS staff modeling anticipates the policy will result in a lowering of the expected portfolio volatility to 8 percent in about 21 years, improve funding levels gradually over time, and cut risk in the system by lowering the volatility of investment returns. While rates are expected to increase for CalPERS employers in the future, the policy is designed to minimize any increases above projected rates.
The CalPERS Board implemented the first revision to the Funding Risk Mitigation Policy on February 14, 2017, lowering the first threshold for triggering a discount rate reduction from a 4.0% difference between actual investment return and discount rate to a 2.0% difference. This policy was implemented effective FY 2021.
5. December 2016 Lowering of Discount Rate (effective FY 2018, three-year phase-in through FY 2020): On December 21, 2016, the CalPERS Board voted to lower the discount rate from 7.5% to 7.0%. Lowering the discount rate, also known as the assumed rate of return, resulted in employers that contract with CalPERS to administer their pension plans experiencing increases to their normal costs and unfunded actuarial liabilities. Active members hired after January 1, 2013, under the Public Employees' Pension Reform Act will also see their contribution rates rise.
The actuarial valuations provided to the City of Hayward by CalPERS immediately prior to this decision in August 2016 included the then-final rates for FY 2018; however, these rates did not incorporate the change to discount rates, which resulted in FY 2018 rates increasing over FY 2017 rates by 1.0– 8 percent of payroll. The rate change to assumed discount rates significantly impacted the City’s required contributions in the years since. The City’s revised rates (combined average for all groups) increased from
37.1% in FY 2018 to 56.2% in FY 2023 based on the latest CalPERS actuarial valuation from July 2021.
6. February 2018 Change to Amortization Period for New Members: The CalPERS Board recently voted to shorten the period over which actuarial gains and losses are amortized from 30 years to 20 years for all new members. The change in amortization period will speed up the rate of debt payments to CalPERS, and likely increase cities’ annual pension costs. The new policy was effective as of the June 30, 2019 actuarial valuations, and payments under this new policy began in FY 2021.
7. November 2021 Lowering of Discount Rate (effective FY 2024, no phase-in): On July 12, 2021, CalPERS reported a 21.3% net return on investments for the year ending on June 30, 2021. The higher-than-expected investment return triggered the Fund Risk Mitigation Policy first adopted in 2015, and resulted in a reduction of the discount rate from 7.0% to 6.8%. Triggering of the policy also began the process of revising assumptions and portfolios, culminating in the approval of the new discount rate on November 17, 2021. Contributions under the new discount will be effective in FY 2024.
Estimated Rate Impacts and Projected Normal Cost Increases:
The most recent valuations, as of July 2022, reflect rate projections that include all the rate actions taken by the CalPERS Board prior to the triggering of the Fund Risk Mitigation Policy and approval of the new 6.8% discount rate in November 2021. Table 2 provides a detailed summary of the City’s projected CalPERS employer rates and normal costs (employer contribution) based on the current discount rate of 6.8%. Under the CalPERS rate projections shown in Table 2, by FY 2029, rates for Miscellaneous Plans are estimated to be 32.0% of payroll, rates for Police Safety Plans are projected to be 66.6% of payroll, and Fire Safety Plans are projected to be 57.1% of payroll. During the five-year period from FY 2024 through FY 2029, the City will see its contributions for the Miscellaneous plan decrease by $0.8 million, by $0.5 million for the Police plan, and by $0.4 million for the Fire plan.
Table 2: CalPERS Rate Comparison & Growth
Funding Status & Plan
The City is fully meeting its annual required contribution (ARC) amounts based on the CalPERS premium rates. Given the new CalPERS “smoothing” methodology, the long-term intent is to fund the City’s liability over the 30-year amortization period.
Retiree Medical (OPEB)
Annual Required Contribution (ARC): $7.5 million
Unfunded Liability: $66.5 million
Components of OPEB $7.5 million ARC:
$3.9 million: Current Retirees (“pay as you go”)
$3.6 million: Unfunded Actuarial Liability
The retiree medical benefit represents the second largest benefit liability, and is the most significantly underfunded of the City’s benefit liabilities. By City Council resolution – and as agreed to with some bargaining groups – the City provides certain health care benefits for (in the $1,000s) FY 2023 FY 2024 FY 2025 FY 2026 FY 2027 FY 2028 FY 2029 Miscellaneous
Employer Contribution ($) $ 19,434 $ 20,251 $ 20,336 $ 20,109 $ 19,857 $ 19,427 $ 19,945 Change over Prior Year $ 1,118 $ 817 $ 85 $ (227) $ (252) $ (430) $ 518 Employer Contribution Rate (%) 36.9% 37.3% 36.4% 35.0% 33.6% 32.0% 32.0% Change over Prior Year 1.0% 0.4% -0.9% -1.4% -1.4% -1.6% 0.0% Police
Employer Contribution ($) $ 19,616 $ 20,023 $ 20,224 $ 20,087 $ 19,927 $ 19,566 $ 19,929 Change over Prior Year $ 1,532 $ 408 $ 201 $ (137) $ (160) $ (362) $ 363 Employer Contribution Rate (%) 74.6% 76.9% 75.5% 73.0% 70.4% 67.3% 66.6% Change over Prior Year 7.8% 2.3% -1.4% -2.5% -2.6% -3.1% -0.7% Fire
Employer Contribution ($) $ 13,738 $ 13,491 $ 13,579 $ 13,467 $ 13,338 $ 13,121 $ 13,467 Change over Prior Year $ 627 $ (246) $ 87 $ (112) $ (129) $ (217) $ 346 Employer Contribution Rate (%) 64.6% 65.8% 64.4% 62.1% 59.9% 57.2% 57.1% Change over Prior Year 3.6% 1.1% -1.4% -2.3% -2.2% -2.7% -0.1%
employees who retire directly from the City with at least five years of City service (most bargaining groups require ten years of service) and who are vested in the California Public Employees Retirement System (CalPERS). The City participates in the CalPERS health care plan, which is governed under the California Public Employees Health and Medical Care Act (PEMCHA).
The City contributes a fixed dollar amount for retiree medical benefits for all employees, except sworn police employees hired before June 12, 2012 (rate tied to Kaiser plan rates), with amounts varying by employee bargaining group and coverage level as governed by PEMCHA. Benefits continue for surviving spouses in amounts as required by PEMCHA. As of June 30, 2022, approximately 712 retirees were eligible and were receiving retiree health care benefits from the City at an annual cost of about $3.9 million, which is the “pay as you go” amount the City currently pays.
There are approximately 806 active employees that may be eligible to receive health care benefits upon retirement. This group of employees represents the number of eligible, current employees and it is the City’s current maximum exposure; it does not necessarily mean all of these employees will either retire with the City or ultimately meet the requirements for receiving this benefit. Similar to the CalPERS retirement plan, the increased life longevity of retirees places stress on the benefit. The updated actuarial valuation of our local plan will consider these impacts within its analysis.
Funding Status & Plan
The current ARC was determined as part of a June 2022 actuarially determined contribution by MacLeod Watts, the City’s OPEB Actuary. The valuation analysis was calculated based on the results of the June 30, 2021 valuation and the trust asset values as of June 30, 2021. The analysis considered benefits that are expected to be earned in the future as well as those already accrued, and is required by the Governmental Accounting Standards Board (GASB) to be completed every two years; the most recent actuarial report was completed in June 2022.
The City’s OPEB unfunded actuarial accrued liability is amortized as a level percentage of projected payroll using a closed thirty-year amortization period that has twenty years remaining as of the latest valuation date. The minimum funding target is the ARC, currently estimated at $7.5 million annually. Pursuant to City Council direction, the City began contributing toward the cost of the UAL both through direct City contributions, as well as employee contributions pursuant to some bargaining unit agreements. Payments for both components of the ARC are built into payroll to spread the cost appropriately across all City funding sources. Additional voluntary contributions towards the ARC were made in FY 2014 of $1 million and FY 2015 of $2 million; however, in an effort to reduce the use of reserves in FY 2016 and FY 2017, additional voluntary contributions were not made. In FY 2018, the City reinstated its practice of contributions toward the ARC, in the amount of $1 million, with additional voluntary contributions in the amount of $2 million for FY 2019, and $2.5 million in FY 2020. The City had anticipated making a significant voluntary contribution of $4.0 million in FY 2021; however, due to fiscal uncertainties brought on by the COVID-19 pandemic, Council recommended a reduced contribution of $1 million during budget adoption. During the FY 2021 Mid-Year Review, Council recommended an additional $1.0 million contribution, for a total voluntary contribution of $2.0 million in FY 2021. In FY 2022, the City made additional voluntary contributions towards the ARC in the amount of $4.3 million. In FY 2023,
the City contributed $3.5 million to meet the ARC. The City continues to meet its commitments by fully funding its ARC payment for FY 2024.
During labor negotiations in 2017, two employee groups agreed to contribute funding to an irrevocable trust to fund unfunded retiree medical obligations. IAFF Local 1909 recognized the continued need to fund retiree medical, and agreed that employees represented by Local 1909 would continue to contribute one percent (1%) of base salary (excluding all special pays, allowances, and overtime), to an irrevocable trust to fund the unfunded retiree medical obligations. The contribution made by employees to the trust fund shall be exclusively allocated for the expense of retiree healthcare of its members. Hayward Police Officers Association (HPOA) agreed that employees represented by HPOA would begin contributing one percent (1%) of base salary (excluding all special pays, allowances, and overtime) effective July 1, 2018, to an irrevocable trust to fund the unfunded retiree medical obligations for their members.
Additionally, in 2020, the City established a Section 115 Irrevocable Trust with CalPERS – a California Employers’ Retiree Benefit Trust (CERBT) as recommended by both the Committee and the full Council. The trust was established as a means to deposit additional funds as they become available to the City. The funds are then placed in the trust to offset expenses related to future payments and to reduce future liabilities.
Workers’ Compensation
Current annual cost: $6.4 million
Unfunded Liability: -($19) million
The City is self-funded for Workers’ Compensation and began its program on July 1, 1975.
Payments are made to the Workers’ Compensation Self-Insurance Fund by transfers from all City funds through established rates assessed against payroll pursuant to classification type.
These accruals represent estimates of amounts to ultimately be paid for reported claims, past experience, recent claim settlement trends, and other information. Funds are available to pay claims and administrative costs of the program on a pay-as-you-go basis.
It is important to understand that payments on indemnity claims may be made over a very long period of years. Indemnity claims are those in which future medical care is projected to be needed for the injured worker and the cost is largely dependent on the type and severity of the injury, as well as whether or not the claimant is a sworn employee.
Funding Status & Plan
Pursuant to the latest actuarial valuation presented to the City in November of 2022, a funding status of 70–85 percent is recommended. Table 1 shows that the City is currently well overfunded. Several years ago, the Workers’ Compensation Fund was severely underfunded.
In an effort to improve funding levels, an additional percentage was applied on top of the standard rate. As a result of this methodology, the Workers’ Compensation Fund is overfunded by 138%.
The FY 2024 budget reflects a reduction in the Worker’s Compensation rates and will result in a significant reduction in contributions from all City operating funds to adjust to a more appropriate funding balance level.
Accrued Leave Payouts (Compensated Absences)
Current annual cost: varies
Unfunded Liability: $11.2 million
It is the City’s policy to permit employees to accumulate earned but unused vacation and sick leave benefits. The City records the cost of vacation and sick leave as “earned.” Earned vacation and sick leave that is taken during the year is payable from the fund(s) to which the employee’s salary or wage is charged. When an employee retires or otherwise separates from the City, vacation balances are paid out to the employee, and in some cases, some of the accumulated sick leave is also paid out (pursuant to bargaining unit agreements). These payouts are paid through a department’s budget from vacancy salary savings – and are not specifically budgeted for as a separate line item.
Funding Status & Plan
For several years, the City had lowered this liability over its all-time high in FY 2012.
Beginning in 2016, the City began to realize increases in the accrued leave liability year over year. The steady change was attributed to an increase in the number of employees who had been employed with the City of Hayward for five or more years, accruing more leave and increasing the City’s liability. Accrued leave liability balance in FY2022 was $11.2 million decreased by $0.5 million compared to FY2021. Table 3 provides a historical overview of the City’s accrued leave liability.
Table 3: Accrued Leave Liability History
Accrued Leave payouts are currently absorbed within each department’s budget appropriation. In practice, the salary savings achieved through normal attrition and the vacancy created by the exiting employee covers the cost of these payouts. In general, departments have had enough salary savings to accommodate this cost.
Unfunded
Liability
Change from
Prior Year
FY 2010 $9,250,970 $1,773,756
FY 2011 $10,497,994 $1,247,024
FY 2012 $10,701,569 $203,575
FY 2013 $8,589,354 ($2,112,215)
FY 2014 $7,230,041 ($1,359,313)
FY 2015 $7,104,541 ($125,500)
FY 2016 $7,660,340 $555,799
FY 2017 $7,894,439 $234,099
FY 2018 $7,913,945 $19,506
FY 2019 $8,347,418 $433,473
FY 2020 $9,511,174 $1,163,756
FY 2021 $11,722,431 $2,211,257
FY 2022 $11,212,700 ($509,731)
A possibility to further fund this liability is to build a funding mechanism into payroll as a component of the fringe benefit rate (e.g., 1% of payroll for non-sworn and 2% of payroll for sworn positions). While this might provide a segregated funding source that would prevent spikes to department payroll budgets for large payouts, it does increase the overall City payroll budget. Given the City’s fiscal challenges, it does not seem a prudent use of City resources at this time to add this cost. Staff recommends continuing to actively manage employee leave balances in order to lower the overall long-term liability.
NEXT STEPS
Staff will continue to actively manage benefit liabilities and report annually to the Committee and the Council on the funding status of these benefit liabilities, including review of existing Council policies regarding funding.
Prepared by: Marichu Maramba, Accounting Manager
Recommended by: Nicole Gonzales, Director of Finance
Approved by:
______________________________________
Kelly McAdoo, City Manager
CITY OF HAYWARD
Hayward City Hall
777 B Street
Hayward, CA 94541
www.Hayward-CA.gov
File #: ACT 23-048
DATE: June 7, 2023
TO: Council Budget and Finance Committee
FROM: Director of Finance
SUBJECT
Review and Approve the FY 2024 Agenda Planning Calendar
RECOMMENDATION
That the Council Budget and Finance Committee reviews and approves the FY 2024 Agenda Planning Calendar.
SUMMARY
The FY 2024 Agenda Planning Calendar suggests agenda topics for the year for the Committee’s consideration.
ATTACHMENTS
Attachment I FY 2024 Agenda Planning Calendar
CITY OF HAYWARD Printed on 6/2/2023Page 1 of 1
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ATTACHMENT I
COUNCIL BUDGET AND FINANCE COMMITTEE
FY 2024 Agenda Planning Calendar
June 7, 2023
Meeting Location: Conference Room 2A/Zoom Platform
Meeting Time: 5:30 p.m.
Meeting Dates: The Council Budget & Finance Committee generally meets monthly on the 1st Wednesday of the month, except for July and August, due to City Council Break.
Special meetings will be scheduled as determined necessary by the Committee or the City Manager.
DATE SUGGESTED TOPICS (subject to change)
July 5, 2023 Council Recess
August 2, 2023 Council Recess
September 6, 2023 Update on Hayward Community Foundation Public Bank East Bay
October 4, 2023 FY 2023 Annual Audit Process (Oral Presentation by External Auditor) Measure C Annual Report
November 1, 2023 Investment Portfolio Review and FY 2024 Statement of Investment Policy and Delegation Authority (Oral Presentation by External Investment Manager) December 6, 2023 Informational Report of the Fiscal Year 2023 Audit FY 2025 Budget Process and Calendar Review
January 3, 2024 Transmittal of Annual Comprehensive Financial Report for Fiscal Year Ended June 30, 2023 (ACFR)
February 7, 2024 Hayward Community Foundation Update
FY 2025 Budget Process Update
March 6, 2024 Mid-Year Budget Review and General Fund Five-Year Update April 1, 2024 Discussion on Mayor & City Council FY 2025 Budget FY 2025 Proposed Budget Discussion
May 1, 2024 Annual Review of City-Issued Debt
Annual City Benefit Liabilities and Funding Plan Review June 5, 2024 FY 2024 Budget Process Debrief (Oral Presentation) (continued on next page)
ATTACHMENT I
Non-scheduled future agenda topics:
- Fleet Utilization Study
- Pension Obligation Funds (as Updates are Available)
- Additional Payment OPEB Trust
- 238 Parcel Sales Update (Timing TBD on Transactions)