Good afternoon.
Good afternoon. It's 4 o'clock.
Today is Wednesday May 27th.
I'm calling to order the Finance Committee of the City of San Andrew City Council.
Madam Clerk, would you please take the roll?
After each agenda item is presented, Meryl has her committee member comments and then take public comment.
You will have 2 minutes for your comment.
A cafeteria timer will appear for the convenience of the speaker and attendees.
And would you also take rule to establish a quarter map.
Oh, sorry.
Mayor Mills.
Present.
Councilor Redden.
Present.
And Vice Mayor Goselfo is not intended to.
I believe she is delayed.
At this point in time, we will continue to our first item, item 2A.
The pension trust analysis, I believe we have an instruction called with Solidarity percent.
Thank you. Good afternoon, good afternoon, Mayor.
members of the Finance Committee, this afternoon I will present to you today's cultists pension
trust analysis and I'm joined here today by one of our consultants the city of
Actuary, Foster & Foster. So today we're going to provide a bit of an update on the
city's pension trust. So the city of San Diego does have a pension trust that we do
provide regular updates to both the Finance Committee as well as to the
Council. We will be taking specific review based on direction from the finance
committee to analyze the pension trust brought down to help meet budget
challenges. And so that's kind of the highlight of what we'll talk about today as far as it
relates to the city's pension trust. So just want to give a little bit of
background context around the pension trust. So what is the Section 115 supplemental
trust. It is often referred to in the context of an IRS section 115. It is an irrevocable
tactical trust established by government entities like the city of San Diego. We often use it
to pre-fund post-retirement employee benefits such as OPEP or retiree medical or pensions.
And so today when we're talking about section 115 trust, we're talking about the city's pension
Trust. And so what can that trust be used for? It can be used to reimburse cities or
CalPERS contributions or their annual payments and you can also make direct
payments to CalPERS out of your trust fund. The trust pension can not be used
for any other expenses not related to pension reimbursement or payments or
lease covers. So why establish a pension 15 or pension trust for the city
the City of San Diego has.
Again, pension trust helps stabilize pension costs,
mitigate budget challenges,
and ensures future financial obligations
are met for its employees.
Pension trust does allow for more flexibility
and control of our investment strategies
and risk tolerance than is more visible.
So, while the City is establishing a pension trust,
it allows us to determine the investment strategies
and when it chooses to draw down on that pension trust
to pay for those CalPERS expenses.
The city established a pension trust
to ensure adequate funding for future obligations,
specifically during the peak of CalPERS
required annual payments.
And that trust was established by the City of San Juan
and I think from 2012 to 2012.
So since it's inception,
this is a chart that shows the pension trust contributions
and the current asset balance.
So the city made its first contribution in June of 2022,
of about 6.5 million have made meaningful contributions
every year up until this quite a fiscal year
where we have contributed about a half a million
based on positive performance over the last several years.
The trust has grown not only by the contributions
made by the city, but also the investments earned.
And so currently the balance in the trust
for our pension is 38.6 million.
This provides a projection of assumed performance
of our trust benefit, excuse me, our trust pension,
based on known factors today, with no drawdown.
So as you can see, we have a balance of 41.1 million
currently in the trust projected at the end of 2027.
Should the city not draw down on this pension trust,
with a continued conservative growth
of about 5% each year,
we have a projected balance of 99.1 million by 2045.
So I talked a little bit about CalPERS annual payments
and why the trust was established.
And so I want to talk a little bit
about what those CalPERS payments look like
and how they can potentially vary from year to year.
So what is a CalPERS annual payment?
CalPERS annual payment is often referred to
as the actuarly determined contribution.
You'll hear acronyms such as an A, B, C.
So an ABC is determined as the sum of the following.
There's the normal cost,
which is the percent of your current payroll.
It's an annual cost of pension benefits earned
by active employees representing the current cost
of workforce paid in the percentage of the payroll.
This is paid through both a combination of contributions
by both the employer and the employee.
The second component of the ABC is the payment
of the amortized unfunded actuarial accrued liability,
often referred to as the UAAL, and that's a $6 out.
And what that represents is the shortfall
between the projected benefits to be paid,
so our promise or obligation that we have made to employees,
and the assets that the city currently holds
in the pension trust.
This just provides a little bit more of a graphical detail
of what an ABC is.
As I stated, an ABC is a required annual contribution
of a pension plan like Alpert's.
It's calculated by a plan actuary
and it's designed to provide benefits
and they come due and fund the plan over the long term.
And so what's included in that ABC we talked about
in the previous slide which is the normal cost,
the amortization payment for the UAAL,
and then there's also some cost associated
with administration as well as any changes
based on asset gains and losses and other factors.
And so why is this important and why does it matter and why do we focus on it?
So the AEC again is the actuaries required funding amount that helps maintain a long-term
financial health and security of the city's pension application.
So this just provides another kind of graphical to show that EDC and how it works.
So in combination of the four components here, we get to our AEC.
Again the goal is to ensure pension plan has efficient resources to pay
promise benefits today and in the future. So unfunded actuarial crew liability, the
UAAAL, is the amount of which a pension plan promised benefits exceed the
current assets that have set aside. What does that calculation looks like? Again we
take that AAAA, which is the actuarial accrued liability, so the total projected pension
obligation that we have today, minus the actuarial value of assets. So the assets available to
pay those assets. And so essentially the UAAL represents the funding gap that the city has
between its obligations and its current assets. So another just graphical visual representation,
And you'll see in the red bar chart here,
that represents, these are for illustrative purposes,
only this is not representing the city's current liabilities.
So that AAL is the projected pension obligation.
And in this picture, we'll see an obligation of 500,000.
With ABA, or assets available to pay those benefits,
representing in that green bar, 420,000.
And so that difference, or that gap,
So you can see that light pink shade is the UAL,
which represents the email again.
And that's that funding gap based on the promises
that we made and the obligations we have
versus the actual assets we have to pay for those.
The goal is to reduce this gap over time
to contributions and investment.
So the table here provides projected CalPERS annual payments.
The blue bar above shows the combination
of our annual payments for both
miscellaneous and public safety plans. The purple represents the obligations the
annual payments for the miscellaneous and then that orange bar for public
safety and obligations. So what really brought us here today was to really
provide some analysis around what a drawdown might look like from the
city's pension trust and what that would do does is to specifically to the city's
pension trust, but also potential future obligations. So as a reminder, during
the fiscal year 2027 mid-cycle budget process, the finance committee directed
staff to explore and analyze potential drawdown scenarios from the city's pension
trust. The intent of the analysis is to understand the impact on city life in
both the city's financial budgetary challenges, but also ensuring that the
city have the ability to pay for its long-term obligation. So the drawdown
scenario that we're going to talk about today is as follows. So the city makes
the annual ADCs about that annual required payment to CalPERS, which is the
normal cost plus the unfunded liability portion. In this scenario the city's
projected annual ADC for fiscal years 27 through 2037 ranges from 27.9
million to 30.4 million. So the scenario that we will discuss today and look at in just a
minute is students with a city funds annually from city accounts 25.5 million. So for example,
25.5 million from the channel cost from city loan accounts. The balance owed would be on an
on an annual basis, an annual withdrawal from the pension
trust, so bridging that annual payment,
would range anywhere from about half a million
to $4.9 million.
The CalPERS projection, the projected contributions
or the projected payments are based on 50th percentile loan,
which is essentially best estimated based on
stable market and profile expectations.
trust fund also assumes a reflection of investment return to the top 5%. So this
is a table that shows what the potential drawdown would look like if we
stabilized the city's annual payment at $25.5 million. And so if this were your
$27 million, if the city chose to contribute $25.5 million and bridge the annual
requirement was a drawdown to the trust, that drawdown would be 2.7 million.
So again as a reminder at the lowest point of the drawdown would be about half a
million in 2037 and at the peak at 2031 would be 4.99.
So the projected CalPERS payment sources, so this is again more of a depiction of
the table that we just saw in a previous slide. So the orange bars here you'll see
$25.5 million stabilized from the city's account shown in the orange bars through 2035 and a little bit into 2035.
The yellow bars represent the payment from the section 115 trust, so from the pension trust.
This just provides a depiction of the stabilization of the city's financial contribution towards the annual CalPERS payment.
And the difference for the balance owed would be a drawdown from the city's pension draft.
So we wanted to provide a little bit of a kind of comparison of what the pension trust
balance would look like with and without a drawdown.
So the balance with no drawdown, which we talked about in the previous slides, show
a growth, again, on that blue line for $4.1 million with a growth factor of no drawdown
no additional contributions, bringing the projected balance to 99.1 million.
The orange bar is the estimated balance based on a drawdown that we discussed in the previous
slide.
So again, if the drawdown occurred beginning in 2027, the balance would be brought down
to 38.4 and at its lowest 13.7 million in 2037 and then we start to see it grow again
as we assume that there will be no more withdraws and this would just be gross based on market
performance.
So potential risks with a draw down approach at this point is funding status, not using
the pension trust to accelerate pay-down of the OAL could cause a decline in the aggregated
funds. It may go against what the initial purpose was. The initial purpose was originally
established to help mitigate significant future increases in pension payments due to the fluctuation
in investment performance as well as assumptions. And then a significant risk would be the
unpredictability of investment performance. Based on recent CalPERS investment
performance, projected annual payments trends over the next five to ten years
are currently more stable than it was previously anticipated. We have had
conversations about the change in the peak of those payments, and that is often
derived from the performance of CalPERS investments. If in fact CalPERS
experiences a period of poor investment of performance, this would have a direct
increase in the city's annual health or payments, and so we'll talk a little bit
about that in a few slides as well. So what are some of the advantages of a
drawdown scenario? What if it helped the city currently mitigate some of the
budget challenges while ensuring future obligations are still maxed? It does a lot
For flexibility, because the city has control over its pension
dress, it does allow for flexibility on a throwdown
approach.
The city remains in control over the timing of those withdrawals
and strategically can change course at any given point
to respond to any changes in the economic conditions
that we see today and into the future.
So impacts of potential changes in CalPERS.
I did note that that's a risk.
Should the city choose to draw down at this point,
it is a risk whether the city chooses not to draw down.
It is a risk to the city of the unburdened LAS flexibility
that we are seeing with CalPERS rates.
And so, we wanted to provide a depiction
to show you the difference,
what could happen with CalPERS rate changes.
And so, the current rates right now
are represented on that blue line.
And so, we did start in 2024
and took it out to 2036.
As you can see, by 2028, 2029, we start to see a difference.
And part of that is we start to see a change.
Again, it is the orange lining of representing potential changes
in CalPERS.
So in the event that there is a change in discount rate
or that reflects the potential core performance
of investments or CalPERS, as I mentioned,
has a direct impact on the annual required contributions of the city and so
we can see in scenarios in the event that there is a change in discount rate
based on performance and or assumptions by CalPERS that the city's annual
required payment could reach 40.2 million by 2036 in this scenario. Should the
city or in CalPERS experience relatively positive investment performance or
stabilized investment performance as we see today. The city's payment could drop
to $27.9 million by the same year, $12.36. So final considerations. Pension
trust drawdown is still risky, right? Early drawdown could
diminish available funds that would be necessary if CalPERS were to experience
for investment returns, resulting in city rates,
or the annual city payment, increasing
beyond the current projections.
And storing money is available to pay the bill
and obligations to come due.
There are legal mandates to meet that have got obligations,
and we can talk a little bit about those.
And it's a little too risky today,
but we do believe that we should continue to monitor and evaluate
when is the appropriate time to draw down
from the city's pension trust?
And some of those things that we would look at
and weigh in on are changes in the market performance,
impacts from the pension reform for PEPRA.
So as we start to see less and less classic helpers
in more PEPRA that could impact the city's annual payment
as well, and so really monitoring the change
a number of members within within the city's plan as well as changes in our market performance.
So in conclusion you know at this point the pension trust right now is not necessary at this
time. As I mentioned before I think it's important that we continue to monitor both the city's annual
required payments to CalPERS as well as the performance of the city's pension trust.
The City successfully addressed its $11.6 million deficit during the 20-27 cycle budget process,
with the City's financial forecast assuming the fully required annual payment for CalPERS.
So our financial forecast assumed the City would be paying for the full required contribution to
CalPERS each year without any drawdown from the City Pension Trust. At this time, it's recommended
to refrain from pension trust withdrawals,
reserving for a time of significant economic downturn
or large-scale change in the annual CalPERS payment
requirement.
I just wanted to provide just a reminder of where
we ended the fiscal year 27 mid-cycle adoption
just on April.
And so I just wanted to provide a snapshot
to show the great work that was done through the fiscal year
of a budget process to stabilize the city financial forecast. With that I will
pause for discussion and questions.
Thank you for the presentation. I do not have any public comments on this item.
We have not received any cards.
Okay, so we'll close public comment. Come back to the members for questions.
Thank you Mayor, thank you for the presentation and you know thank you to everybody with regards
to addressing the deficit regarding the mid cycle budget process and so my question is
you know we talked about the legal mandate but my other concern is how do we get here
I know there's so much going on with CalPERS
and being from the life of the aspect.
But what is the legal mandate?
Can you talk more about that?
Sure.
I will take kind of a high-level summary
and then turn it over to our city attorney
who's going to answer some.
There's both financial risks, as well as just
legal mandate risks, as it relates to the financial,
I can speak to, and then turn it over
to kind of the legal mandate.
But some of the financial is just
compound interest.
Again, the unpaid portion is tacked on to that UAL,
and begins to incur interest in the city's discount rate.
There's a negative emergency detention.
Excuse me, the city isn't covering
the interest of its debts.
The total growth grows every year.
So again, if we're not making regular contributions,
that liability just continues to grow.
And it becomes to a point where it becomes so large
is unattainable for cities to make meaningful contributions
to a obligation.
And so falling behind can result in a city
not meeting those obligations, and there's a possibility
that the city can't meet those obligations.
They start deferring funding that we might receive,
for example, a grant funding through the state.
They start deferring some of those funds,
potential for the city's drawdown.
So there is, excuse me, for the city's required
contribution because we do have a requirement
to provide those obligations to our pension obligations
to our employees as well.
I will turn it over to our city chair
and you might want to provide a little bit more in depth
as far as relates to the city's legal mandates
to provide those services.
Thank you.
Thank you, Nicole, and thank you, Council Member Aria.
I think what might be helpful is to know
what the city's penalties, legal ramifications may be
Should it fail to make those annual payments, staff has asked us to provide a high level review without my fee.
And first off, there are associated penalties under the CalPERS mandate.
So if the city is late or unable to make these annual payments, there is an actual mandated 10% double-quencing penalty,
as well as an additional 10% annual interest.
So if the city was unable to make its payment, that full outstanding balance would then, in addition, continue to accrue a 10% annual interest until it's paid in full.
Another thing to consider are potential direct legal actions. In addition to the CalPERS obligations, the city would have contractual obligations for any of its representative employees, for example.
for example, and they might have the opportunity
to take directly the election against the city
to recover any of those protected retirement benefits
and promises that were made to employees.
CalPERS also holds a statutory authority
to enforce collections.
They could possibly intercept any state or federal funds
that the city receives.
They would intercept those before the city received those
with until that pension goal was that that debt was satisfied. So that's another
leg of legal risk the city could take. Of course there's the general operational risk which is the
tax exempt status itself of a 115 tax exempt pension fund. The city has to make sure that it is properly
accounting for expenditures using for its intended purposes of these government terminus essential
government function so if it's used by another purpose it could risk also losing
the taxes and the standard status of that trust. And then lastly long-term
considerations if the city were in a position where it wasn't able to make
this payments work in long period of time it wasn't that subject to
reelection or any other possible remedies. It could, of course, be depleted to one word and we have to consider bankruptcy but that's a very
long-term risk analysis. So that's kind of a high level I hope that.
I understand. Thank you so much for mentioning that.
And if I could just clarify to the record that it couldn't necessarily divert grant
funds. It's revenue share. So the city's sales tax, the state revenue shares, gas
tax allegations could be intercepted and used as payments towards the city's
CalPERS contributions. And have you seen any other cities who have been in that
situation? I have not been aware of a city that has not been able to make its
CalPERS payments. You know, without completely confusing the city files or
bankruptcy, then yes it would have it would sit in that kind of default status
that it did not have the funds to meet essential services to prevent its
including its death obligations.
I just wanted to confirm, I think on page six, the assumed rate of return is five percent.
If you have a act where you can provide some more detail, it is a conservative news.
news we don't have built into the model
recessions or significant fluctuations in investment returns. It is a stable 5% growth
So I'm happy to have our actuaries provide additional context of feedback.
Does that sound targeted right now?
I don't know if that does that target. Let me turn it over to our actuaries.
Yes
Good evening, I'm Drew Ballard with foster foster.
So there's kind of two rates for terms that are used in our model.
One is the CalPERS rate, which is their long-term expectation
on how they invest their portfolio, which is currently 6.8%.
For your, the city's 115 trust, that would just be partner's rate.
The way the powers invest that, I can't remember,
is that could be like 55% equities, 45% fixed income.
We're assuming, on average, of the long term,
that's going to produce 5% earnings.
but from this illustration, it's basically showing
if it grew exactly 5% per year, what would that look like?
Or you know, it could be small and silty,
but in this example, just for the illustration,
the screen top half is at 5%.
They showed you the best performance photo.
Who determines the normal cost?
Is it the CalPERS actuaries on their board?
Yes, CalPERS actuaries produce an annual valuation report
And part of their calculations is determining the normal cost rate, which is different for a classic member's Andrew Pepper membership.
So, suppose I started a city today.
Hence, I have a pension obligation at the end of the year based on the employees and what has been promised to the capitalist state employees.
If I paid the normal cost for me in my brand new city,
if I paid the normal cost would I be 100% kind of new?
So the way that that normal cost rate is determined
is let's say you were starting from inception, right?
Only for future service, right?
There's no current liability, there's no assets
and you contributed to the normal cost rate
on behalf of each employee
starting their period of employment.
The normal cost rate is designed
such that assuming all assumptions hold true,
that that would fully fund them
and that you would be 100% funded
when each member retires.
Assuming people retire when they think they'll retire,
then as long as they're single-ended,
CalPERS aren't 6.8% in any given year, that is correct.
That is the theoretical foundation behind it.
Okay, that's good because I've heard
different interpretations of what that number means,
And so the interpretation I gave here is if I did this for 12 years and it was a long term then we're 100% funded.
In any one year it might be 92 or 95 or 106, but the longer that I go, on average, I'm going to be 100% funded if I'm just paying the normal cost for brand new city.
Right, the other thing I would say that would also assume assumptions never change and benefits never change here.
Page 9. Oh, and fund the plan over the long term up at the very top of the page. I think that's what I'm just trying to clarify, so if I'm paying the full AEC now, so it's everything, that gets me to 100% funded, on average, in expectation.
Yes, I think if you think about where the city's pension plan sits today, there's a normal cost rate plus there's that unfunded liability because
experience has not matched assumptions, and CalPERS has changed their discount rate over the year, they used to be 7.75 percent, not too long, they announced 6.8 percent.
Whenever you change those assumptions, it's no longer just the normal cost rate, there's an unfunded liability component.
So, the normal cost is paying the benefits that are being earned.
And then the unfunded liability is to release the two fund that plan over the long term to make up that funding gap.
You've jumped my next question.
How has the discount rate, the rate of return, the state rate of change over the last 20 years?
It's a pretty much consistent rundown.
Yeah, oh yeah.
I wish I knew.
So I think that this,
I'm going to turn it into.
10 years ago, for sure.
Yeah.
I'm going to turn it into an ask, can we from CalPERS just get this?
Because I think that to some degree, we bear some of the pain from the perspective of our
residents and I said it at State of the City and I believe it to be true that a large chunk
of this falls on CalPERS for having overestimated the rate of return that they thought they
could get.
And to be able to explain that, pick a number, $80 million of our unfundedness is because
discount rate has changed from 7.7 or 8.0 or whatever it used to be down to 6.8.
I think that's very important from a storytelling perspective and informing our residents that
it's not that we've been excluded from Switch, but that as CalPERS has continued to fail
to meet their objectives, we bear the burden
of their decisions.
So just comment more than the request would be,
can we get that information in the last 20 years
so that we can build that story?
I think I'll address it.
I'll address it.
I think I had that so that I can understand that.
Page 10.
Oh, that's patients.
For examples like this, I think it's always
useful to have illustrations but have our numbers is extra helpful. So slide 10a would
have been nice if we can do that in the future. This goes to City Council for example. And
I have the same comment on page 12, page 18, same comment. Going back to the change in
discount rates. It is my sense that I don't have the data to prove it. The peak
payment, I think currently since about 2032, the year 2032, is my sense that that has been
sliding upward, but I don't have the actual data to show that. How hard would
that be for us to get? Calpar shows the number of theirs where they
project where they assume that they're gonna earn 6.8% each and every year of
when that peak would occur. I think that, you know, one thing that Nicole and I
looked at was we did a similar analysis a year ago. What we knew since then is
that developers actually earned 12% in fiscal 2025 but you have not received
your June 3rd to 25 report hit and we'll get that this summer. So we updated our
analysis to show the impact of that positive return and that peak did come
or came earlier and then after that started to come down quicker rather than last year,
I think we showed it kind of continuing to increase. So I'm not sure.
I think the nature of my question is maybe a little bit different because, again,
if calipers discount dropping is discount rate, meaning that cities have a much bigger
or burden to carry through as a result of increasing that time of
liabilities that's one aspect but when we tell residents trust me the pain is
almost done things are gonna get better but I'd like to be able to know factually
speaking is whether that that finish line so to speak has kept stretching so
So if I go back to when PEPRA was put in place in 2008,
they were going to get flipped in 2013,
and they were doing the modeling.
And they said, look, it's going to be happening.
And once the peak, and by doing this, we save the world,
what exactly has happened in the last 13 years to that peak?
OK, this isn't just an academic exercise.
The focus really isn't what we call a resonance.
other cities tell their residents because there's a certain expectation and that keeps
stretching and getting worse, that's not a good thing.
And to make matters even worse, if we tell them, we're just six years away.
And then in four years we tell them, we're just five years away, right?
That's how government loses credibility.
And I just want to make sure that we're able to be documenting that story, so that we tell
our residents, this is what the state of California is telling us.
I see wishing to get in there, so please do that.
I think it's an excellent point, and I think it's something that we're tracking is to really
see—we have seen a peak shift, right?
I won't find it in 2020, 2029, and just keep pushing out.
And so a lot of that really is indicative, based on those actuarial, that we're getting
And CalPERS tells us how much we have to pay, and you're right, the discount rate is gone.
As Drew mentioned from 7.75 down to 6.8, part of that change in discount rate happened because
the city, or excuse me, the CalPERS experienced double-digit returns, but then the following
year significantly lower, and then back up again to very positive, and now again.
when Drew and I were looking at the modeling last year,
there was a rejection that Calcors
was gonna have a negative return
and it ended with a 12.9% positive return.
And so it's really, you know, coming on us
to just kind of track some of those performance
and changes, because those changes and assumptions
are what's really impacting the city's required panel.
That brings me to next question.
Some of the impression that their discount rate,
your target reflected an expectation form over 20 years.
And so there's gonna be ups and downs in any given year,
but the discount rate wouldn't move that quickly
because it's a moving, 20-year moving average.
So I'm gonna start with that, is that correct?
Let me answer part of that.
Yeah, so when they have a number of years ago
and they experienced double digit return
that triggered one of their policies
that said they needed to look at that discount rate
and whether or not that discount rate needed to be adjusted.
And at that time, I believe it went from 7% to 6.8%.
As far as their assumptions for 20 years,
perhaps Drew can speak more about kind
of what those long-term CalPERS projections are like.
It's shorter than any one.
So kind of the philosophy behind the discount rate
that's being used, that's one way that's classified,
the other way that's classified is what's the long-term
expected return on their assets, right?
CalPERS has a very sophisticated investment portfolio.
They have a lot of, you know, access to other investments
that, you know, you might not have in the city,
private real estate, private equity.
What they're trying to accomplish in that discount rate
or that long-term expected return on assets is
How much money will the assets earn each year on average
until the last benefit would become due
based on the current population, right?
Which would be 50 plus years from now.
So it's, but they get kind of capital market assumptions
that are 20 plus year assumptions,
and what they, what coverage does is every 40 years
they go through their ALM process,
asset liability management process,
and they review their strategic investment allocation,
they review the discount rate,
they make a decision whether they want to change it or not. In November of 1.5, the
last time they finished that four-year study, they elected to maintain that 6.8%
discount rate. So, with the change of mind, we believe they will stay at 6.8% until the
next four-year review comes up and they'll do it again. That's kind of a
current expectation. Perfect, thank you so much for that additional information.
And for me, at this point in time, you've provided us information on comments or sessions.
You've provided us information, you've got some things to think about.
I don't think that there's any action for us to provide at this time.
All you said to me along, perfect, thank you.
So we will close this item, appreciate the time that went into this presentation.
Great questions.
Let's go to item 2B as an Op-Ed Trust, pension trust, investment report through March 31st,
2026 of guidance.
This is your guidance director, Felicia Silva, presenting.
Felicia Silva, assistant guidance director here to present the calendar year 2026, birth
first quarter investment report, or the OPEB, in pension trust. And again, calendar year,
so we're looking at January through March 31st, 2026. So we have the two sides of the
trust that OPEB primarily related to the military medical benefits and then the pension trust.
And we did get off to a bit of a sluggish start to the year.
So negative returns for the quarter of about a little under 0.5%, so negative 0.46% for
the overhead of trust, taking our assets from $24.6 million to $24.5 million.
But again, looking at the longer term view, we've got returns of $8.86, looking at the
the year and then inception to date at a low honor 5% of 4.92%. Heading over to
the pension trust, again slowly start to the year primarily related to the geopolitical conflict in the Middle East,
impacting the markets and decrease of about negative 0.8% taking the value down from 37.4 million to 37.1 million.
Again, looking at the longer term horizon, one year return of 11.71% and then inception to date return of 4.2%.
And with that, we're recommending that the finance committee accept the calendar year
Q1, the calendar year 2026 first quarter OPEB invention trust reports.
And forward to the full city council for review and acceptance.
We're also here to answer any questions.
Councilmember Miranda.
Thank you, Mary Gisburgs.
Thank you for the presentation.
question with regards to I'm here on this on the slide three cases before this
on the open trust versus a pension trust you're mentioning that the one year
return was eight point eight six percent but the inception today return is four
point nine two is that from the fiscal year is that what does that start the one
year return well the exception. I think the open trust was
was established in 2015, that's the measurement date for that, and is measuring it from that
inception in 2015 all the way to this current report.
Gotcha.
Okay.
That's my question.
Thank you.
I had the same question.
So, the pension trust is 2021.
21, I believe.
And what public comment do we have on this item?
We do not have any public comment on that.
Okay.
We do not have any public comment there.
Okay, so we'll close public comment on this item.
Are you fine on the recommendation of the historic city council?
Fine, I'll start finishing.
Okay, see you in Act 2, pretty much.
Okay, so a item to see how to colorate.
Been waiting for this.
Are you ready?
Assistant City Manager, you win.
Yes.
Good afternoon, Mayor and Councilmember Agalar,
Assistant City Manager Mike Bowen, happy to be here to present to you an update on Project Elevate.
I am joined by the Steering Committee for Project Elevate, which includes Finance Director Robert Gazzalas,
IT Manager Ricky Gown, who's the Project Manager for the project, HR Director Emily Hung, and I'm pleased to introduce to you
The new Chief Technology Officer for the City, Alicia Hernandez, I am a two of the job as a member of the Stone Community as well.
I'm also excited to be here for two reasons. Number one,
I'm doing something that I have not done for two years since I've been the Assistant City Manager, which is to present to you
from this lecture here.
But secondly, I am very excited to share with all of you that Project Elbate is on schedule.
We are on schedule to go live on July 1st of 2026, less than six weeks away.
And I will share with you the timeline that we have gone through and are about to go through
down the home stretch here.
So you'll see on the very far left here, up until May 18th, just a couple weeks ago,
thousands of cases were tested in the workday system.
As a reminder, this project basically is to transition our legacy enterprise resource
system, or ERP system, called Eden, to a new system from Workday who is an
industry leader in ERPs. So when we got to the point of completing the testing
of thousands of cases, we gave the green light to our implementer cognizant and
Workday, the product, to proceed with the final build of that system. That final
build is going to take place over a series of four weeks between May 18th to
June 12th, when that final build is done we will get it and have a few days to do
a quick turnaround to give them a decision on whether we are a go or a no
go for July Post Go Live. Assuming that we are a go and we give that go to them
then on June 26th that final build will move to the production environment and
once that takes place we have about nine days or so to do some final cleanup and
preparation work before we do an official goal live on July 1st.
Now the reason why we share that with you is because with all projects and timelines
there are risks and challenges.
So some of the risks and challenges you'll see are listed in the boxes under the various
timeline that you just saw.
The risks and challenges that we had going up until May 18th in our testing was we could
have discovered some wrong pay calculations. There could have been some
failures with the integrations that are tied to Workday and we could have
discovered that some of the business processes were misaligned with the
capabilities of Workday. Thankfully we have moved past all of those challenges
which we were able to then rewrite the final bill with the system but in the
final build in the system, there's also some challenges and risks that exist.
There is the possibility of scope read, where we may identify some things that
we want to go into the build. Well, if the Workday and Congressman teams are
teams are busy with the build, we certainly don't want to disrupt that
progress. So that is a risk of new scope read. There could be some system bugs
that are incompatible what we had in that testing stage could be incompatible
with the final bill that they're doing. There could be some bad data that
migrated over into the final bill and we could have we could discover that some
of the testing that we did prior to May 18th was actually deficient and not
working well in this final bill. But assume that does not take place and we
do move forward with a go-go-go decision. When we're faced with that decision, once
we receive that final build back, we could discover once again that system
bugs and that data are challenges. But another thing that we have to keep in
mind is we have, for the past seven months, have had three different people
serve in our payroll technician position. That's unusual for us. This is a position
that has had stability over the past several years.
However, we have had turnover over the past seven months
and have our honor of third staff person on that position.
That staff person started yesterday,
so the challenge for us is to make sure
that she is well-versed in Workday
and is comfortable running payroll in Workday
to be prepared for H&I 1 Go Live.
Assuming that we work through all those risks and challenges
and we do move to production on June 21st.
Once again, as we play with the system
in the production environment,
we will want to make sure that there are no system bugs
and that all the data is clean coming into the system.
And assuming that those challenges are overcome,
we move into the final clean up and preparation stage.
We do want to look at the system once again
to make sure that all paid populations are accurate.
One of the worst things we can do is pay our people wrong
and he certainly wanted to avoid that for July and weren't going to lie.
But we also want to make sure that all of our integrations are intact and working properly.
And we also want to make sure that just a few days before we go live,
that all of the security roles are in place and we don't have any vulnerability there
because we wanted to ensure integrity in the security of the new ERP system.
Assuming that all that goes well, we overcome all those challenges and we do do a July 1 Go Live,
then all of a sudden we face a new set of challenges from Go Live.
Those challenges being technical and performance threats, we want to make sure that our systems can support this new EBRP.
But we also want to make sure that the performance of our staff, our users, are minimized as much as possible from the EBRP.
I will tell you that this is the fourth major enterprise-wide system that I've been involved
with in my career, the three ERP, and all four systems, the two primary ERPs that I've
been involved with, and the other enterprise system have not gone smoothly at implementation
because they are messy, and the reason why they're messy is because you are taking what
know and what have known for years and have developed the comfort level work.
And you are telling them to set all that aside and learn this completely new system, completely
new business processes.
That's what will get messy.
And I will give you a very brief example from 16 years ago when I was with the city and
county of San Francisco and implemented a new ERP there.
San Francisco used a legacy ERP system that was all grown and written and software developed
1959 called COBOL. In 1959 there were no personal computers. That's 12 years
before the first personal computer was introduced. So as a result they did not
use this thing called a mouse. And everything that was done in that COBOL
system was with a series of codes, hitting function keys on your keyboard
and knowing how to work your tab and arrow keys to be able to navigate the
different pages that you need to get to.
Well, in 2010, and being in an area 46 miles
away from Silicon Valley, in San Francisco,
we never imagined that one of the greatest challenges
when we went live with a modern new ERP system
would be user acceptance of using a mouse.
That was something that we overlooked,
and it was something that we took for granted
because the mouse by then had been introduced
for almost two decades.
So, there will be user acceptance issues,
and we will need to work through those,
because once again, we are taking users
out of their comfort zone,
have a system that they have used for many, many years
with business processes for many years,
and ask them to adopt completely new business processes
in a different looking system that gets,
while new, is unfamiliar with them.
So we need to make sure that we are doing our part
to get users to accept the system
while minimizing any operational slowdowns
that may come from user acceptance challenges.
However, assuming that we will be successful
to work through all those risks and challenges,
we will start crossing out some of these challenges
like we just did with that Green X error in that first box
because on May 18th, we did green light the final build.
That means we overcame those challenges
and we certainly hope to be able to do the same thing
as we reach the remaining stages
of this final home stretch to July 1st.
So as we do work toward a July 1st implementation,
the main foci for us will be twofold.
Number one, first and foremost,
we want to make sure that we are doing
what we can to support the transition workday.
As I had just mentioned,
there will be a lot of user acceptance challenges.
We want to make sure we have the adequate level of support
to get our city staff through all of that.
But number two, we need to also migrate historical data
from our legacy even system to Workday.
So in order to do that, we will be bringing to Council
an item in early July, a $300,000 contract amended request
with our integrator, Parkinson.
They have a service called Continuous Value Services
that will assist with troubleshooting, with integrations,
and with reporting for the support
of this new system to the city team.
but also they will do evaluation and design
for how to migrate that historical data
from Eden into Workday.
The good news here is no new funding is needed.
We anticipated that this would be needed
when we put that project budget together,
so we will be seeking merely contract authority
from existing funds that Council has already appropriated
for this project.
Just wanted to give you a brief overview of those funds
that Council have accrued.
Now this is broken out into two sections
and I'll explain why the top is staffing
and the bottom is everything else.
The software, the services, the consulting, the training.
And the reason why it's broken out two-fold
is because for staffing, those numbers are what they are
and at the end of the year,
there are unused funds in staffing.
They don't carry forward into the following year.
They simply revert back to the technology
internal service fund.
Whereas everything else, the box below,
whatever's unused at the end of every fiscal year,
that is carried forward to use
for the remainder of the project.
And that is because we don't necessarily control
the main deliverable timeline for what is needed
mostly from services and consulting.
So if it's unused from one fiscal year,
we wanna make sure we are able to carry that forward
into another fiscal year for use
for the remainder of the project.
So you'll see here just the overview,
fiscal year 24 for staffing, $700,000,
and then $1.1 million in both subsequent years since then
with the copy being that the current fiscal year,
those numbers are only through May 15th of 2026
when this staff report was put together.
And then for everything else,
for the what we can turn the operational costs,
software services, consultant training, equipment,
a $5.4 million budget to be expended $4.8 million so that remaining $700,000 that is where that
$300,000 request to amend the contract will come from assuming that Council authorizes that contract.
So for next steps, staff will continue to work with work bank cognizant to make sure that we
We stay on schedule, of course, to address any challenges and risks that come up.
But assuming that all that goes well to prepare for July, we want to go live.
We want to make sure that we continue to do more testing, more validation, and also to
commence with our user training to make sure that all of our staff who will touch this
system are comfortable as much as they can be in July when this new system goes in place.
As I mentioned earlier, we will bring a council item for contract authority for that CVS service
through comprehensive with already budgeted funds.
Workday will go by first if this all goes well, if we believe it should, and we then
will continue user training.
Endowedly, there will be a list of punchless items that will need to be addressed and we
will work through those and we will continue to address any change actions that may occur.
With that, I'm happy to take any questions I have now.
OK, we'll be on somewhere right now.
Thank you very much.
Also, thank you, Michael, for this presentation.
I think this is long overdue.
I know there are going to be some growing pains
with this implementation process.
And I appreciate your story about the transition that's
happened since COVID.
So you mentioned, I'm sorry, I kind of like
was thinking about other things when you were discussing
on page, or you mentioned the 300,000 dollar contract amendment. We're on page 5. What
is that fund to be taking? I mean, we budgeted for this. We have to go to Council for approval,
but is this to be taken out of the software services consultant training?
That's exactly right. So the 300,000 dollars on page 4 will come out of the lower right-hand
box, if you will, the remaining 700,000 dollars that exists in that budget.
So once we approve that contract we'll be launched with $100,000.
That's correct.
Gotcha.
Those are your questions, thank you.
Thank you.
So the final build of system, what does that mean?
So what that means, the technical term there
that our partners are using is the gold build.
So that is basically taking everything
that has been in the test environment
and then incorporating, taking all of the changes that we've identified that need to
be made in the final system, and then building that goal build.
So taking, to really use simplified terms, is to take what works in the test system and
then incorporate what we have informed them need to be fixed in the test system to develop
one final system.
The way I had assumed this was working is that we had a system that was operating in
a test bed and then the last step, because we're tweaking it and we're tweaking, the
last step is you literally point the pipes to new data sources.
In an ideal world, that is correct, but in a world of a technology project, a lot is
identified that it does not look correctly in a test system.
So the final build is really the opportunity to correct all of what did not work properly.
So that is what's going on in that final build.
It's taking the test system, keeping everything that works and then fixing everything that
the city team has identified does not work through all the testing that was done.
Are most of those new works because we have unique processes here?
It's a combination.
It can be unique processes, it can be because work is, as you are aware, was founded as
a private sector solution, but they are branching into the public sector world and on the public
sector world there are things that we don't encounter in the private sector world.
In our case we have a handful of labor organizations and therefore different rules per employee
depending on which classification they ran
and how that goes into payroll, for instance.
Those all need to be incorporated as well.
In some of the testing, that is an example of something
that could not have been, or could have been
not functioning properly, where we've identified
what needs to be fixed, and then they will go ahead
and incorporate that into property.
And that asks us to cultivate an expectation
that if we've hired a software vendor
place in the government space and city space in particular that they have
accommodations and will tend to handle these sorts of things and so on to see
change orders for things that would be to be expected in a city government
right you're absolutely right mayor and to be very clear there are they are not
change orders they are basically clarifying to them what our requirements
are and if what they provided in the test system is not consistent or aligned with our
requirements, it's getting them to fix the system so they do meet our requirements.
And our requirements, who's asked about anomalous processes or anomalous standards?
Is it, I don't think of us as an unusually complex city.
I'm going to say something like San Francisco or other geographies, so I just want to make
sure that the expectation is that if you provide software for government
functioning in cities that these these things are at best tweaks and that we're
not that we're not that we're not inventing the wheel did you know that
thank you mayor though though I
But this is my third, I'm a little further away as a city manager in this process.
But I also, I've also never done one before where it's perfect, it's smooth.
And work day though, we actually do this amazing system and the city will be better for having it.
It is, you know, we're in the government space there.
Branching, since we're not the first government on it all.
Every other system I've done before this has been with companies that only did government.
And there were those same type of issues as well.
So it is.
and data migration issues, what sort of data migration issues are we experiencing or do we expect to experience?
I think for this question I will point to, I will ask IT manager, Reggie John, to give you kind of a technical explanation.
Thank you. Thank you. Thank you, manager, Reggie John.
So data migration is one of the key component of this whole build process.
so even the build process I think as Mike mentioned, right so they are moving the configuration something called a core dinner and
Then we are going all the data that we have decided. So there is 34 different fines
Supervisory or the personal files the payroll files that people and from the production and more mentors
So it's a like iterative process which is happening right now. It started in around
dating to the Goldish, my question was not what is dating to the Goldish, my question is what kind of challenges do you expect to see or how do you understand that risk?
So the risk is more like in our specific case, so are we missing certain data?
So are we missing retirement data? Is the data that getting moved from Eden to world data current?
So what we do is from either microisyl, the file,
they load it, there's something called a pre-validation
and post-validation.
So the team evaluates it all over
and see if it's correct or not.
If it is incorrect, they then go back.
So there's a little bit back and forth that happens.
So that is the risk is not getting the correct data
or not getting all the data to try it.
It's less data corruption and more data selection.
It's less data corruption.
Okay, thank you.
That's useful.
Wrong A. I know that we have tested for months on this, and I suspect that by this point in time,
out of the however many employees that we have, that we've got to be less than a handful.
I will tell you with confidence that we have worked out all of our Wrong A calculations.
The reason though why this is up there in the very final box before we get to go live is you
Never know if something will be misaligned or mispointed once the system moves into production
So that's right. There's pipes may be pointed wrong. That's right
Data issue then they pay algorithm issue. Yes. Thank you
I want to see the first two weeks of any chaotic
in the first two months
So who can have a little bit about the all hands on deck mentality that we're implementing to make sure that
please feel up and care for
That's an excellent question maker. So that is something that we are actively working on now
Now that all the testing is has been completed. We are spending some time trying to prepare for what is coming
so I will say that what we are planning includes some sort of
ribbon kiting if you will to to really celebrate the achievement on July 1st
but then we also plan on some personal visits to the multiple locations in the
city to do some more celebrating but also to let our staff know that we are
not just implementing and walking away that we will still be here that we will
still have a physical location for a little time
after goal line for if anyone wants to come in
with their laptop and be able to pull up something
and work on it together, or if they want to do it
over a phone or a team, that's fine as well.
But the goal is to make sure that we are there
for our staff and employees, and that we are
adequately responding to their issues and questions.
We still have some details to work through
on how to best set up some sort of helpdesk and triage process,
but that is something that we are actively discussing.
Thank you.
So does the city attorney use Wookiees at all?
I don't know.
No.
No.
We mostly use SharePoint.
OK.
So again, that's spirit.
As employee A learns a trick about how to solve a problem,
it would be great if you lose some knowledge sharing
in a system of time.
I always think of things in terms of wikis, but it could be used by whatever, not a word
document that has global, air quotes, access, or it could just be populated ideas.
Because then it's searchable knowledge.
The other thought that comes to mind is some kind of focus groups, you know, seven days
in, one person, two people from each department, where they collect care problems that they're
having.
that's something we've percolated up very quickly.
So, Mayor, those are two excellent points.
We do have a SharePoint site dedicated to this project,
which will continue after Go Live,
and we can certainly look at putting some sort
of information exchange on that SharePoint site.
To your second point on YouTube groups,
we do have a group of what we call Workday Champions,
or City Employees, who have been helping with the project.
We really took the philosophy a couple months ago
that the more people that we can expose to Workday now
and help us test and navigational experience
and all of that, the better.
That group will continue after goal-line
to really help us carry out the message,
but to really establish a bench of folks
that fellow employees can turn to
if they have any questions or concerns about Workday.
Thank you so much.
This whole concept of risk of user acceptance,
I think the amount of story is really huge,
but the principle is correct.
So the more people you need to be exposed to it, the faster.
I'm assuming we're just turning off the old systems.
Eventually we will-
In terms of user access.
Yes.
So they can't enter things into accounts
like to make a purchase order in the old system.
Well, a certain group will,
And what I mean is it's a group in this room.
The finance team will need to because they need some time
to close out the books for the fiscal year.
That's all going to be done in the legacy system.
But for the most part, yes.
For example, no you purchase orders in the old system, right?
Yes.
Okay, so good for you to help me out because you know,
I like precision.
I know where you're going,
but because I want to make sure this is accurate.
This is a little after July.
Finance team is still dealing with,
which is fiscal year 27.
They are still dealing with fiscal year 26
in July, no matter what system you have for one year fee.
The fiscal year we're in today, which is fiscal year 26,
will still need to be dealt with in July,
maybe even August, which means things will be happening
in the old system.
So I don't wanna on the record say nothing
will happen because things happen.
The thing is that come July 1,
things that are meant for July run into the future
will happen to the future system.
There are some pennies we've done
post-annual for the fiscal year we're currently in.
It will be done in the old system.
And that will be restricted purely to the folks in this room.
And that's fine.
But I picked my example with specificity purchase orders.
There should be no purchasing activity
in July for things that should have happened in 2026,
fiscal year 26.
No new purchase orders?
Like you're saying, no new purchase orders
will be created in Eden after July 1st.
However, there will be some transactions.
So there might be a purchase order in place in Eden
and an invoice where June comes in July.
But no new purchase orders will be created in.
Perfect, perfect is that kind of thing?
And of course you might need a journal entry
to clean something up and all that stuff.
Okay, perfect.
So it's not like we're making amazing progress.
So that's my question about dual systems.
How many of your current employees are there?
People are kind of late.
Are they broken yet?
Are they doing good?
I will say that we have an incredible group of employees
working on this project who are very, very resilient.
Amen.
Are they broken yet?
I will say no, but are they tired?
Absolutely.
I just want to make sure that we recognize
this exercise that they aren't making,
that we provide them a lot of attention and support,
and that when this thing is done
at a natural finish point, i.e. July 1st,
that we have a heck of a celebration.
I know that we're government,
and if we find money from other sources, that's fine, too.
But to me, this is an amazing accomplishment.
Implementing it at a new ERP in two realms
is a big, big deal.
And so I just want to make sure that we take time to celebrate and that we really, really, really do not just say, Oh, well, next.
So that if you have that opportunity to see the outcome, the fruits of their labor point, well taken, that's certainly our intention.
OK, the very last thing that I have is you talk about the punch list. I'm assuming that the punch list is part of our budget.
Yes, so as you see here, so the request coming to console for contract authorities, $300,000,
which will be taken out of the remaining $700,000 available, that leads us, $400,000, to address
anything else that comes up like a bunch of the signup.
To the extent that it's not the signup, are you ready to come to scope?
Yes.
Because if it was supposed to be delivered, it didn't get delivered?
Yes, there's a new budget for that, that's correct.
Thank you.
There's been just really, really good news.
Obviously, our biggest concern as a council
is the risk and the budget.
I mean, those are just a big picture of things.
It sounds like you're firing on all cylinders.
So thank you for all the hard work,
to all the team leads that are here,
to our project manager, everyone that's involved.
Thank you for what you're doing.
So at this point in time, we will go to public comment
on non-agenda items.
We have any public comment.
Yeah.
OK, so let's go to the comment on non-agenda items.
Can you give me one more comment?
That's what we're talking about.
The other thing that I'll add is I'll just
add my regular comment that when we invested in expected rate
of 5% and CalPERS is discounting at 6.8%,
we are literally planning to lose money.
We're literally planning to fall further and further behind
before I came onto the city council
and made public statements from that lecture
and said that we should invest our money
at least the same expected rate of return as CalPERS
because otherwise we fall further behind.
And though someone can explain
why our strategy is a moot strategy,
I will continue to say this incessantly
because I just go very adamantly
that we've had plenty of time to begin
to address this in some way.
And we can really abide at it, I think in December of 24.
We had a really complicated presentation that came
that made no sense and the person couldn't answer questions
so we stopped that discussion.
The opportunity is here for us to have this discussion
in a real way.
It can be started in like a small group
and then committee and then go to full council.
I don't care how we did, but we need to have an explanation
of our education to a 5% rate of return.
I invest $100 billion, I get $5 million.
CalPERS is expecting 6.8 million
in the way that they invest money.
So therefore I'm falling further behind
the CalPERS performance.
And I couldn't say just be having my money with CalPERS
and getting their way to return.
So I'll keep our bit on that after that.
We will go to adjournment and our time is 5.17
We are.