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CC 2021-07-27_11a American Rescue Plan Act Funding_PP Presentation OPTIONS FOR REDUCING THE CITY’S UNFUNDED ACTUARIAL LIABILITY APPROPRIATION OF EXCESS AVAILABLE FUND BALANCE ALLOCATION OF AMERICAN RESCUE PLAN ACT FUNDING 7/27/2021 1 Tonight Review and provide direction on the following items: Options for reducing the City’s CalPERS Unfunded Actuarial Liability (UAL) Allocating excess available Fund Balance Providing guidance on priorities for an expenditure framework for the City’s American Rescue Plan Act (ARPA) funding decisions and appropriating funds 7/27/2021 2 Recommendations Receive report on UAL options and provide direction; Appropriate $1,751,000 of Reserve Fund Balance towards the Pavement Management Program; Adopt Resolution accepting the receipt of ARPA funds and authorize City Manager to execute all documents as necessary for funding; Appropriate $2,493,950 of ARPA funds to Water, Sewer, and Stormwater Infrastructure projects; and Create an ad-hoc committee to evaluate options and provide future recommendations for allocating the remaining ARPA funds 7/27/2021 3 Options for Reducing the City’s UAL 7/27/2021 4 Options for Reducing Unfunded Actuarial Liability Making only required UAL payments each year Making additional direct payments to CalPERS Establishing a Section 115 Irrevocable Trust Issuing Pension Obligation Bonds (POBs) 7/27/2021 5 Unfunded Actuarial Liability 7/27/2021 6 7/27/2021 7 Making only required UAL payments each year This year’s $1,918,541 payment was made on July 2 Annual payment expected to rise to just over $2 million by 2030 before declining rapidly in the following years If all actuarial assumptions hold, UAL would be fully paid off in 2044 This option is currently built into the City’s budget 7/27/2021 8 7/27/2021 9 7/27/2021 Pros/Cons of making only required UAL payments each year Pros: Smallest impact on the City’s budget in the short-term Provides for the most short-term flexibility to fund other City priorities No further action needed Cons: Most expensive long-term option Like a 30-year vs 15-year home mortgage, the longer the payment plan, the higher the total interest costs will be 10 Making Additional UAL payments In 2018 the City Council approved paying down UAL by $5 million $3 million sent to CalPERS in 2018 and another $2 million in 2019 $423,000 average annual savings $7.5 million total savings over 30 year amortization period 7.1% ROI 7/27/2021 11 7/27/2021 12 Making Additional UAL payments Apply $1,750,000 UAL Savings of $120,000 to $140,000 annually CalPERS “fresh start” program: More aggressive 15-year pace Payments start at $2 million and drop off to $1.4 million in 2031 Total savings of $3 million Similar savings can be achieved with more flexibility to adjust payments if needed by making additional UAL payments each year similar to what would be required under “fresh start” 7/27/2021 13 7/27/2021 15 Year Amortization of UAL 14 7/27/2021 Pros/Cons of Making Additional Direct Payments to CalPERS Pros: Reduces overall pension costs City Council controls the timing and size of any additional contributions, which allows for greater flexibility to fund other City priorities that may arise (this would not be the case if the “fresh start” option were chosen) Cons: Takes available funding away from other City priorities If “fresh start” option is chosen, this would lock in higher UAL payments in the near and mid-term. 15 Establishing a Section 115 Trust Reasons for establishing a Section 115 Trust: Maintain local control over pension assets Use as a pension rate stabilization fund UAL payment of $1.8 million Due to an unforeseen drop in market conditions the payment is expected to increase by $500,000 This additional amount could come from the Section 115 Trust instead of the City’s available fund balance or from emergency reserves 7/27/2021 16 Establishing a Section 115 Trust Section 115 Trusts have the advantage of the potential for higher returns than can be generated by the City’s investment portfolio. City earned a weighted average of 1.09% over the past year The most conservative investment fund offered by the Public Agency Retirement System’s Section 115 Trust program earned 9.09% last year and 4.12% over the past ten years 7/27/2021 17 7/27/2021 Pros/Cons of Establishing a Section 115 Irrevocable Trust Pros: Alternative to sending funds to CalPERS Maintain greater local control of pension assets Stabilize budgeting for pension costs Reduce City’s UAL Higher potential earnings than City can achieve   18 7/27/2021 Pros/Cons of Establishing a Section 115 Irrevocable Trust  Cons: City retains fiduciary responsibility for the program Potential for negative investment performance Assets in Trust can only be used for pension liabilities Though assets can be accessed at any time as long as assets are used to fund the City’s pension obligations Administrative overhead can be a burden on City staff Typically, an investment committee is established to oversee investment of Trust assets; regular reporting must be prepared 19 Issuing POBs Replaces all or a portion of an agency’s UAL with bonded debt. Unlike previous options, POB essentially exchanges one form of debt for another – hopefully at a lower cost Since it is not possible to know up front how the market will perform over the life of the POBs or predict what actuarial assumptions, true cost savings will not be known until the POB is paid off 7/27/2021 20 7/27/2021 Pros/Cons of Issuing POBs Pros: Reduce City’s UAL Potentially provide cost savings over the term of the bond Provides better pension cost budget predictability 21 7/27/2021 Pros/Cons of Issuing POBs Cons: Risk that CalPERS earnings could drop below the cost of borrowing UAL could still reappear if market conditions or other assumptions deteriorate, although the UAL would be lower than it would have been without POBs Issuance costs can range from $280,000 to $400,000 depending on the size of the bond. Government Finance Officers Association (GFOA) recommends against issuing POB due to possibility bond proceeds may fail to earn more than interest rate owed over bond term thereby increasing overall liabilities. 22 7/27/2021 UAL Recommendation Provide direction on whether Council would like staff to pursue any of the options discussed Depending on Council direction staff would engage other expert resources such as bond advisors, investment management advisors, actuaries, etc. In light of the City’s recent $5 million investment in reducing its UAL, staff recommends investing excess reserves in maintaining the City’s infrastructure, specifically pavement maintenance 23 Allocating Excess Available Fund Balance 7/27/2021 24 General Fund Approved vs. Proposed 7/27/2021 25 Option 2 approved Streets Repairs on 04/27/2021 7/27/2021 26 Four street segments that fall below the line in Option 2 7/27/2021 27 ARPA Funding Decisions 7/27/2021 28 APRA Funding Arroyo Grande is eligible to receive $4,300,241 The City received the first portion of funding on July 13, 2021, totaling $2,150,121 Balance will be delivered 12 months later 7/27/2021 29 ARPA Eligible Uses Support public health expenditures, by funding COVID-19 mitigation efforts Address negative economic impacts caused by the public health emergency Replace lost public sector revenues Provide premium pay for essential workers Invest in water, sewer, broadband, and stormwater infrastructure 7/27/2021 30 ARPA Ineligible Uses Offset tax cuts implemented during the public health crisis Deposits into pension funds or rainy day funds Funding debt service and legal services 7/27/2021 31 ARPA Timeline and Reporting Requirements December 31, 2024, to commit ARPA funds December 31, 2026, deadline to spend these monies Funds are subject to annual project & expenditure reports 7/27/2021 32 ARPA Funding 7/27/2021 33 ARPA Funding 7/27/2021 34 APRA Funding 7/27/2021 35 Use of Remaining ARPA Funds Create an ad-hoc ARPA sub-committee to consider all options available with key considerations including: Avoid funding items that could be funded by other state or federal sources Be strategic and measured, considering the time horizon to spend the dollars (2024) and staffing constraints to initiate and complete projects Remain flexible, as the City’s needs may evolve over time Prioritize projects that are consistent with Council’s adopted FY2021-23 Goals   7/27/2021 36 Use of Remaining ARPA Funds The following uses would be consistent with Council’s adopted FY2021-23 Goals and may be considered by the committee: Homeless services Economic development effort Affordable housing programs 7/27/2021 37 Questions? 7/27/2021 38 End 7/27/2021 39 Backup Slides 7/27/2021 40 Safety Plan Amortization Bases 7/27/2021 41 7/27/2021 42