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HomeMy WebLinkAbout09/27/11 1 “The discontented man finds no easy chair.” - Benjamin Franklin AGENDA HERMOSA BEACH CITY COUNCIL Tuesday, September 27, 2011 - Council Chambers, City Hall 1315 Valley Drive 6:00 p.m. - CLOSED SESSION: See attached Closed Session Agenda 7:00 p.m. - REGULAR MEETING MAYOR Howard Fishman CITY CLERK Elaine Doerfling MAYOR PRO TEM Jeff Duclos CITY TREASURER John M. Workman COUNCIL MEMBERS Patrick ‘Kit’ Bobko Michael DiVirgilio Peter Tucker CITY MANAGER Stephen R. Burrell CITY ATTORNEY Michael Jenkins All council meetings are open to the public. PLEASE ATTEND. The Council receives a packet with detailed information and recommendations on nearly every agenda item. City Council agendas and staff reports are available for your review on the City's web site located at www.hermosabch.org. Complete agenda packets are also available for public inspection in the Police Department, Fire Department, Public Library and the Office of the City Clerk. During the meeting, a packet is also available in the Council Chambers foyer. Written materials distributed to the City Council within 72 hours of the City Council meeting are available for public inspection immediately upon distribution in the City Clerk's office at 1315 Valley Drive, Hermosa Beach, California, during normal business hours. All written communications from the public included in the agenda will be posted with the agenda on the City’s website To comply with the Americans with Disabilities Act of 1990, Assistive Listening Devices (ALD) will be available for check out at the meeting. If you require special assistance to participate in this meeting, you must call or submit your request in writing to the Office of the City Clerk at (310) 318-0203 at least 48 hours prior to the meeting. Your participation in this meeting is in the public domain. Meetings are both cablecast and streamed live over the Internet. Minutes of this meeting will reflect your participation in this meeting and are posted on the city’s website 2 CALL TO ORDER PLEDGE OF ALLEGIANCE ROLL CALL CLOSED SESSION REPORT ANNOUNCEMENTS PRESENTATIONS PRESENTATION OF PROCLAMATION TO THE CITY OF HERMOSA BEACH FROM SOUTHERN CALIFORNIA EDISON RECOGNIZING 125 YEARS OF EDISON SERVICE TO OUR COMMUNITY CERTIFICATE OF RECOGNITION TO AECOM INTRODUCTION OF NEW POLICE CAPTAIN PRESENTATION BY BILL BRAND REGARDING AES EXPANSION PUBLIC PARTICIPATION: Although the City Council values your comments, the Brown Act generally prohibits the Council from taking action on any matter not listed on the posted agenda as a business item. 1. ORAL AND WRITTEN COMMUNICATIONS This is the time for members of the public to address the City Council on any items within the Council's jurisdiction not on this agenda, on items on this agenda as to which public comment will not be taken, or to request the removal of an item from the consent calendar. Comments on public hearing items are heard only during the public hearing. Members of the audience may also speak: 1) during discussion of items removed from the Consent Calendar; 2) during Public Hearings; and, 3) during discussion of items appearing under Municipal Matters. Comments from the public are limited to three minutes per speaker. The City Council acknowledges receipt of the written communications listed below. No action will be taken on matters raised in written communications. 3 The Council may take action to schedule issues raised in oral and written communications for a future agenda. Citizens with comments regarding City management or departmental operations are requested to submit those comments to the City Manager. NO WRITTEN COMMUNICATIONS 2. CONSENT CALENDAR: The following more routine matters will be acted upon by one vote to approve with the majority consent of the City Council. There will be no separate discussion of these items unless a Council member removes an item from the Consent Calendar. Items removed will be considered under Agenda Item 4, with public comment permitted at that time. (a) Recommendation to receive and file memorandum from City Clerk Elaine Doerfling regarding the minutes of Regular meetings of August 9, 2011 and September 13, 2011. (b) Recommendation to ratify check register and to approve cancellation of certain checks as recommended by the City Treasurer. (c) Recommendation to receive and file 1) Tentative Future Agenda Items; and, 2) City Council Directives (d) Recommendation to receive and file the August 2011 financial reports: 1) Revenue and expenditure report; 2) City Treasurer's report; and, 3) Investment report. (e) Recommendation to receive and file Project Status Report. Memorandum from Public Works Director Frank Senteno dated September 17, 2011. (f) Recommendation to reappropriate funds from 2010-11 to the 2012-12 budget; approve revenue revisions related to reappropriations; and, appropriate additional funds for 2010-11. Memorandum from Finance Director Viki Copeland dated September 14, 2011. (g) Recommendation to waive $480 banner fee for the Hermosa Beach Firefighters Association and the Hermosa Beach Education Foundation 3rd Annual Poker and Casino Night on October 15, 2011. (h) Recommendation to waive $480 banner fee for the Hermosa Beach Woman’s Club Pancake Breakfast on October 16, 2011. (i) Recommendation to adopt the proposed revisions to the City’s Speed Hump Policy. Memorandum from Public Works Director Frank Senteno dated September 20, 2011. 4 (j) Recommendation to receive and file the action minutes of the Emergency Preparedness Advisory Commission meeting of July 18, 2011. (k) Recommendation to receive and file the action minutes of the Planning Commission meeting of September 20, 2011. (l) Recommendation to award Professional Services Agreement to John M. Cruikshank Consultants, Inc. to provide design services for Project No. CIP 11-652 Pier Structural Repairs FY 11-12; including a detailed structural assessment of the entire pier and construction plans and specifications for repair of damaged pilings; for a fixed fee of $59,000; authorize the Mayor to execute and the City Clerk to attest the agreement subject to approval by the City Attorney; and, authorize the Director of Public Works to make changes to the agreement within the project budget. Memorandum from Public Works Director Frank Senteno dated September 20, 2011. (m) Recommendation to adopt resolution approving final map #70445 for a 7-unit condominium project at 722 1st Street. Memorandum from Community Development Director Ken Robertson dated September 21, 2011. 3. CONSENT ORDINANCES a. ORDINANCE 11-1326 – “AN ORDINANCE OF THE CITY OF HERMOSA BEACH, CALIFORNIA, REGARDING CITY COUNCIL MEETINGS AND AMENDING THE HERMOSA BEACH MUNICIPAL CODE. For adoption. Memorandum from City Clerk Elaine Doerfling dated September 19, 2011. 4. ITEMS REMOVED FROM THE CONSENT CALENDAR FOR SEPARATE DISCUSSION ∗ Public comments on items removed from the Consent Calendar. 5 5. PUBLIC HEARINGS - TO COMMENCE AT 7:30 P.M. a. TEXT AMENDMENT TO ALLOW OUTDOOR DINING IN THE PUBLIC RIGHT-OF-WAY WITHOUT A CONDITIONAL USE PERMIT, IN COMMERCIAL DISTRICTS, EXCLUDING UPPER PIER AVENUE, DURING STUDY OF A PERMANENT ORDINANCE. Memorandum from Community Development Director Ken Robertson dated September 20, 2011. (Continued from meeting of September 13, 2011.) RECOMMENDATION: Waive full reading and introduce an ordinance to amend the Municipal Code to allow outdoor dining on the public right-of-way in commercial districts, excluding Upper Pier Avenue, as a temporary measure, and confirm that study of a permanent ordinance pertaining to commercial encroachments fits within Council priorities within a 6-month time frame at which time the temporary ordinance will automatically expire; and, direct the Planning Commission to incorporate outdoor merchandise and other possible retail oriented encroachments into the study. 6. MUNICIPAL MATTERS a. REPORT OF OUTDOOR SMOKING ORDINANCE SUBCOMMITTEE. Memorandum from Mayor Fishman and Mayor Pro Tem Duclos dated September 13, 2011. RECOMMENDATION: That the City Council direct staff to advertise a public hearing for the City Council meeting of October 25, 2011 to consider an ordinance banning smoking in the following outdoor areas: Restaurant patios/outdoor dining, Pier Plaza, all City parks and Greenbelt, the Strand and public parking lots. b. DISCUSSION OF OPTIONS FOR REDUCING MARINE DEBRIS DUE TO POLYSTYRENE (NO. 6 RECYCLE CODE) FOOD SERVICE TAKE-OUT CONTAINERS. Memorandum from Community Development Director Ken Robertson dated September 16, 2011. RECOMMENDATION: That the City Council direct staff to prepare an ordinance to ban polystyrene (No. 6 Recycle Code) food service take-out containers and schedule for public hearing. c. CONSIDERATION OF REVISED RESOLUTION SUPPORTING THE HEALTHY EATING ACTIVE LIVING CITIES CAMPAIGN. Memorandum from City Manager Stephen Burrell dated September 20, 2011. RECOMMENDATION: That the City Council consider adopting the attached resolution that embraces policies that promote healthy eating and an active lifestyle. 6 7. MISCELLANEOUS ITEMS AND REPORTS - CITY MANAGER a. GOALS AND WORKPLAN FOR 2011-12. Memorandum from City Manager Stephen Burrell dated September 19, 2011. RECOMMENDATION: Review the materials provided and provide any further direction to staff. 8. MISCELLANEOUS ITEMS AND REPORTS - CITY COUNCIL a. POLICE DEPARTMENT MONTHLY REPORT FOR JULY 2011. Memorandum from City Manager Stephen Burrell dated September 20, 2011. RECOMMENDATION: Receive and file report. b. RESPONSE TO 2010-11 GRAND JURY REPORT ON PENSIONS IN LOS ANGELES COUNTY. Memorandum from Finance Director Viki Copeland dated September 20, 2011. RECOMMENDATION: That the City Council approve responses to the 2010-11 Grand Jury findings and recommendations. 9. OTHER MATTERS - CITY COUNCIL Requests from Council members for possible future agenda items. No discussion or debate of these requests shall be undertaken; the sole action is whether to schedule the item for consideration on a future agenda. No public comment will be taken. a. Request from Mayor Fishman to revisit the $10.00 parking key reloading fee and direct staff to report back. ADJOURNMENT 7 AGENDA CLOSED SESSION MEETING HERMOSA BEACH CITY COUNCIL Tuesday, September 27, 2011 - Council Chambers, City Hall 1315 Valley Drive 6:00 p.m. The City Council finds, based on advice from legal counsel, that discussion in open session will prejudice the position of the City in existing and anticipated litigation. CALL TO ORDER 1. PUBLIC COMMENT: This time has been set aside for members of the public to address the City Council on Closed Session items. 2. MINUTES: a. Approval of minutes of Closed Session meeting held on September 13, 2011; and, b. Approval of minutes of Closed Session meeting held on September 15, 2011. 3. PUBLIC EMPLOYEE PERFORMANCE EVALUATION Government Code Section 54957 a. Title: City Manager b. Title: City Attorney 4. CONFERENCE WITH LEGAL COUNSEL The City Council finds, based on advice from legal counsel, that discussion in open session will prejudice the position of the City in the litigation. Existing Litigation: Government Code Section 54956.9(a) Name of Case: Sipple vs. City of Hermosa Beach, [Los Angeles County] Case Number: BC462270 ADJOURNMENT Page | 1 Page | 2 NOTE: The City submits the following clarifications and additional information to explain and provide a complete response to the Grand Jury’s findings and recommendations pursuant to California Penal Code Section 933.05. City comments are in bold, in the shaded box. The original corresponding Grand Jury (GJ) report pages are referenced on the left where the page starts. 5. Hermosa Beach Safety Police Plan The City of Hermosa Beach also contracts with CalPERS to provide pension benefits for its Miscellaneous and Safety employees. Because it has fewer than 100 employees in each of its plans, Hermosa Beach participates in CalPERS pooled fund plans, whereby the assets and liabilities of the City are pooled with those of other similarly sized jurisdictions that have elected the same plans for their employees. As of June 30, 2009, Hermosa Beach was participating in 3 such pooled plans: the Miscellaneous 2% at 55 Plan for non-sworn employees, the Safety 3% at 55 Plan for sworn Fire Department employees, and the Safety 3% at 50 Plan for sworn Police Department employees. The funded status for these 3 pooled plans as of that date was: 2008 a. Miscellaneous: 2% at 55 Plan b. Safety- Fire: 3% at 55 Plan c. Safety- Police: 3% at 50 Plan 64.9% 92.9% 61.5% 87.8% 60.2% 87.3% Funded ratios shown above are on a Market Value basis and include side funds (meaning they will be higher funded ratios as agencies pay their side fund balances off). Market Value funded ratios fluctuate significantly from one year to the next. For 2009 the Actuarial Value (smoothed market) funded ratios were 89%, 84% and 83% respectively. Page A-9 of the GJ report cites the USGAO statement that, measures relating to pension system strength should be “measured over time”. The GJ report may not present an accurate representation, as it looks at funded status for only one year. The USGAO report is quoted also as stating that “many experts consider a funded ratio of 80% or better to be sound for government pensions.” The GJ report also states that while the current challenges facing local government are serious, most plans have demonstrated a history of maintaining funded status well above this 80% threshold; and already, after the first full year of investment recovery, many plans have risen back above this mark. In addition to having low funded status in each of these 3 pooled plans as of June 30, 2009, the City had an additional negative "side fund balance" of $13.9 million, representing the balance remaining on UAAL for the plans at the time they joined the various pooled funds. The amortization of this negative side fund balance significantly increases the City's annual contribution requirements, which is particularly apparent with the Police Safety Plan. The funded ratios shown above include the side fund balance, so the side fund is not in addition to the unfunded liability shown. The appropriate Actuarial Value funded ratio excluding side fund balances for the three plans was 93%, 92% and 91% respectively. Further, CalPERS requires that all agencies with fewer than 100 active members join a risk pool. Consequently joining the pool was not a choice the City made; it was mandatory. CalPERS acts as a common investment and administrative agent for participating public entities within the State of California. Benefit provisions and all other requirements are established by State statute and City ordinance. In addition to the unfunded liabilities of its 3 CalPERS pooled plans, Hermosa Beach had nearly $2.5 million of UAAL in retiree health, or OPEB liability. While the City had not borrowed using POBs as of June 30, 2009, the CGJ was advised during interviews that management was poised to borrow using POBs during the current fiscal year to prefund its UAAL and negative side fund balance. Hermosa Beach was chosen by the CGJ because it is a CalPERS risk pool plan that has annual contribution rates that are among the highest in the County. The City is considering prefunding only the side fund; not the UAAL. The CalPERS side funds accrue interest at 7.75% regardless of CalPERS actual investment return. Consequently borrowing at a lower rate and paying the side funds off can yield significant savings for the City. 2010-2011 LOS ANGELES COUNTY CIVIL GRAND JURY p. 208 Page | 3 PHASE II: SECTION 5 HERMOSA BEACH POLICE SAFETY PLAN SUMMARY The Hermosa Beach Police Safety Plan is one of 3 plans the City provides to its employees through CalPERS. In 2009, this plan had the highest contribution rate in the County at approximately 57.9% of salaries for the employer and employee share of pension benefit costs for uniformed personnel. The City also contributed to a defined benefit retiree health plan for these employees at a rate of approximately 5.3% of salaries, for a total retirement contribution rate of 62.2% in that year. Pension contributions are projected by CalPERS to increase by an additional 8.0% by 2012, increasing the total effective rate for uniformed Police Department retirement benefits to 70% of salaries by that year if retiree health rates remain static. The rate stated above for Police appears to be incorrect. The correct rate is 55.353% without the employee portion of 9%. Cities with side funds are presented in Exhibit C.7 but there is no presentation to add rates together. Cities who have issued POB’s to pay off their side fund would appear lower, using PERS rates only, but in fact could be higher when the PERS rate and the POB obligation are considered together. Therefore, the comparison used by the GJ may be inaccurate. Further, PERS rates are predicted to increase from 55.353% to 56.6% in 2012-13, resulting in an increase of 1.2 percentage points (or 2.25%) rather than the 8% stated above. Because CalPERS was conservative in estimating 2012/13 contribution rates (actual June 30, 2010 investment return was better than anticipated) this rate increase may be overstated. It is also important to note that for 2011/12 over half of the rate (29.5%) is due to the side fund contribution. Furthermore contribution rates are not just a function of unfunded liability, they are also a function of the amortization period over which the unfunded liability is paid. A shorter amortization period results in a higher contribution rate. The City’s Police Safety side fund is being amortized over 8 years, which is a very short fiscally conservative period when compared to most other jurisdictions according to Independent Actuary John Bartel. This growth in contributions is also occurring with the Miscellaneous and Fire Safety plans for Hermosa Beach. Also administered for the City by CalPERS, the Miscellaneous employee effective contribution rate was 27.1% of salaries in 2009 and could increase by an additional 2% by 2012.The Fire Safety employee effective contribution rate was 51.9% in 2009, and could increase by an additional 3% by 2012. In total for the 3 plans, CalPERS projects that the City will be required to contribute $4,149,982 on base salaries of $12,751,612 in FY 2011- 2012, or approximately 32.5% of salaries excluding retiree health benefits. The rates above are incorrect. The correct Miscellaneous rate is 16.04% or 23.036% with the employee rate of 7%. The rate is projected to increase by 0.5 percentage points or an increase of an additional 3% from 2011/12 to 2012/13. The Fire rate also appears to be misstated. The correct Fire rate is 40.43% or 49.425% with the employee rate of 9%. The Fire rate is projected to increase 1.0 percentage point or an increase of 2.4% from 2011/12 to 2012/13. Similarly a large portion of the Miscellaneous plan’s contribution rate (6.0%) and the Fire Safety plan’s contribution rate (17.4%) was due to their respective side fund payments. Furthermore the amortization periods for Miscellaneous and Fire Safety were very short, at 7 and 6 years respectively, which as explained above, results in a higher contribution rate over the short term. The City has recognized the significance of the funding difficulties that it faces and has initiated several strategies to reduce costs including proposals to labor unions to modify pension formulas. However, the City is not proposing to reduce or eliminate the City's commitment to p. 283 Page | 4 pick up the 7% (Miscellaneous) and 9% (Safety) employee contributions for CalPERS pensions at this time. The City is considering the issuance of Pension Obligation Bonds (POBs) to take advantage of current lower interest rates on borrowing. In recent analysis, bond advisors have estimated that POBs would save an estimated $329,818 over 8 years. The City did propose eliminating the pick-up of the employee’s contribution for future employees during the last negotiations but this was not part of the final package. The City typically does not discuss labor proposals that do not result in an agreement. According to the GFOA, when issuing pension obligation bonds, the estimated net present value savings should be compared to the actuarial investment return assumption of the pension plan. The net present value savings of $623,100 is referenced on page 289. PURPOSE The Hermosa Beach Police Safety Plan was chosen by the CGJ for in-depth review, based on the high annual required contribution for pension and retiree health benefits, amounting to over 62% of pensionable salaries in 2009, and expected to rise to over 70% of pensionable salaries by 2012. BACKGROUND The City of Hermosa Beach offers pension benefits to its employees through CalPERS. CalPERS acts as a common investment and administrative agent for participating public entities within the State of California. Benefit provisions and all other requirements are established by State statute and City ordinance. Hermosa Beach participates in 3 risk pool plans for its Miscellaneous, Fire and Police employees. As of the last valuation, the City had among the highest CalPERS employer contribution rates of any jurisdiction in Los Angeles County (LAC). The Police rate for Hermosa Beach is the highest but the Fire and Miscellaneous rates may not be the highest in the County. Cities who have issued POBs to pay off their side fund would appear lower, using PERS rates only, but in fact could be higher when the PERS rate and the POB obligation are considered together. Therefore, the comparison used by the Grand Jury may be inaccurate. The employer contribution rate for its Police Safety Plan was the highest in the County at a reported rate of 48.9% of salaries. In addition to its employer contribution, the City has agreed to pay the full amount of the employee contribution which amounted to an additional 9% for uniformed Police Department employees. This has a significant effect on the City's costs, creating an effective contribution rate for uniformed police personnel of 57.9% of salaries in FY 2009-2010. The above rates are incorrect. The rate in 2009-10 was 47.822% + 9% employee rate or 56.82%. The rate in 2010-11 was 47.543% + 9% employee rate or 56.54%. The City also offers its employees retiree health benefits, or Other Post Employment Benefits (OPEB), which had an Annual Required Contribution of $595,482 in FY 2009-2010. On Citywide pensionable salaries of $11,229,859, this resulted in an OPEB rate of 5.3% in that year. Added to the effective CalPERS rate described above, the City paid 62.2% of salaries for uniformed Police Department employee retirement benefits in that year. The rate could rise to 70% by 2012. Exhibit 38 shows key attributes of the retirement plan: p. 284 Page | 5 Exhibit 38. Hermosa Beach Police Safety Plan Attributes Membership Plan Benefit and Options Active Members 37 Normal Retirement Age 50 Retired Members 68 Benefit Formula 3% x Years Disabled/Retired Members Unk Lump-Sum Death Benefit Yes Survivor Members Unk Survivor Benefit Yes lnactive Members 29 Retiree Health Yes Total Members 134 Deferred Compensation Yes Actuarial Financial Investment/Discount Rate Assumed Actuarial Rate 7.75% One Year Actual Return (FY 2009) -24.00% Pension Fund Actuarial Accrued Liability $ 41,566,800 Unfunded Actuarial Accrued Liability* $ 16,550,608 Funded Status 60.2% Methods lnvestment Smoothing 15 Years lnvestment Corridor 60% to140% Market Amortization of Unfunded Liability 30 Years Retiree Health Fund** Actuarial Accrued Liability $ 5,830,000 Unfunded Actuarial Accrued Liability $ 3,192,758 Funded Status 45.2% Contributions Pension Obligation Bonds Employer Contribution 48.9% Employee Contribution Pick-Up 9.0% Total Contribution 57.9% Principal Balance $ - Projected Interest Expense $ - Total Indebtedness $ - *Includes estimates adjusted by Side Fund balance **All City employee cost. Source: Hermosa Beach -2009 CalPERs Pooled Plan Actuarial Report and CAFR for year ending June 30, 2009 The above estimates for the AAL and UAAL appear to be high. Independent Actuary John Bartel estimates the AAL and UAAL at $35,188,397 and $11,003,744 respectively. See the response on page 7. Page | 6 Because Hermosa Beach has less than 100 employees in each of its plans, it participates in CalPERS pooled fund plans, whereby the assets and liabilities of the City are pooled with those of other similarly sized jurisdictions that have elected the same plans for their employees. As of June 30, 2009, Hermosa Beach was participating in 3 such pooled plans: the Miscellaneous 2% at 55 Plan for non-sworn employees, the Safety 3% at 55 Plan for sworn Fire Department employees, and the Safety 3% at 50 Plan for sworn Police Department employees. OVERVIEW OF HERMOSA BEACH PLANS Exhibit 39 shows the low funded status of all 3 Hermosa Beach pooled plans as of June 30, 2009. The City also had an additional negative "Side Fund balance" of $13.9 million, representing the balance remaining on Unfunded Actuarial Accrued Liability (UAAL) for the plans at the time they joined the various CalPERS pooled funds. The amortization of this negative Side Fund balance significantly increases the City's ARC which is particularly apparent with the Police Safety Plan: Exhibit 39. Hermosa Beach 3 CalPERS Pooled Plans Funded Status-2009 Hermosa Beach Pension Plan Funded Status Miscellaneous: 2% at 55 Plan 64.9% Safety - Fire: 3% at 55 Plan 61.5% Safety- Police: 3% at 50 Plan 60.2% See first response on page 2. In addition to the unfunded liabilities of its 3 CalPERS pooled plans, Hermosa Beach had nearly $2.5 million of UAAL in retiree health, or OPEB liability. While the City had not borrowed using POBs as of June 30, 2009, the CGJ was advised during interviews that management was poised to borrow using POBs during the current fiscal year to prefund its UAAL and negative Side Fund balance. The CGJ chose Hermosa Beach for in-depth analysis because it is a CalPERS risk pool plan that has annual contribution rates that are among the highest in the County. As mentioned earlier, the only plan was to use POB’s for the side fund balance. Exhibit 40 shows key attributes of the 3 Hermosa Beach retirement plans. Because these are all pooled plans, the exact amounts for liability and assets for each was not available from CalPERS for this assessment. However, estimates could be made by apportioning the pooled fund actuarial data to Hermosa Beach and then adding specific data for the City's Optional Benefit cost and Side Fund amortization. The results of this analysis indicated that the City's overall CalPERS funded status as of June 30, 2009 was approximately 46.7%, as shown in Exhibit 40. The Police Safety Plan had the lowest funded status of approximately 39.5% and; because it is the largest of the 3 funds, it caused the overall average for the City to skew downward. p. 285 Page | 7 Exhibit 40. Estimate of the City of Hermosa Beach Pension Plan Funded Status Employee Group Plan Total Member Count Estimated AAL Estimated UAAL Net Funded Ratio Side Fund Balance/AAL UAAL Plus Side Fund Gross Funded Ratio Miscellaneous Safety Fire Safety Police TOTAL 2% at 55 3% at 55 3% at 50 307 77 134 29,602,475 19,792,157 41,566,800 90,961,432 10,396,555 7,626,696 16,550,608 34,573,859 64.9% 61.5% 60.2% 62.0% 2,677,994 2,590,630 8,609,663 13,878,287 13,074,549 10,217,326 25,160,271 48,452,146 55.8% 48.4% 39.5% 46.7% Source: Hermosa Beach and Pooled Fund CalPERS actuarial reports for the year ending June 30, 2009 The Gross Funded Ratio shown above understates the City’s Market Value Funded Ratio. The terms “Net” and “Gross” can be misleading and Bartel Associates suggests using the terms “Funded Ratio including Side Funds in Liabilities only” and “Funded Ratio including Side Funds in Liabilities and Assets” and revising the table. Since the City owes the side fund to CalPERS, the City’s total unfunded liability should be based on the former not the latter. The Net Funded Ratio shown above is consistent with this on a total risk pool basis while the Gross Funded Ratio adds the side fund balance to a UAAL, essentially double counting the side fund balance in the unfunded liability. Bartel Associates estimates the Funded Ratio including Side Funds in Liabilities and Assets as 69.2%, 69.1% and 68.7%, with a total funded ratio of 69.0%. Bartel Associates believes the above “Net Funded Ratio” should be replaced with these percentages and with the two previous columns revised to accurately reflect this change as shown below. It is important to note that these are Market Value unfunded liabilities and Actuarial Value unfunded liabilities would be noticeably higher and consistent with the City’s anticipated contributions. Exhibit 40 shows the Side Fund balances due as of the valuation date were significant and appear to be a major reason for the overall low funded status for the City even when considered in relation to investment losses. This assessment is borne out by analyzing the components of the City's contribution rate for its Police Safety plan for the current fiscal year as shown in Exhibit 41: Exhibit 41. Components of the Hermosa Beach 2010-11 Police Safety Contribution Rate Source: Hermosa Beach CalPERS actuarial reports for the year ending June 30, 2009 Exhibit 41 shows the amortization of the Side Fund adds 26.663% to the City's Police Safety AAL UAAL Funded Ratio Including side fund in liability and assets Side Fund UAAL + Side Fund Funded Ratio including side fund in liability only Misc 24,657,512$ 7,588,586$ 69.2%2,677,994$ 10,266,580$ 58.4% Fire 17,569,964$ 5,428,367$ 69.1%2,590,630$ 8,018,997$ 54.4% Police 35,188,397$ 11,003,744$ 68.7%8,609,663$ 19,613,407$ 44.3% Total 77,415,873$ 24,020,697$ 69.0%13,878,287$ 37,898,984$ 51.0% FY 2010-11 Cost Category Cost Percent of Payroll Risk Pool’s Net Employer Normal Cost $653,715 15.707% Risk Pool’s Payment on Amortization Basis 102,800 2.470% Optional Benefits 112,497 2.703% Amortization of Side Fund 1,109,691 26.663% Total Employer Contribution $1,978,703 47.543% p. 286 Page | 8 Plan rate, which represents approximately 56.1% of the total cost of the benefit in that year. According to City management staff, when the City initially joined the CalPERS pooled plans in 2003, it had an existing UAAL that was amortized over a period of 15 years. Each year, the City has paid down the Side Fund balance in amounts required by CalPERS. According to data provided by Hermosa Beach, the Side Fund balances for each of the 3 plans will be fully paid off between FY 2016-2017 and FY 2018-2019. The schedule generally conforms to what the CGJ was told by Hermosa Beach management staff during interviews, who estimated that the Side Fund balances would be completely paid off in 7 to 8 years. Based on the above rates, if the side fund were paid off, the Police rate would change from 47.543% to 20.88%. Further, a simple comparison of contribution rates does not fully describe the impact of the side fund, as amortization periods should also be considered. The City’s side fund balance has a short (8 year) amortization period, which is one of the primary reasons why the City’s contribution rates are higher than others. However, as mentioned above, this is a fiscally conservative approach because the City pays less interest for the side fund. For example, if the amortization period were 20 years instead of 8 years, the City would have to pay additional $5.6 million in interest over the next 20 years. IMPACT ON CITY SERVICES AND LABOR NEGOTIATIONS The significant costs of retirement benefits for employees, as well as the general revenue losses from the recession, have impacted the City's ability to fully fund historical service levels. In FY 2010-2011, the budget included $2.4 million in revenue enhancement initiatives; e.g., increase parking lot fees, extend meter enforcement hours, etc., as well as cost reductions; e.g., eliminate funding for 14 positions, eliminate parking attendants and replace with automated attendant machines, reduce contracts for services and supplies, etc. These initiatives equated to budget reductions of approximately 8.2%. In addition to these recommendations, City management is considering a series of other initiatives to increase revenues and reduce expenditures that could be pursued during the fiscal year. This included a potential option to offer an early retirement program and a commitment to be "moving to implement a 2-tier retirement system for all new employees." City management stated that the City would be looking at alternatives for more effectively integrating retiree health care benefits with Medicare. MODIFICATIONS TO PENSION PLANS During interviews, the City management stated that these initiatives are being actively pursued. Specifically, as part of active negotiations, the City is offering the changes shown in Exhibit 42 to its 7 employee bargaining groups: Exhibit 42. Hermosa Beach Pension Change Initiatives Being Pursued with Its 7 Employee Bargaining Groups Employee Group Current Formula Proposed Formula Miscellaneous Fire Safety Police Safety 2% at 55 3% at 55 3% at 50 2% at 60 2% at 50 2% at 50 According to City management, they have received "strong policy direction" from the City Council to reduce the annual pension cost and are confident that the labor unions will work collaboratively with management to establish less costly second tier retirement plans for new employees. The two tier system with the plans above was implemented on July 16, 2011. p. 287 Page | 9 REDUCING OR ELIMINATING EMPLOYEE CONTRIBUTION PICK UP The City of Hermosa Beach presently picks up the full 7% (Miscellaneous) and 9% (Safety) employee contribution as part of negotiated compensation for City employees. In FY 2010-2011, this equates to approximately $900,000 on salaries of approximately $11.2 million. According to the City management, this represents employee compensation that could be reduced or eliminated through the collective bargaining process. However, a proposal to make such changes has not been made to the City's labor unions at the writing of this Report. Further, because of the way in which CalPERS calculates rates, City management states that impacts of reductions in the contribution pick up would not be realized for approximately 3 years. The last sentence above is not correct. Any reduction to the pickup would be effective as soon as it was implemented. The City could receive more immediate budget savings by approaching labor unions to reduce the amount of the pick up for current employees when compared with the timing of eventual savings from establishing a second tier. Typically, savings from establishing second tier benefits occur over a long period as employees receiving the more costly benefits leave employment and are replaced by new employees. This transition often takes 15 to 20 years before substantial savings are realized, particularly in a small jurisdiction where many employees stay for their entire career. Although the CGJ did not analyze the attrition rate in Hermosa Beach, or conduct analysis on projected future savings from the proposed second tier benefit formulas, the CGJ believes immediate budget savings will be minimal unless the City has an older workforce that could be induced to leave employment using early retirement incentives. The CGJ does recognize that the City could also achieve savings as staffing levels return to levels that existed prior to the recession. In addition to the 14 positions which are included in the budget without funding, City management reported that there were an additional 11 positions that were funded but unfilled at the time of the interview, for a total of 25 vacancies. To the extent the City hires staff to fill these vacancies after the tiered pension plan is implemented, the budget requirements for retirement benefits will increase at a slower rate. The City did offer an early retirement incentive; 13 employees took advantage of the program. A total of 17 positions were dropped in the 2011-12 Budget for a savings of $1.4 million. The City does have the option of offering the early retirement program again. PENSION OBLIGATION BONDS At the time of this analysis, the City did not have any POBs but was exploring the possibility of borrowing funds through the California Statewide Community Development Authority to pay down its CalPERS Side Fund balance. An initial analysis by the City's financial advisors indicate that interest savings of as much as $329,918 could be realized over the funding period by reducing the amount of interest being paid on the debt.49 Exhibit 43 summarizes the interest savings projections made by the Hermosa Beach financial advisors on the planned POBs versus the interest charged by CalPERS on the Side Fund balance over the amortization period: GFOA recommends that governments consider the amounts of the estimated net present value savings, the spread between the true interest cost of the bonds and the actuarial investment return assumption of the pension plan. The analysis In Exhibit 43 mentions but does not consider the net present value savings of $623,100. Furthermore, because the Bond Advisors were somewhat conservative in their savings estimates, it is likely actual savings will be higher than shown. 49 Known as arbitrage, the savings is essentially achieved from the differential between the interest expense on the original debt and the interest expense on the new debt. The amount of savings is highly dependent on market conditions. The financial advisor assumed fixed interest expense of 4.62% through 2016 and 6.20% from 2017 through 2019 on the bonds, compared with 7.75% being charged by CalPERS throughout the debt period. Using the financial advisors assumptions, the present value of the savings would amount to $623,100. p. 288 Page | 10 Exhibit 43. Hermosa Beach Bond Advisor Estimate of POB Savings Side Fund Refunding Term Balance Plus Amount Plus Estimated CalPERS Plan Date Interest Due Costs Savings Miscellaneous 7/1/2018 $ 3,226,028 $ 3,167,118 $ 58,910 Fire 7/1/2017 2,963,585 2,903,161 60,423 Police 7/1/2019 10,875,473 10,664,989 210,484 Total $ 17,065,086 $ 16,735,268 $ 329,818 Source: January 4, 2011, California Statewide Community Development Authority Prepared by Morgan Stanley/BWR The present value of this savings is estimated to be $623,100 over the term of borrowing. While the financial analysis supports a decision to borrow POB funds at this time, the City will need to monitor the market and ensure that the savings potential remains since current projections are modest. Should the cost of borrowing funds increase, the ability to realize even these modest savings will be compromised. In addition, once the Side Fund debt is paid, the City will still be required to contribute significant amounts for pension benefits directly to CalPERS. Except for the arbitrage savings of $329,918 that is projected to occur over the 8 year debt window (an average of $41,227 per year), the total outlay for CalPERS and POB debt will approximate the costs that would otherwise be charged by CalPERS. Using the net present value of savings, the average per year would be $77,888. The GJ suggests the City should monitor the market to determine if savings are materialized. The Bond rates will be determined at issue and CalPERS discount rate would be used to determine savings. Consequently the only variable will be the possibility that CalPERS will lower its discount rate. The Bond Advisors have already determined that the City will save even if CalPERS, at some future date, lowers their discount rate to 7.25%, an unlikely event in the short term. In addition, as stated elsewhere in this Report, the Government Finance Officers Association of the United States and Canada (GFOA) has issued an advisory on this topic. When discussing practical considerations regarding decisions to issue POBs, the advisory states: Even if the analysis indicates that financial benefits appear to outweigh the risks, governments should evaluate other issues that may arise If the bonds are Issued, such as the loss of flexibility in difficult economic times because of the need to make timely payments of principal and interest in order not to default on the bonds, potential misunderstanding by policy makers regarding the possibility that an unfunded liability may reappear in the future, and potential pressures for additional benefits by government employees if plans are fully funded and government's contribution as percentage of payroll has declined relative to neighboring jurisdictions.50 Given the relatively modest annual savings to be achieved by issuing the proposed POBs, taking these other considerations into account as it moves toward a decision is advised. OPEB PREFUNDING AND ANNUAL REQUIRED CONTRIBUTIONS As part of this assessment, the CGJ analyzed the funded status of OPEB for those jurisdictions that offer retiree health benefits to employees in the County. Only 14 of 70 cities offering such benefits have funded any portion of the AAL for OPEB. The remainder has not been pre-funding these benefits and continues to operate on a pay-as-you-go basis. The City of Hermosa Beach began to pre fund OPEB benefits in 2007 shortly after it had completed its first actuarial evaluation of retiree health benefits. At that time, the City contributed $1,401,000 to a trust to begin accumulating a balance that could be invested in high yield 50 GFOA of the US & Canada, Advisory: Evaluating the Use of Pension Obligation Bonds (1997 and 2005) p. 289 Page | 11 investments so that future contributions could be discounted and to establish asset reserves to pay for the future costs of benefits. In addition, the City Council adopted a policy of fully funding the ARC each year in conjunction with the budget action to appropriate funds to the reserve. As of June 30, 2008,51 the City reported OPEB AAL of $5,830,000 and an Actuarial Value of Assets (AVA) of $2,647,242 resulting in a funded ratio of 45.2%. Although a more recent valuation was not available for this Report, the Hermosa Beach Finance Department reports that the actual market based investment balance for the fund was reported to be $3,386,296 as of January 31, 2011. The City has done a notable job in attempting to prefund its OPEB obligations since the initial valuation was prepared, both with the deposit of $1.4 million in the fund shortly after it was created and with the policy to fully fund the ARC on an annual basis. In addition, costs appear to be well contained with monthly benefits ranging "between $40 and $612 per month" at the time of the last valuation and CAFR description. According to the City management, there are currently no plans to modify benefits or increase employee cost sharing. METHODS AND PROCEDURES Using information obtained for each of the 277 pension plans in Los Angeles County (LAC), the CGJ selected those that exhibited a range of characteristics that suggested in-depth research and analysis would be appropriate. Once the plans were selected, meetings were held with officials, various documents were obtained and analyzed, and Findings and Recommendations were developed. 51 This is the date of the most recent valuation, as reported in the City's Comprehensive Annual Financial Report for the Period Ended June 30, 2010. Page | 12 FINDINGS 1. The City of Hermosa Beach pays among the highest retirement system employer contribution rates in the County and pays the highest employer contribution rate for its CalPERS Police Safety Plan. In addition, the City picks up the full amount of the employees' contribution at 7% of salaries for Miscellaneous employees and 9% for uniformed police and fire employees. The respondent agrees with the finding.. 2. These high rates are being driven by unfunded actuarial accrued liability that is reported in a "Side Fund" created after the City moved to its CalPERS Risk Pool plans. Based on the CalPERS rate estimate for the Police Safety Plan in FY 2010- 2011, the City is paying over $1.1 million annually for the amortization of that plan's Side Fund balance, which equates to 56.1% of the total CalPERS employer contribution rate in that year. The respondent partially disagrees with the finding. To the extent that the finding states that the side fund has improperly created high contribution rates, respondent notes that a primary reason that contribution rates are high is due to the shorter amortization periods for the City’s side fund balances. Independent Actuary John Bartel, who reviewed this report for the City, indicates that paying the side fund off over a shorter period is a fiscally responsible and conservative approach. At the end of the amortization period, Police rates will drop dramatically. 3. The high cost of employee retirement benefits plus the impacts from the recession have caused the City to make significant budget reductions in the past years. In FY 2010-2011, City management made budget recommendations to reduce costs by modifying service levels and removing funding for 14 positions. Other positions have been kept vacant to achieve salary savings equating to 25 total vacant positions. The respondent agrees with the finding. 4. The City has taken action to create a second retirement tier for new employees pursuant to strong policy direction from the City Council. However, the City is not pursuing other alternatives that would result in more immediate savings such as reducing or eliminating the pick up of the employee contribution rate. The respondent partially disagrees with the finding, in that it specifically disagrees with the statement that “the City is not pursuing other alternatives that would result in more immediate savings such as reducing or eliminating the pick up of the employee contribution rate.” The City did pursue eliminating payment of the employee contribution rate for all future employees in the last labor negotiations but was not able to reach agreement. In the 11-12 Budget, 17 positions were dropped which saved $1.4 million. The City will be undertaking labor negotiations with all seven bargaining units in the near future and will consider many alternatives to reduce costs, including reducing or eliminating payment of the employee contribution rate. The City will continue to pursue other alternatives that would result in savings to the City while maintaining the high standards of service quality and staffing provided for its residents. 5. The City is contemplating the issuance of Pension Obligation Bonds which will pay off the Side Fund balance and improve the funded ratio of the pension plan. However, annual savings will be modest based on the most recent analysis conducted by the City's bond analysts. p. 290 Page | 13 The respondent partially disagrees wholly or partially with the finding, specifically the statement that “annual savings will be modest.” Foot note 49 of the GJ report refers to the present value savings of $623,100. The CalPERS side funds accrue interest at 7.75% regardless of CalPERS actual investment return. Consequently, borrowing at a lower rate and paying the side funds off quickly can yield significant savings for the City. Furthermore, because the Bond Advisors were somewhat conservative in their savings estimates, it is likely actual savings will be higher than shown. 6. The City has moved forward aggressively to pre fund its OPEB obligations, being one of only 14 out of 70 OPEB cities to do so in the County. While the City's most recent actuarial evaluation from 2008 reported a funded ratio of only 45.2% on $5.8 million in liabilities, recent finance reports show that the cash balance in the fund has grown substantially to $3.4 million as of January 31, 2011. The respondent agrees with the finding. RECOMMENDATIONS 1. Hermosa Beach make proposals for reducing or eliminating the employee retirement pick up during contract negotiations with employee bargaining groups. This pick up does not represent a vested pension benefit for employees, but is considered deferred compensation that could be reduced through the collective bargaining process to achieve more immediate budget savings. The recommendation has not yet been implemented, but will be implemented in the future to the extent feasible. As indicated in Finding 4, the City will be undertaking labor negotiations will all seven bargaining units in the near future and will consider this alternative to reduce costs, among many others. The City is governed by the Myers-Milias- Brown Act and as such, is required to meet and confer in good faith regarding wages, hours and other conditions of employment. 2. Hermosa Beach proceed cautiously with its current initiatives to pay off the CalPERS Side Fund balance by issuing POBs, making certain that the financial benefits are substantial and taking into consideration potential obstacles cited by the GFOA with respect to removing the debt obligation from its pension plans. The City needs to weigh any projected modest savings against other advice from the GFOA for jurisdictions that may be considering POBs as a means of reducing UAAL. The recommendation has not yet been implemented, but will be implemented in the future. This recommendation does not require any immediate action, but the City will take this recommendation into consideration when deciding whether to issue POBs to pay off its Side Fund balance. Respectfully submitted, ______________________________ Mayor, City of Hermosa Beach Page | 14 REQUEST FOR RESPONSE California Penal Code Sections 52 §933(c) and §933.05 requires a written response to all Recommendations contained in this Report which shall be made no later than ninety (90) days after the Civil Grand Jury publishes its Report (filed with the Clerk of the Court). Respond to: Presiding Judge Los Angeles County Superior Court Clara Shortridge Foltz Criminal Justice Center 210 West Temple Street, Eleventh Floor, Room 11-506 Los Angeles, CA 90012 All responses for the 2010- 2011 CGJ Report's Recommendations must be submitted to the above address on or before the end of business September 30, 2011. Responses are required from: Recommendation Number(s) Responding Agency 1 City of Hermosa Beach 2 City of Hermosa Beach 52 Reference California Penal Code Sections §933(c) and §933.05 at the beginning of this 2010-2011 Civil Grand Jury Report p. 291 15 16