City of Palo Alto Office of the Mayor and City Council*

R2A

Some cities, including Palo Alto, have adopted second tier plans, but further changes are needed. Second tier plans should be implemented for both Miscellaneous and Public Safety. Response: Agree. Since the Grand Jury questionnaire was submitted, Palo Alto has now adopted second tier plans for safety employees as well as miscellaneous.

R2B

Cities which have not already done so should implement second tier plans for Miscellaneous and public safety employees. Response: Agree. As discussed above, Palo Alto has already implemented this recommendation.

R2C

All Cities' new tier of plans should close the unfunded liability burden they have pushed to future generations. The new tier should include raising the retirement age, increasing employee contributions, and adopting pension plan caps that ensure pensions do not exceed salary at retirement. Response: Agree. However, as discussed above, the City's options are currently limited to the pre-determined formulas and other optional benefits established by CalPERS. The City has taken steps to address issues associated with some of its optional benefits, but also would like 2 to see CalPERS offer more options for additional cost containment. As discussed in the response to

R5

Cities should immediately work toward implementing policy changes and adopting measures aimed at making full OPEB ARC payments as soon as possible. Response: Agreed. Palo Alto approved a policy to make full Retiree Medical Annual Required Contributions (ARC) payments in 2007 (CMR:438:07) when the City established the trust with CalPERS for Retiree Medical benefits.

R6

This recommendation pertains to the City of San Jose and is not applicable to Palo Alto.

R7

Cities should transition from defined benefit plans to defined contribution plans as the new tier plans are implemented. Response: Agree in principle. The Council has recognized the importance of new and more creative options for post-employment benefits going forward and views defined contribution plans as an important option. The City already offers all employees, in addition to their CalPERS pension, the option of participating in a IRC 457 retirement plan and contributing a portion of their pre-tax earnings for retirement. However, this is another area where CalPERS currently limits the City's ability to make changes. As a CalPERS participant, the City cannot opt out of the defined benefit plans offered by CalPERS without a prohibitive exit cost, or otherwise reduce the proportion of retirement needs to be met through the defined benefit program. As a result, changes in state law would be necessary before the City could fully implement this recommendation. If PEPRA is any indication, the state may only make it more difficult to introduce or switch to a defined contribution model. In the recently-approved legislation, it appears a public employer may not adopt a new defined benefit formula unless it is the same as those in PEPRA or is 4 certified by the retirement system's chief actuary and approved by the Legislature. PEPRA also places restrictions on the ability of employers to contribute to defined contribution plans, so the City's ability to transition away from defined contribution may also be limited. Additional Information and Clarification <b>Unfunded Liability</b> On of the Report, Table 3 shows unfunded liability for pension and OPEB for 8 cities in Santa Clara County, as well as the County itself, in total and on a per-resident basis. Staff has reproduced that table below: FY 2010 Unfunded Liabilities Liability per Resident Pension OPEB Total City Santa Clara $ 1,547 County 1,455,835,322 1,300,000,000 2,755,835,322 18,581,728 $ 629 18,069,366 Cupertino 36,651,094 $ 819 Gilroy 4,900,000 40,000,000 35,100,000 Milpitas 31,230,798 $ 1,518 101,397,773 70,166,975 MV $ 1,803 29,396,467 133,517,763 104,121,296 Palo Alto $ 4,021 153,941,000 105,045,000 258,986,000 $ 3,320 San Jose 1,706,081,881 3,140,778,352 1,434,696,471 Santa Clara $ 2,125 23,855,000 223,667,947 247,522,947 Sunnyvale 92,800,000 $ 1,728 149,300,000 242,100,000 It appears from the above Table that Palo Alto has a high ratio of unfunded liability per resident; however several factors must be considered to place this ratio in perspective. The table does not appear to take into account the level of service and the unique services that Palo Alto provides in comparison to other cities in the County. First, Palo Alto is the only of the above cities operating its own utilities: gas, electric, water, waste water collection, refuse, storm drain, waste water treatment and fiber optic. Utility operations account for 40% of the Palo Alto workforce. The General Fund administration provides services (HR, finance, etc.) to the Utilities which they reimburse annually. The other cities would not have the same staffing levels as a result of Palo Alto having more utilities. Furthermore, the compensation offered to Utilities employees must be competitive with equivalent private-sector utilities; salaries in the 5 Enterprise Funds tend to be higher, and they participate in the CalPERS pension based upon their salaries. Second, Palo Alto offers regional services, such as our Water Quality Control Plant, our Animal Services, and our Fire Services provided to Stanford, for which we receive offsetting revenue. However the full liability is captured in the table. Fourth, the Cities have unique attributes that make up the OPEB liability, which should be considered in detail. For instance, comparing Palo Alto to Mountain View's OPEB liability, Palo Alto's is higher due, in part, to covering the cost of dependent healthcare coverage for retirees while Mountain View does not. Palo Alto also has a greater number of retirees, 860 compared to Mountain View's 304. The actuarial calculation of OPEB liability for the two cities differs in a key assumption related to assumed annual increase in healthcare expense, which increases the cost of future year liability. Palo Alto's OPEB actuarial report assumes that healthcare will increase 9.4% in 2013 and then at least 7.8% per year through 2020. Mountain View's, on the other hand, assumes healthcare will increase 7.6% in 2012 down to 5.5% through 2019 and beyond. Palo Alto's healthcare cost estimates are very likely to materialize given the recent trend in healthcare increases. These important differences are a significant factor in while Palo Alto's valuation is higher than Mountain View's. An additional factor not examined in the table is what the total liability for pension and OPEB is in each City. Comparing unfunded liabilities disregards the level of "go-forward" savings that each City has achieved towards its liabilities. The following table compares total liability for the General Fund of each of the seven cities. If we isolate the liabilities of the General Fund only, this eliminates the Enterprise Fund effect from the figures, and the table looks a bit different: 6 FY 2010 Unfunded Liabilities* Liability per Pension OPEB Resident City Total $ Santa Clara County 1,455,835,322 1,300,000,000 2,755,835,322 1,547 $ Cupertino 18,581,728 18,069,366 36,651,094 629 40,000,000 $ Gilroy 35,100,000 4,900,000 819 $ Milpitas 70,166,975 31,230,798 101,397,773 1,518 MV $ 104,121,296 29,396,467 133,517,763 1,803 PA General Fund $ 2,727 only 101,711,687 73,900,776 175,612,463 $ San Jose 1,706,081,881 3,140,778,352 3,320 1,434,696,471 $ Santa Clara 223,667,947 23,855,000 247,522,947 2,125 $ 1,728 Sunnyvale 149,300,000 92,800,000 242,100,000 *Other cities' liabilities shown in table may include non-General Fund amounts. Palo Alto's General Fund's liability of $2,727 per resident is more of an apples-to-apple comparison than the $4,021 figure that includes liabilities for Enterprise Fund employees. Palo Alto's General Fund liability of $175,612,463 is 115 percent of the General Fund budget of $152,807,000. By comparison, Mountain View's liability of $133,517,763 is 138 percent of General Fund budget of $96,644,000. If we next compare the unfunded liability per employee or per retiree, rather than per resident, for each city, Palo Alto does not particularly stand out. The following table shows the relative (unfunded) post-retirement expense of each staff person - current and former - for each agency. Combined Number of Unfunded Number of Active liability/active Active Number of <b>Employees</b> Employee or City <b>Employees</b> Retirees and Retirees Retiree Cupertino 262 $ 97,998 212 374 $ 82,474 Gilroy 230 255 485 Milpitas 372 206 $ 175,429 578 Mountain View 521 288 809 $ 165,040 Palo Alto Gen'l Fund 556 842 1,398 $ 125,615 Santa Clara 947 621 $ 157,859 1,658 896 $ 127,087 Sunnyvale 1009 1,905 Among the seven cities shown in the table above, Palo Alto's average unfunded liability per active plus retired employee is close to the median. Sick Leave Payout A recent article in the press described the option in some local governments for employees to get cash for unused sick leave at the time of retirement. Palo Alto made changes to this practice in the 1980s. Presently there are only 9 long-term employees eligible to receive sick leave payout. Eventually, all employees eligible will have left the city. <b>Additional Clarifications</b> 1. On of the Grand Jury Report, Table 5: Pension Benefit Plan Changes, does not capture Palo Alto's second tier and employee contribution changes. The Palo Alto line items should read as follows: 2^nd Tier Plan 1st Tier Plan Year of Year City Original Benefit Employee- Plan Employee- Plan Paid Adopted Paid Change Increase Name contrib. contrib. Palo Alto Public Public 3% at 55 2011- 6.25%-9% 2002 0%-9% Safety Safety 2012 2% at 50 3% at 50 Palo Alto Misc. 2007 Misc. 7%-8% 2% at 60 7%-8% 2010 2% at 55 2.7% at 55 2. On of the report, it mentions "Mountain View, Sunnyvale and Cupertino are commended for having begun to implement a "pay forward" strategy [for Retiree Medical], which demonstrates fiscal responsibility." Palo Alto would like to point out that we have executed a "pay forward" strategy since 2007. 8 3. On of the report, it mentions that "all Cities surveyed [with a few exception] ... either reimburse for accrued unused sick time or permit it to be converted into service time for purposes of determining pension. Palo Alto wishes to point out that in our city, sick leave payouts do not count towards pension credit. In conclusion, we in the City of Palo Alto share the Grand Jury's concern about the present and future costs of employee benefits. We have taken concerted action to contain these costs and will continue to look both strategically and operationally at how to reduce the City's benefit- related liabilities. The City's options are limited by the rules and structures of CaIPERS, however, and we look forward to additional changes both within the CalPERS system and in state law to provide cities with greater flexibility in reducing these costs. Sincerely, Yia,w∕ay Ye4h Måvor City of Palo Alto 250 Hamilton Avenue Palo Alto, CA 94301 . . . Exhibit 1 City of Palo Alto (ID # 2716) PALO <b>City Council Staff Report</b> ALTO <b>Report Type: Consent Calendar</b> Meeting Date: 4/9/2012 <b>Summary Title: Labor Guiding Principles</b> Title: Recommendation from Policy & Services Committee to Approve Labor <b>Guiding Principles</b> From: City Manager <b>Lead Department: Human Resources</b> <b>Recommendation</b> Staff and the Policy and Services Committee recommend that the Council approve the attached Labor Guiding principles. <b>Background</b> The concept of Labor Guiding Principles arose when the City modified its Impasse procedure last year to incorporate a new state law allowing employee organizations to request nonbinding fact