August 2015 MiniNews

August 2015 MiniNews

    • Willdan Financial Services
    • CSMFO with Sponsor

Download the pdf version *Please note that updates are continually made to the Job Board section of the MiniNews (PDF format) after its original release. Check the Job Board regularly.


President’s Message

By: Jesse Takahashi


Pay Me Now or Pay Me Later

Those of us that have been around for a while probably are familiar with this phrase, which was made popular by a company advertising automobile oil filters over 40 years ago. The moral of the ad was that you had a choice to spend a few dollars today or spend many more dollars in the future, with the implication that it was better to spend the few dollars now and avoid a volatile situation later that costs a lot more.

Well, CalPERS is currently considering a similar situation for its pension trust fund and is asking its member agencies for feedback on whether we will support its recommendation to the Board, which is expected to take place sometime in the fall. This is an important issue as those of us in CalPERS have seen and felt the impact of the market volatility for many years now on our employer contribution rates. It has played havoc with our budgets and has made it difficult to project future retirement costs. One of the reasons it is so volatile is that investment earnings comprise a large percentage of funding for benefit payments. Any shortfalls in investment earnings must be made up by employer contributions. This feature subjects our agencies to the big rate increases whenever a large loss occurs, as we have experienced in past years. What is being considered is a tradeoff of higher, but more stable, rates now in exchange for less volatility of rates in the future with the goal of reaching full plan funding over time.

As background, the CalPERS Board approved various policy changes including one to fully fund its pension trust. This was done for a number of reasons, not the least of which was to ensure the sustainability of the fund for the long-term. This is a concept that we are familiar with as Finance stewards for our agencies. As a means of attaining this objective, CalPERS staff began discussions to lower its risk volatility by reducing the discount rate over a 30 year period and, thus, lower the risk of negative impacts from bad investment years such as occurred in FY 2009 with a -24% return. This “de-risking” would happen by changing the asset allocations to a less “volatile” mix of investments that would be pegged to earn less than the current assumed rate of 7.5%.  The means to accomplishing this goal would be to gradually increase contribution rates by both employers and PEPRA members through one of two options:

  1. Flexible Glide Path Option—this option would occur during a period of above average returns (e.g., >7.5%) and reduce the discount rate based on how far above the return is above the expected rate. Part of the excess earnings would go toward risk mitigation to lower future volatility. Risk mitigation would occur only during “good” years.
  2. Blended Glide Path Option—while similar to the Flexible Glide Path option, it would be based on specified intervals called “checkpoints” such that the discount rate would be lowered periodically (e.g., every four years) by 15 basis points regardless of how the returns performed that year. This would ensure that risk mitigation would happen even if there were several “bad” years in a row.

CalPERS is getting close to making final decisions that would affect the funding risk and rate volatility. Agencies are being asked for feedback on these two options that will be submitted to the Board. The League of Cities has sent out a survey to cities and will be weighing in on this to CalPERS later this month. If you haven’t already provided feedback either to the League or to CalPERS directly, please consider having the discussion and let them know which option you prefer.

In the end, higher rates are going to be with us for the near term; but, with some strategic planning by CalPERS and working with its agencies, at least there may be improved rate stability in the future if we can absorb the added costs of what CalPERS would have us do. Click here for more details on CalPERS’ proposal.

September Board Retreat and Planning Session

Next month, the CSMFO Board will be meeting in Anaheim at the site of our Annual Conference hotel for its annual planning session and Board meeting (Sept 21-22). This is an opportunity for the leadership of this organization to come together to discuss what our priorities should be for the following year. It is also a great time for the Board, Committees and Chapter leaders to share ideas and get to know each other. It’s one of the few opportunities where we get to meet in person. This year, President-Elect John Adams will lead the planning session with the assistance of an outside facilitator. Our planning session is one of the reasons this organization is so successful. If you have any comments or ideas that you would like to be discussed as part of the planning session, feel free to contact John at jadams@toaks.org or me at jesset@cityofcampbell.com. We will be sure to incorporate your comments or issues into our session. As a reminder, the meeting is open to all of our members, so if you are curious as to what goes on at the planning session, you are more than welcome to join us.


Executive Director’s Message

By: Melissa Dixon, CAE

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Now that your fiscal-year budgets are set, it’s award time!  Visit the CSMFO website to submit your budget award application online.

Here are the details:

Operating Budget Awards

-Submissions due within 90 days of your fiscal year start

-$150

 

 

Capital Budget Awards

-Submissions due within 90 days of your fiscal year start

-$150

CAFR Awards

-Submissions due December 31, 2015

-$50

Please note: If you do not utilize the online submission process, there is an additional $50 processing fee for hard-copy submissions.

Best of luck to you all!


Get Your Own CSMFO Sweater or Polo TODAY! CSMFO-Polo

Did you notice the CSMFO staff wearing CSMFO sweaters and polo shirts at the Annual Conference?  CSMFO is now offering those items, plus fleece jackets, available for purchase through Land’s End.

 

 

 

 

 


Great Stories Aren’t Just Told. They’re Experienced.

Get ready to be dazzled with a treasure chest of opportunity at the 2016 CSMFO Annual Conference.

Yo Ho Ho and Ahoy Me Hearties!  At the heart of every conference is a message.  Told well, it becomes a story.  Told in collaboration with Disney & CSMFO, it becomes unforgettable.  Our unforgettable story is “A Finance Life for Me”.   Be surrounded in the spirit and wonder of CSMFO past and present as we again come together at the Disneyland Hotel, which will be our ‘adventure land’ March 2-4, 2016.  We will be steps from Downtown Disney and only a short stroll to both Disneyland and Disney’s California Adventure.

The Annual Conference offers the perfect combination of “treasures” including opportunities for technical learning, professional development and networking with our fellow finance professionals and much, much more.  The intent of the Conference is to enhance knowledge and training of the CSMFO membership . . . this chest full of bounty is yours for the asking.  Put the CSMFO Annual Conference on your calendar now for March 2-4, 2016 and not risk missing our high-seas adventure.  Look for information in future editions of the CSMFO MiniNews about conference and hotel registration.

Your 2016 Annual Conference Host & Program Committees are already hard at work, creating a treasure chest of general and breakout sessions, vendor and networking events and a special Thursday night activity.  The Host Committee is composed of:
John Adams, City of Thousand Oaks – CSMFO President-Elect & Conference Chair
Pamela Arends-King, City of Tustin
David Cain, City of Fountain Valley
Ronnie Campbell, City of Camarillo
Scott Catlett, City of Riverside
Steve Heide, Chino Valley Fire District
Joan Michaels, City of Dixon
Margaret Moggia, West Basin Municipal Water District
Stephen Parker, City of Stanton
Lilly Ng, Bank of the West
Scott Johnson, MGO CPA
Anna Van Degna, Stifel
Danielle Wood, NBS
Elena Zaretsky, First Southwest
Melissa Dixon, SMA & CSMFO Executive Director
Elizabeth Cardwell, SMA
Marisa Anticevich, M&AMS
Teri Anticevich, M&AMS
Janet Salvetti, M&AMS
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Avast me hearties and sail ho! “X” marks the spot for the 2016 CSMFO Annual Conference in Anaheim. This will be an event ye won’t want miss. We hope to see ye mateys there!

 


Standardizing Threshold Exemptions in State Procurement

By Charles Belle

Threshold exemptions are one of the most powerful tools in the arsenal of municipal finance officers. However, the amount of the exemption varies wildly across cities, preventing officials from leveraging threshold exemptions to pool resources. The Municipal Threshold Exemption Database (MTED) is a research project-funded through a Sunlight Foundation OpenGov grant – to create a repository of threshold exemptions from cities across California. With your help, we can standardize policies to empower local procurement professionals.

Why threshold exemptions matter                                                           

While not explicitly labeled as such in procurement statutory codes, threshold exemptions are legal provisions that many cities have implemented to accelerate the procurement process. The exemptions operate by allowing the standard procurement process to be bypassed when the purchase of a contract or service is below a certain amount, or below a threshold. And while common, not every municipality employs the process.

The critical challenge procurement professionals face is that threshold exemption laws and policies are fragmented. For example, neighboring cities might vary wildly in the amount permitted, from $500.00 to $100,000.00. This fragmentation occurs for several reasons: (i) threshold exemption provisions are relatively obscure within statutory codes; (ii) there is no statewide standard for a threshold exemption; and, (iii) various agencies may issue Administrative Orders modifying local threshold exemptions, but these Orders are not codified in the statutory code.

I need your help to build a centralized and public resource

The Municipal Threshold Exemption Database (MTED) is an online repository of threshold exemptions from cities across the State of California. The purpose of the MTED is to serve as a resource for policymakers, citizens, and companies by making information about threshold exemptions as accurate and robust as possible. The idea for the MTED came from requests by local government officials to identify and make accessible threshold exemptions across the State. A model effort of this approach is the Multi-City Innovation Campaign; this initiative gathered together 25 cities by leveraging the threshold exemption as a means to gain access to innovative tools from startups.

Before we can have a broader conversation about how to leverage threshold exemptions, we need information on the current state of threshold exemptions across the State of California. The MTED is the first step in this process. Once we understand the landscape, we can begin to address the existing fragmentation and identify the policies that would most benefit cities across the State.

Help a researcher out

Please complete a short 2-minute survey (click here). To make this repository as useful as possible, I need your help with the following information:

  • Add Your City. I want to include every city in California. If you don’t see your city listed, please submit the information and it will be added to the repository.
  • Ensure Information Correct. Accuracy matters. Please submit any errors in the information posted.
  • Additional information. The repository can be made more valuable with additional information. Specifically, the Total Budget and General Law budgets of each city. Please feel submit the information.
  • Anything Missing. As experts in the space, please submit any additional ideas, feedback, or suggestions.

About the Author

Charles Belle is the Founder and CEO of Startup Policy Lab. Startup Policy Lab is a nonprofit think tank working at the intersection of law, technology, and policy that builds technology to inform laws, data driven public policy, and culture in support of innovation and civic engagement. Charles engages in research around the interplay of government technology initiatives in support of building innovative communities. He has a particular fondness for studying the impact of Open Data in multiple contexts, such as privacy and procurement reform.

You can find Charles on Twitter @CharlesBelle


Opportunities to use Assessment Districts to Finance Facilities and Services Today in California –
A paper published by CDIAC

By Tim Seufert, NBS

As California finance professionals, we generally know about Assessment Districts and what they offer to cities, counties and special districts. Assessment districts have been vital to California’s prosperity for 150 years, financing essential infrastructure as well as funding desired services. However, certain challenges including Propositions 13 and 218 and recent court cases have faced Assessment Districts, and there is a need for clarity and a “road map” for their continued success.

Assessments, such as 1913/1915 Acts, Landscape & Lighting, or Business Improvement Districts, remain a vital public finance mechanism in the State today, but there has been a desire to establish some “best practices” and legislative edits for their continued proper use. This paper is an important first step in that direction to ensure they remain a valid tool for local governments and their communities. The paper in its entirety is available at:

http://www.treasurer.ca.gov/cdiac/publications/opportunities.pdf

The California Debt and Investment Advisory Commission, known as CDIAC, published this paper under the direction of Executive Director Mark Campbell. CDIAC is a state commission charged with assisting local and state agencies with prudent public debt and investment practices. An assessment working group of public finance professionals and attorneys came together to develop this paper. The group is continuing to look at options to support the use of assessments.


In the Spotlight: Understanding Pension Obligation Bonds

By Scott P. Johnson, Partner, MGO Advisory Services

The topic of Pension Liability has found its way into the media spotlight in recent weeks, with high-profile articles appearing in the Washington Post, the New York Times and a number of other prominent news outlets.  At the heart of these stories is the stark reality that many government entities continue to face growing risk from unfunded pension liabilities – an assertion that’s hardly a revelation to those of us who have spent our careers managing municipal finances. However, one possible solution addressed in these articles merits a closer look: Pension Obligation Bonds (POBs).

Several years ago, working with staff in the City of San Jose, I co-authored a white paper on the feasibility of POBs.  Based on the recent media attention, I suspect a brief overview of this particular tool might be helpful to a number of government executives and financial managers.  Please note, this article does not constitute advice or recommendations – it’s simply intended as an introduction to the topic for any of my CSMFO colleagues who might find it helpful.

What is a Pension Obligation Bond?

  • Pension Obligation Bonds are taxable bonds that can be issued by a government entity, used to finance some or all of the entity’s Unfunded Actuarial Accrued Liability (“UAAL”).
  • Bond proceeds are deposited with the pension plans and invested, along with the plans’ other assets, in a mix of long-term investments, such as equities and fixed income securities.
  • For the portion of the UAAL that was paid through bond proceeds, instead of making contributions to the pension plans for this portion of the UAAL, the government agency would make debt service payments to bond holders.  This replaces the portion of the employer retirement contribution rate due for payment of the UAAL which was paid off.
  • Pension Obligation Bonds can be issued for the entire UAAL as of a particular date, or for a portion of it. The term can be for up to 30 years.
  • The agency would make two payments: the debt service payments to pay off the bonds and contributions to the retirement system.

What is Unfunded Actuarial Accrued Liability (UAAL)?

  • The UAAL is the difference between the funds necessary to fund retiree benefits, as estimated by an actuary, and the actuarial value of the funds already committed to the pension plans to pay those benefits.
  • The UAAL for pensions currently is a debt to the pension plans that the agency (not employees) is entirely responsible for.  This debt is paid/amortized over a period of time at an actuarially determined rate of interest.

Can POBs save agencies money?

The theory of POBs is that an agency could replace the higher-cost UAAL obligation owed to the pension plans with lower-cost debt owed to bond holders. Savings can result when, if over the life of the bonds, the borrowing costs on the bonds (bond interest rate) is below the actual rate of return earned by the pension plans (pension plan rate of return).  The difference between the bond interest rate and the pension plan rate of return is called the “interest rate spread.”   POBs are a form of risk arbitrage: the government issuer borrows against its good (low-risk) credit rating and invests the proceeds through its pension plans in higher-risk, higher-return investments.  The intended result is that government agency’s payments to bondholders are lower than what it must otherwise contribute to the pension plans for the UAAL.

Illustration A.  As an illustration of the theoretical savings, for each $100 million of POBs the agency issued at a net average interest rate of 6% amortized over 30 years, if the pension plans earned an average net rate of return of 7% during the same 30-year period (an interest rate spread of 1%), then the average annual savings (net of debt service) to the agency would be approximately $500,000 per year over the 30-year term.

Illustration B. Alternatively, if the POBs were issued at an interest rate of 6% and the pension plans earned an average net rate of return of only 6% over the 30-year period (an interest rate spread of 0%), and then the average annual cost to the agency would be $600,000.

As indicated below, cities considering POBs must understand that even if there appears to be annual budgetary savings in the early years, the POB could result in a net financial loss to the city over the longer term due to the market volatility of pension plan investment performance over time.

What potential risks of financial loss are associated with POB’s?

Investment risk is the principal risk associated with a POB program.  If the pension plan earns less than the pension system’s Board-approved rate of return over the life of the bonds compared with the interest paid on the POBs, then the POB program becomes a net cost to the agency.

A significant factor that must be understood is how market volatility—the timing and degree of market upturns and downturns—can affect the ultimate financial gains or losses of issuing a POB.

POBs can have a positive impact if market returns are favorable early in the term of the POB program; which results in additional pension system assets that provide a cushion against future market declines.

However, market volatility can also have a negative impact on the long-term economics of a POB program. Even if the spread between the expected return on pension plan assets and the POB yield is positive, the volatility of returns on the investments funded with the bond proceeds can cause a drag on returns, leading to less favorable results than were originally expected.

Investment losses experienced early in the POB term may contribute to a new unfunded liability and could require more years of future gains to break-even.  Even though short-term budgetary savings are possible, actual interest rate savings over the life of a POB are less certain, since earnings on the investments funded with the bond proceeds may be less than the bond payments in any given year.  In addition, the factors on which the actuaries base their calculations in determining the UAAL may change over time.

Clearly, POBs should only be issued when the interest rate spread is expected to be sufficiently wide to mitigate potential risks associated with POB issuance, at least a 1% to 2% spread.   In addition, and equally important, the agency must be comfortable with the potential for financial loss due to market volatility in the pension plan rate of return due to investment gains and losses.

Besides the risk of financial loss, what are other potential drawbacks of POB’s?

  • Issuance of debt to fund pension liability increases debt burden and may use up agency debt capacity.  Therefore, an agency should consider their total debt profile, including anticipated debt to be issued over the long-term.
  • Issuing pension obligation bonds converts a “soft” liability into a “hard” liability.  Governments must make the debt service payments on the POBs regardless of retirement plan performance.
  • Additional unfunded liabilities could still exist in the future due to plan performance and/or changes in actuarial assumptions (it should be noted that PERS is currently in the process of a comprehensive review in evaluating actuarial assumptions which may result in higher annual required contributions and higher unfunded liabilities for PERS agencies).
  • Government Accounting rules require that unfunded pension liabilities are to be disclosed annually in the government’s annual audited financial reports.
  • POBs make it more difficult to identify the full cost and systemic issues associated with the retirement plans.  The POB debt responsibility becomes part of the agency’s debt portfolio and out of context from the cost of retirement plans.
  • Issuance of POBs involves transaction costs similar to other financing instruments.

What’s the process for issuing POBs?

If an agency chooses to issue POBs, a court validation process may be necessary.  The purpose of the court validation process is to establish that the agency’s obligation to pay the unfunded liability is a debt imposed by law, and comes within an exception to the State constitutional debt limitation.  The validation process typically takes 6-12 months.  The validation action does not obligate the agency to issue POBs, but there are costs associated with the validation process.  As with every debt issuance of the agency, each issuance of POBs would require Council/Board approval.

 Conclusion

Given the inherent risks associated with POB’s,  it is imperative to understand the market-volatility risks of POBs and the potential for financial losses to issuers of POB’s over the long term.  These risks exist even with optimistic assumptions about the average spread between bond interest costs and pension plan earnings.

Should an agency wish to explore POBs, any further exploration of POBs should occur in the context of a comprehensive look at pension system cost mitigation measures.

About the Author

Scott Johnson has over 29 years of experience in government, successfully managing city finances and budgets. He has led multi-billion dollar operations in government including the cities of Santa Clara, Milpitas, San Jose, Oakland, Concord and the County of Santa Clara.

Scott is currently a partner with MGO Advisory Services specializing in State & Local Governments.  He welcomes any questions or comments via email: sjohnson@mgocpa.com.


Welcome New CSMFO Members!

  • Matthew Anderson, Chief Financial Officer, Silicon Valley Clean Water, Peninsula Chapter
  • Hector Arreola, Fiscal Technician, Mojave Desert AQMD, Desert Mountain Chapter
  • Jay Baksa, Financial Analyst, Dublin, East Bay Chapter
  • Chris Browning, Payroll Accountant, El Segundo, South Bay Chapter
  • Darlene Colaso, Human Resources Director, Napa, North Coast Chapter
  • J’on Dennis, Audit Manager, Lance, Soll & Lunghard, CPA’s LLP, Central Los Angeles Chapter
  • Julia Erdkamp, Manager, Client Services, MuniServices, LLC, Orange County Chapter
  • Mariana Grajeda, Accounting Supervisor, Alameda County Water District, East Bay Chapter
  • Shawn Jones, Interim Director of Fiscal Services, Palomar Community College District, Inland Empire Chapter
  • Jerry Legg, SVP – Business Development Officer, River City Bank, Sacramento Valley Chapter
  • Michele Logan, management analyst, Pasadena, San Gabriel Valley Chapter
  • Bridgette McInally, Accounting Manager, Ventura, Channel Counties Chapter
  • Doaquin Mosley, VP, Treas Rel Mgr, Government Banking, Rabobank N. A., Inland Empire Chapter
  • Armando Nunez II, Public Safety Budget Analyst, Los Angeles, Central Los Angeles Chapter
  • Audrey Ramberg, Finance Director, Redwood City, Peninsula Chapter
  • Vina Ramos, Accounting Supervisor, El Segundo, South Bay Chapter
  • Patricia Reavey, Director of Finance and Administration, Alameda County Transportation Commission, East Bay Chapter
  • Jody Scott, Accounting Manager, El Segundo, South Bay Chapter
  • Kimberly Siemen, management anaylst, Pasadena, San Gabriel Valley Chapter
  • Justina Tien, Accounting & Financial Analyst, Santa Clara Valley Open Space Authority, South Bay Chapter
  • Victor Velasquez, Department Manager, FP&A, Orange County Transportation Authority, Orange County Chapter

Education Opportunities

Introduction to Governmental Accounting, City of Solvang
– August 6, 9:00am – 4:30pm
– Instructed by Ahmed Badawi

Power of Fiscal Policies/ Long Term Financial Planning, City of Camarillo
– August 20, 8:30am – 4:30pm
Presented by Bill Statler

Intermediate Governmental Accounting, City of San Diego
– August 21, 8:00am – 5:00pm
Instructed by Susan Mayer

 


Chapter Meetings

Orange County Chapter and CMTA Division IX, City of Irvine
– August 20, 11:30am – 1:30pm
Annual GASB and Single Audit Update

Presented by: Kathy Lai, Macias Gini & O’Connell LLP (MGO)

 

Monterey Bay Chapter Meeting, Marin County
– August 27, 10:30am – 2:30pm
“Financing Districts – a Flexible Option for Local Revenues”
Presented by: Jim Fabian, Principal, Fieldman Rolapp & Associates
“Enjoy Higher Investment Returns as the Economy Recovers”
Presented by: Peter Becker and Arron Bonck, Investment Representatives, Time Value Investments

Central Los Angeles & South Bay Chapters Meeting, City of Paramount
– August 27, 11:30am – 1:30pm
 Speaker: Ken Al-Imam, Consultant to Davis Far LLP


Coaching Corner
“Community Participation for Successful Budgeting”

2:00 – 3:30 p.m. Thursday, August 13, 2015
Advance registration required for this no-charge webinar:
https://attendee.gotowebinar.com/register/6946589487504364801

Community members want to be more involved in the budget process, but engaging the public productively can pose challenges. Learn how you can structure your budget process for successful results.

Webinar topics:
* How is community involvement in budgeting valuable?
* What are innovative tools and participatory budgeting techniques to engage your community effectively?
* How can you tap best practices effectively and efficiently to serve your agency?

Presenters:
* Karen Clower, CAO Project Manager, Humboldt County
* Bill Statler, consultant, a past President of CSMFO, retired Finance Director, San Luis Obispo

Audience: all local government finance professionals

***
Don Maruska, Master Certified Coach
Director, CSMFO Coaching Program
See “Coaching Corner” at www.csmfo.org/coaching


Career Opportunities

CSMFO provides government finance professionals with numerous resources for enhancing and advancing their careers. Visit the job opportunities page of the CSMFO website for a list of current job openings.