Drew Corbett, Finance Director, City of San Mateo

Grace Leung, Administrative Services Director, City of Irvine

Smart Planning in an Upturn

San Mateo • Incorporated 1894, Chartered 1922

• Population 102,000+

• 14.6 Square Miles

• $110 Million General Fund

• Full Service

Irvine • Incorporated/Chartered 1971

• Population 250,000+

• 66 Incorporated Square Miles, Sphere of influence

• $172.8 Million General Fund

• Mix of City and Contract Services

Core Message

▪ Strategic resource management key in upturn – Assess capacity to increase service levels and/or add new services

– Prioritize adds carefully

▪ Take advantage of a good economy to position your agency for the next downturn

3

Assessment Areas 4

Revenue Sustainability

Expenditure Growth

Reserve Levels

Infrastructure

Unfunded Liabilities

Service-level Deficiencies

Revenue Sustainability

▪ Careful evaluation of revenue growth –What are the drivers?

– Is it sustainable?

▪ Volatility is a key indicator

▪ Increasing service levels based on volatile revenues can lead to cuts

5

Property Tax

$0

$5

$10

$15

$20

$25

$30

$35

$40

Millio

ns

San Mateo

6

$0

$10

$20

$30

$40

$50

$60

Millio

ns

Irvine

Sales Tax

$0

$5

$10

$15

$20

$25

Millio

ns

San Mateo

7

$0

$10

$20

$30

$40

$50

$60

$70

Millio

ns

Irvine

Transient Occupancy Tax

$0

$2

$4

$6

$8

Millio

ns

San Mateo

8

$0

$2

$4

$6

$8

$10

$12

Millio

ns

Irvine

Property Transfer Tax

$0

$2

$4

$6

$8

$10

$12

Millio

ns

San Mateo

9

$0

$2

$4

$6

$8

Millio

ns

Irvine

Expenditure Growth

▪ Projected expenditure growth in relation to projected revenue growth – Strong long-term plan is key

▪ Focus on personnel cost growth

▪ What you can afford now less important than what you can sustain over the long term

10

Expenditure Growth

0

100

200

300

400

500

600

700

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

Cost Per Employee Number of Employees

City of San Mateo – General Fund

Expenditure Growth

0

200

400

600

800

1000

1200

$-

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

Cost Per Employee Number of Employees

City of Irvine – General Fund

Reserve Levels

▪ Policy levels –GFOA best practices for unrestricted fund balance

▪ At least 2 months operating expenditures

– Some governments hold more than this

▪ Appropriate reserve levels depends on risk – Revenue volatility must be considered

13

Reserve Levels

▪ Great time to assess creation of a stabilization fund – Provides service level stability

– Increase during upturns; draw down in bad times

▪ Especially effective with volatile revenues

14

City of Irvine Contingency Reserve Balance History

15

$5

.3

$6

.2 $8

.3

$1

0.0

$7

.8 $

11

.9

$1

9.9

$2

3.5

$1

8.4

$2

1.8

$1

3.4

$2

0.1

$2

0.6

$2

3.2

$3

0.3

$3

4.6

$0

$5

$10

$15

$20

$25

$30

$35

Mill

ion

s

City of Sunnyvale Budget Stabilization Fund Scenarios

-$40

-$30

-$20

-$10

$0

$10

$20

$30

$40

$50

09/10 11/12 13/14 15/16 17/18 19/20 21/22

Millions

BSF with Tier 2 Savings

BSF with Tier 2 Savings + Historical Safety SalaryIncreases

Infrastructure

▪ Infrastructure maintenance at risk during downturns – Potentially less painful than other cuts

▪ Significant downside to deferral

17

18

Pavement Condition Index

It is more cost effective to maintain a road while still in good condition over its life, as opposed to letting it deteriorate to the point that it requires major reconstruction.

Irvine

San Mateo City Average

72 PCI

Infrastructure

▪ Streets

–Current Pavement Condition Index = 72

– 19 miles of failed/failing streets

– $34 million additional funding needed

▪ Flood Control

– Limited funding but enormous need ($85M)

19

City of San Mateo

Infrastructure

▪ Streets – Current Pavement Condition Index = 86.6

– Pavement Management Program – Fully Funded

– High Council priority

▪ Facilities & Parks – Facilities Condition Assessment

– Parks, Facilities & Playground Master Plan

▪ Funding Sources – Dedicated Transportation Funds

– Developer Impact Fees

– General Fund

– Assessment District Fund

– Asset Management Plan Reserve

20

City of Irvine

Infrastructure

▪ Utilizing capacity for infrastructure is good investment

▪ Properly maintained infrastructure is the most cost effective

▪ Allows best allocation of resources across all priorities

21

Unfunded Liabilities

▪ Pension and OPEB

▪ Increased public scrutiny

▪ Growing portion of personnel costs

▪ Addressing liability more aggressively a consideration

22

Unfunded Liabilities

Unfunded Liability - Safety

Funded Status - Safety

Unfunded Liability -

Miscellaneous

Funded Status - Miscellaneous

Irvine $36M 82% $70M 78%

San Mateo $108M 67% $48M 79%

Sunnyvale $125M 74% $126M 75%

Menlo Park $15M 81% $20M 82%

23

Pension

Unfunded Liabilities

Unfunded Liability Funded Status

Irvine $5M 0%

San Mateo $12M 4%

Sunnyvale $65M 47%

Menlo Park $0 100%

24

OPEB

Options to Address Unfunded Liabilities

Irrevocable Trust

Shorter Amortization

Period

One-Time Payments

Internal Service Funds

Unfunded Liabilities 25

Shorter Amortization

▪ Request 15- or 20-year amortization from CalPERS (cost impact in actuarial report)

–Pros:

▪ Less overall funds spent on interest payments

▪ Lower payments in the long term

–Cons:

▪ Higher payments now

▪ Reduced flexibility

▪ Risk and reward

– Additional funds subject to investment gains and losses

26

One-time Payments

▪ Utilize one-time funds to accelerate payments to CalPERS

–Pros:

▪ Less overall spend on interest payments

▪ Not locked into a shorter amortization period

▪ Lower long-term rates

–Cons:

▪ Risk and return

– Funds subject to investment gains and losses

27

Internal Services Fund

▪ Set funds aside internally for unfunded liabilities

–Pros:

▪ Funds stay in the agency’s control

–Creates flexibility if conditions change

▪ Can be utilized to stabilize rates

–Cons:

▪ Funds stay in the agency’s control

– Lowest investment return option

–Could be used for other purposes

▪ No reduction to GASB 68 liability

28

Irrevocable Trust

▪ Establish Irrevocable Supplemental Trust – Pros:

▪ Can be used to stabilize rates

▪ Reduced GASB 68 liability

▪ Less restriction on investments

– Higher return than agency’s portfolio

–Cons:

▪ Funds can only be used for established purpose

29

City of Irvine Pension Scorecard 6/30/2014 CalPERS Valuation & 6/30/2015 Estimate

68.0%

73.0%

78.0%

83.0%

88.0%

93.0%

98.0%

Pe

nsi

on

Fu

nd

ing

Actuarial Date

Adopted Plan Target Plan Status 6/30/2014* No Action

Plan Target

Plan Status 6/30/2014

*Projected by CalPERS on the basis of 7.5% future annual investment returns and other actuarial assumptions

Service-Level Deficiencies

▪ Most challenging area to assess – Any operation can point to services not optimized

▪ Community preferences important to consider – An optimal service level may not be the preference

– Resource demand a key factor

▪ Return on investment of available capacity

31

$8

36

$7

79

$7

33

$7

30

$7

53

$7

72

$7

75

$7

70

$7

29

$6

41

$6

31

$6

15

$6

26

$6

35

$6

49

110,000

130,000

150,000

170,000

190,000

210,000

230,000

250,000

270,000

$400

$500

$600

$700

$800

$900

City Population

Cost Per Capita

General Fund Expenditures Per Capita CPI Adjusted (baseline of December 31, 2014)

Prioritizing

▪ Prioritizing capacity – Service-level deficiencies?

– Enhance existing services?

– Add new services?

▪ Likely answer is “All of the above”

33

Prioritizing

▪ Focus on best return on investment

▪ Compare competing priorities by analyzing outcomes from adding resources – Largest impact at lowest cost = best investment

▪ Utilization of performance metrics adds objectivity

34

Barriers to Success

▪ Discipline during good times can be difficult – Political pressure

– Employee association pressure

– Less focus on agency financials

35

Overcoming Barriers

▪ Good long-term planning model – Evaluating long-term impacts of decisions

▪ Strong financial policies – Reserve levels

–Compensation

– Infrastructure

–One-time revenues

▪ Opportunity to strengthen sustainability and resiliency

36