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HomeMy WebLinkAbout05.C. Financial Scenarios for Use of Extra Fund BalanceITEM C FINANCIAL SCENARIOS FOR USE OF EXTRA FUND BALANCE By Thea Vassallo, Finance Manager Lauren Brant, Managing Director, Public Funding Management, Inc. (PFM) FINANCIAL ALTERNATIVES FOR EXCESS RESERVES 1. Pay down CCCERA UAAL (75.3% funded @ 12/31/15) 2. Pay down OPEB (36.6% funded per 7/1/14 valuation) 4Shorten OPEB amortization 3. Set u 115 Pension Trust 4. A ocate to CIB grogram 5. Use to cover 0% rate increase FY 17/18 6. Start annual funding of ve iicle replacement Central Contra Costa Sanitary District www.centralsan.org Optimal Funding Strategy Discussion November 10, 2016 Lauren Brant, Managing Director Ellen Clark, Sr. Managing Consultant PFM Asset Management I LC The PFM Group Public Financial Management. inc. PFM Asset Management LLC PEM Advisors Sarah Hollenbeck, Managing Director Nicholas Jones, Sr. Managing Consultant PFM Financial Advisors I. J.,C 50 California Street, Suitc 2300 San Fr,mcisco, CA. 94111 (4'15) 982-5544 Scope of Assignment PFM was engaged by Central Contra Costa Sanitary District ("Central San" or the "District") to analyze and make recommendations on the allocation of funds for the following: Central San II" Pre -fund Capital Projects 0 Fund/Establish Reserves • Pa down UAAL' 1 Unfunded Actuarial Accrued Liability ► CCCERA • OPEB Trust ► Pension Trust (Section 115) $3.359 million—unrestricted FY15/16 favorable variances $2.5 million—budgeted UAAL payment 2016 The PFM Group Objectives and Executive Summary District Objectives Allocate funds to have greatest impact on long-term financial health of the District given current information Maintain strong credit rating Factor in cost considerations Mitigate future volatility Executive Summary District current cash and reserve position is solid Master Plan will likely present significant capital costs for District over next 20 years; small current dollar contributions will have minimal impact Recommendation: allocate all currently available dollars to reduce District's Pension URAL and OPEB liability 0 2016 The PFM Group 2 District Options Options are not mutually exclusive Optimal allocation is where District will get best return in current environment — Financial health — Stability — Credit perspective CD 2016 The PFM Group Central San Pre -fund Capital Projects Fund/Establish 11111 Reserves • Pay down UAAL 3 F$ 1 Pre -fund Capital Projects Pre -fund Capital Projects Fund/Establish Reserves Pay down URAL 1 District currently funds projects on "pay go" basis: —$36 - $42 millions annually Master Plan in development Initial draft2 1-5 year estimated spend: $364.2 million 6-10 year estimated spend: $491.6 million Dollars currently available would represent <1% of potential capital plan Greater return potential on the other options Awaiting final form; changes could impact recommendations 'Cash Flow Analysis — 2016 — 2017 2CCCSD, CIP Scenario D IkJJI.JJ[JIJLJI.._._.�IL4,,.��,+L1 d11,,�J, ijL 2016 The PFM Group 4 District Cash & Reserve Position Pre -fund Capital Projects Fund/Establish Reserves Pay down UAAL 1 • District position solid given cash flows Favorable variances contributed to "surplus" in FY 15/16 Aal/AAA rated Trend is positive District's current reserve policy FY 15-181 FY 16/17 FY 17/18 O&M 5/12 months $37,423,833 $35,813,934 Sewer Construction 1/2C113 18,404,378 21,337,352 Self Insurance $5mm $1.5mm 6,500,000 6,500,000 Debt Total 1Summary of Cash Flow, CCCS D © 2016 The PFM Group Bond Reserve 4,856,450 $67,184,661 4,856,450 $68,507,736 Pre -fund Capital Projects Fund/Establish Reserves le Pay down UAAL 1 District's Peer Universe District is in an elite group of water and sewer peers with its Aal/AAA rating:1 City of Beverly Hills Water and Sewer Enterprises Water Enterprise is the only water or sewer enterprise in CA rated Aaa by Moody's Los Angeles County Sanitation Districts California Department of Water Resources City of Sunnyvale Water Enterprise East Bay Municipal Utility District (Water: Aal/AAA, Sewer: Aa2/AAA) Metropolitan Water District of Southern California Orange County Water District City of Palo Alto Water Enterprise Santa Clara Valley Water District Credit ratings of other organizations: San Francisco Public Utilities Commission (Water: Aa3/AA-, Sewer: Aa3/AA) City of San Diego Sewer Enterprise (Aa2/AA-i-) 1Moodys MFRA database 0 2016 The PFM Group 6 1 1 Municipal Utility Rating Distribution Pre -fund Capital Projects j Fund/Establish Reserves Pay down UAAL Moody's median credit rating for utilities is Aa3 350 300 250 200 150 100 50 0 —II Aaa District's Rating Aal I NM I Aa2 Aa3 Al A2 A3 Baal Baa2 Baa3 Bal Ba2 Ba3 81 Source: 2014-12 (December) US Municipal Utility Revenue Debt Methodology, Moody's Investor Service CD 2016 The PFM Group 111•11111P- 411111111.- 41 Pre -fund Capital Projects Financial Drivers of Credit Ratings Fund/Establish Reserves Pay down UAAL 1 Moody's Municipal Utility Scorecard Factors1 40% weighting for Financial Strength Weighting Aaa Aa A Annual Debt Service Coverage (15%) >2.00x 2.00x>n>1.70x 1.70x>n>1.25x Days Cash on Hand (15%) >250 days 250 days>n >150days 150 days>n >35 days Debt to Operating Revenues (10%) <2.00x 2.00x<n<4.00x 4.00x<n<7.00x District Metrics2 r 5.0x 338 days 0.43x Annual Debt Service Coverage: most recent year's net revenues divided by most recent year's debt service, expressed as a multiple 0 Days Cash on Hand: unrestricted cash and liquid investments times 365 divided by operating and maintenance expenses, expressed in days u Debt to Operating Revenues: Net debt divided by most recent year's operating revenues, expressed as a multiple 120144 2 US Municipal Utility Revenue Debt Methodology, Moody's Investor Service 2As of FY15. Moody's MFRA database © 2016 The PFM Group 1 Financial Drivers of Credit Ratings Pre -fund Capital Projects Fund/Establish Reserves Pay down UAAL Moody's Municipal Utility Scorecard 10% weighting for Rate Management—steady rate increases and management's track record at setting rates are viewed favorably Below -the -line adjustments Oversized adjusted net pension liability relative to debt, or significant actuarial required contribution payment Source: 2014-12 US Municipal Utility Revenue Debt Methodology, Moody's Investor Service © 2016 The PFM Group 4110 Pre fund Capital Projects Impact of Additional Reserve Funding • Fund/Establish Reserves • Pay down UAAL 1 1 Rating agencies' emphasis is on high liquidity and reserve levels—not specific types of reserves Potential unfavorable view of reserves, which are limited to specific purposes or relied on to avoid making structural changes (e.g. rate stabilization fund) The District's liquidity is cited as a credit strength and has consistently exceeded 300 days cash on hand S&P highest category for days cash on hand is "greater than 150 days"1 Moody's assigns 15% weight to days cash, Aal median is 134 days2 As a result of the District's strong current cash position, increasing reserves will not have meaningful impact on an improved credit rating 12016-01 (January) US Public Finance Waterworks, Sanitary Sewer, and Drainage Utility Systems: Rating Methodology and Assumptions, Standard & Poor's Ratings Services 22014-12 US Municipal Utility Revenue Debt Methodology, Moody's Investor Service 0 2016 The PFM Group /0 1 District's UAAL Position • Pre -fund Capital Projects Fund/Establish Reserves 1111 Pay down UAAL Board funding goal is 100%, including supplemental assets Total Actuarial Liability Plan Assets Unfunded Liability Funded Ratio (000s) Pension Funding OPEB Funding2 12/31/14 12/31/15 7/1/12 7/1/14 $341,095 $357,251 (240,138) (269,067) 100,957 88,184 70.4% 75.3% 1CCCERA Annual Actuarial Valuation 2CCERA & OPEB report, Bartel & Associates, March 7, 2016 CD 2016 The PFM Group $100,498 $103,904 (22,481) (33,695) 78,017 70,209 22.4% 32.4% 11 1 What Drives the Unfunded Liability? Pre -fund Capital Projects Fund/Establish Reserves Pay down UAAL Benefit structure—past, present, and future Determines existing and ongoing accrual of liabilities Contribution strategies Amount and timing of funding strategies have a substantial future impact on the long-term balance Actual vs. assumed inflation Assumptions on medical cost trends impact future liabilities, and may be a determining factor on sufficiency of a given funding strategy Investment risk/return Asset allocation has long-term investment assumptions that carry some measure of risk, and will impact the eventual fund balance 2016 The PFM Group 12 Pre -fund Capital Projects 0 Fund/Establish Reserves 1 Options and Assumptions 1 Pay down UAAL 1 CCCERA Target investment return: 7.00%1 Remaining amortization period: -11-year2 • Additional (over)payments count towards current year valuation • Level percent of payroll; 3.25°/o payroll growth rate • Base payroll: $26,906,131 • Mandatory funding policy OPEB Trust Target investment return: 6.25%3 22 -year amortization schedule4 Level dollar amortization Discretionary funding policy Pension Trust Target investment return: 5.00%5 Discretionary funding policy ,CCCERA Annual Actuarial Valuation, December 31, 2015 2CCCERA Actuarial Valuation and Review (December 31, 2015); CCCERA and OPEB, Bartel & Associates, March 7, 2016; CCCERA CAFR 2015: remaining balance of 12/31/07 UAAL is amortized over fixed period with 8 years remaining as of 12/31/14. Any changes in UAAL after 12/31/07 is separately amortized over a fixed 18 -year period effective that valuation. Effective 12/31/13 any changes in UAAL due to plan p Y amendments(exception with the of a change due to retirement incentives) will be amortized over a 10 -year fixed period effective with that valuation. 3July 1, 2014 GASB 45 Actuarial Valuation Final Results, Bartel & Associates, April 6, 2015 4OPEB: originally 30 -year amortization with 22 years remaining 5PFMAM selected return based upon anticipated target allocation and PFMAM Capital Market Assumptions 0 2016 The PFM Group aJLI 13 1 Investment Returns• • Pre -fund Capital Projects Fund/Establish Reserves • Pay down UAAL • Investment returns are dependent upon actual asset allocation (risk/return profile) of each funding option Actuarial required payments, funded ratios, and various other funding metrics rely heavily on long-term investment return assumptions • Any URAL funding strategy should be viewed as a long-term, sustainable solution, as year -over -year performance is subject to various market conditions, most notably impacting the investment return of the District's CCCERA and Trust portfolios • The District should be prepared to adjust funding policy if investment returns persist below expectations and adopt a strategy which leaves each Trust in a reasonably healthy state 2016 The PFM Group 14 1 CCCERA Return Projections Pre -fund Capital Projects Fund/Establish Reserves Pay down UAAL 1 1 CCCERA Expected Return intermediate -Term Projections Long -Term Projections Standard Deviation Return Variance 95th Percentile 75th Percentile 50th Percentile 25th Percentile 5th Percentile Probability of Achieving 7.0% Return 10.9% 5 Year 14.7% 1O.0% 6.7% 3.4% -1.3% 48.5% 10.4% 30 Year 11.1% 9.2% 8.0% 6.6% 4.8% 69.4% All returns are annualized Hedge Fund, 2.00% Cash Pri,ate Equity 17.00% Short Tern' Gov/Credit 24.00% US Equity 6.00% REIT Core Fixed 2.00% Source: CCCERA Asset Allocation Study, December 2, 2015. Represents unconstrained Functionally Focused Portfolio 4' -yr (FFP 4' -yr). CCCERA has highest risk profile of funding options resulting in more variability in expected return than OPEB or Pension Trust. Probability of achieving long-term return goal of 7.0% is 69.4%. The infoimation pmvided reflects standard risk and return metrics for the portfolio depicted and are derived by runningMonte Carlo simulations using PFMAM's Capital Market Assumptions and the target asset class allocations shown in the pie chart above. Please refer to PFMAM's Capital Market Assumptions presentation.* key assumptions and the methodology utilifzed. The TrobabittO of Achieving" rate of return represents the discount rate or taixet rate qf return as articulated by the client/ prospect. The remrn data is hypothetical in nature and should not be relied upon as independently ven:fiabk information. There is no guarantee that the projected returns can or will be achieved. Results may nary with each use and over time. This material does not pmport to contain all of the information that a proipective investor may wish to consider and is not to be relied upon or used in substitution for the exercise gfindependentjudgment. Past peffoimance is not a guarantee qffuture results. Prior to investing,you should consultyour accounting, tax, and legal advisors to understand the implications of such investment. © 2016 The PFM Group 15 OPEB Trust Return Projections Pre -fund Capital Projects Fund/Establish Reserves Pay down UAAL PFMAM 50/50 Model Expected Return Intermediate -Term Projections Long -Term Pro'ections Standard Deviation Return Variance 95th Percentile 75th Percentile 50th Percentile 25th Percentile 5th Percentile Probability of Achieving 6.25% Return 11. 9.5% 5 Year 12.1% 8.0% 5.2% 2.3% -1.8% 41.1% 9.1% 30 Year 9.9% 8.3% 7.1% 6.0% 4.4% 70.3% All returns are annualized High Yield Bank Loans EM Debt 3.25% 3.25% 3.25% Inv. Grade Corp 3.25% I :S Iqii 33.004 Core Fixed 37.00% P,111 Equity 5.00% Mel Equity 12.00% FrEB Trust has a slightly lower risk profile than CCCERA and a higher risk profile than a Pension rust resulting in some variability in expected return. Probability of achieving long-term return goal of 6.25% is 70.3%. The information provided reflects standard risk and return metrics ibr the ponfolio depicted and are derived by runningMonte Carlo simulations using PFMAM's Capital Market Assumptions and the target asset class allocations shown in the pie chart above. Please refer to PFMAM's Capital Market Assumptions presentation for key assumptions and the methodology utilked. The Trobabili0 of Achieving" rate of return represents the discount rate or target rate of return as articulated by the client/ pro3pect. The return data is IDpothetical in nature and should not be relied upon as independently venfiable infimation. There is no guarantee that the prqjected returns can or will be achieved. Results mg vary with each use and over time. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied loon or used in substitution for the exercise o independentjudgment. Past pelormance is not a guarantee offriture results. Prior to investing,you should consuityour accounting, tax, and legal advisors to understand the implications of such investment. CD 2016 The PFM Group (6 Pension Trust Return Projections Pre -fund Capital Projects Fund/Establish Reserves Pay down UAAL 1 PFMAM 30/70 Model Expected Return Intermediate -Term Projections Long -Term Projections Standard Deviation Return Variance 95th Percentile 75th Percentile 50th Percentile 25th Percentile 5th Percentile Probability of Achieving 5.00% Return 6.9% 5 Year. 9.2% 6.2% 4.1% 2.1% -0.8% 39.3% 6.9% 30 Year 8.8% 7.5% 6.7% 5.8% 4.6% 91,2% All returns are annualized Bank Loans High Yield 4.75% EM Debt 4.75% In Grade Corp 4.75% US Equity 20.00% hug Equity 7.00% EM Equity 3.001/4 Pension Trust has lowest risk profile of funding options resulting in less variability in expected ,Freturn than CCCERA and OPEB Trust. Probability of achieving long-term return goal of 5.0% is 411111111111EMMOIMINIMIK 11111111111111111. 11111111111111111IL The informationprovided reflects standard risk and return metrics for the portfolio depicted and are derived by runningMonte Carlo simulations usingPFMAM's Capital Market Assumptions and the target asset class allocations shown in the pie chart above. Please refer to PFMAVI's Capital Market Assumptions presentation for key assumptions and the methodology uti lked. The Trobabili0 of Athieving" rate of return represents the discount rate or target rate of return as articulated by the client/prospect. The return data is hypothetical in nature and should not be relied upon as independently verifiable information. There is no guarantee that the projected returns can or will be achieved. Results may vary with each use and over time. This material does not putport to contain all of the iqformation that a pro.pective investor mg wish to consider and is not to be relied upon or used in substitutionfor the exercise of independentfidgment. Past peOmance is not a guarantee offitture results. Mior to investingjou should consultyour accounting, tax, and legal advisors to understand the implications of such investment. & DMA IAL, Au dull,' 41,111 I- IIIIIJILAI,JALL 11..1 AM.:I:MEW 2016 The PFM Group 17 1 1 CCCERA UAAL Funding Strategy • Pre -fund Capital Projects Fund/Establish Reserves • Pay down UAAL 15 0 10 -D -10 If $2.5 million applied towards unfunded pension liability, then under current assumptions the annual contributions would drop by approximately $190,000 in year one, and the reduction in cost would increase annually until it reaches $330,00() in year eighteen (light blue) Further supplementing that contribution by $3.359 million would instead reduce the annual required contribution by $450,000 in year one and up to $770,000 in year eighteen (dark blue) CCCERA UAAL Amortization Comparison 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 Years No Additional Contribution © 2016 The PFM Group $2.5 Million Contribution i$5.859 Million Contribution 18 CCCERA UAAL Funding Strategy Savings Pre -fund Capital Projects Fund/Establish Reserves 1 Pay down UAAL • Total cash flow savings associated with contributing $2.5 million dollars towards the CCCERA unfunded liability are approximately $4.6 million • Total cash flow savings associated with contributing $5.859 million dollars towards the CCCERA unfunded liability are approximately $10.7 million 12 0) 0 10 8 6 4 2 1 it.Munc_iasiiitadiumigiP CD 2016 The PFM Group 3 4 CCCERA UAAL Funding Savings Comparison 6 7 8 9 10 Years 11 12 $5,859 Million Contribution • $2.5 Million Contribution 13 $5.859 million contribution $2.5 million contribution 14 15 16 17 18 19 1 CCCERA UAAL Funding Strategy Sensitivity Pre -fund Capital Projects Fund/Establish Reserves Pay down UAAL • Assuming a $5.859 million contribution to CCCERA: - If investment returns are higher than expected -11.1%, then annual contribution requirements will decrease a further $2.9 to $4.9 million (dark blue) - If investment returns are lower than expected -4.8%, then annual contribution 0 0 -5 -10 requirements will increase by $1.9 million to $3.2 million (light blue) CCCERA UAAL Amortization Comparison Sensitivity -15 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 Years $5,859 Million Contribution & 4.80% Return • $5.859 Million Contribution & 7.00% Return • $5.859 Million Contribution & 11.10% Return 2016 The PFM Group 20 1 CCCERA UAAL Funding Strategy Sensitivity & Savings • Pre -fund Capital Projects Fund/Establish Reserves Pay down UAAL 1 • Even including the $5.859 million contribution, adjustments to the UAAL amortization based on a 4.8% investment return would create negative savings of approximately $34.4 million Contribution adjustments based on a 11.1% investment return would create savings of approximately $79.1 million 100 c 80 60 40 20 0 -20 -40 CCCERA Funding Sensitivity Savings Comparison 11.1% return -60 1 2 3 4 5 6 4.8% return 9 10 11 12 13 14 15 16 17 18 Years $5,859 Million Contribution & 11.10% Return $5.859 Million Contribution & 7.00% Return $5.859 Million Contribution & 4.80% Return © 2016 The PFM Group 21 1 • Pre -fund Capital Projects CCCSD OPEB UAAL Funding Strategy Fund/Establish Reserves • Pay down UAAL 1 • if $2.5 million applied towards OPEB liability, then under current assumptions the ARC would drop by $200,000 (light blue) • Further supplementing that contribution by $3.359 million would decrease the ARC by $470,000 (dark blue) • Each series in the graph represents the UAAL amortization portion of the ARC necessary to pay down the unfunded liability given the amortization period 4 3 2 0 Annual Required Contribution (ARC) FY 15/16 (000s) ARC - Cash Implied Subsidy Total • Normal Cost $1,975 $350 $2,325 • UAAL Amortization 5,091 450 5,541 • Total ARC 7,066 800 7,866 Source: Bartel, July 1, 2014 GASB 45 Actuarial Valuation Final Results CCCSD OPEB Funding Comp son 2 © 2016 The PFM Group 4 5 6 7 8 • No Additional Contribution 9 10 11 12 13 Years $2,5 Million Contribution 14 15 16 17 •$5.859 Million Contribution 18 19 21 22 22 CCCSD OPEB UAAL Funding Strategy Pre4und Capital Projects • Fund/Establish Reserves - Savings 1 1 Pay down UAAL 1 Total cash flow savings associated with contributing $2.5 million dollars towards the unfunded OPEB liability are approximately $4.4 million • Total cash flow savings associated with contributing $5.859 million dollars towards the unfunded OPEB liability are approximately $10.3 million 12 0 10 8 6 4 2 CCCSD OPEB Funding Savings Comparison 2 3 4 5 6 7 8 9 10 11 12 Years $5.859 Million Contribution • $2.5 Million Contribution © 2016 The PFM Group 13 14 15 $5.859 million contribution $2.5 million contribution 16 17 18 19 20 21 22 23 CCCSD OPEB UAAL Funding Strategy*, Pre -fund Capital Projects Fund/Establish Reserves Sensitivity 1110 Pay down IJAAL • Assuming a $5.859 million contribution to fund CCCSD's unfunded OPEB liability: — If investment returns are higher than expected -9.9%, then the ARC requirements will decrease a further $2.3 million — If investment returns are lower than expected -4.4%, the requirements will increase by $t6 million Each series in the graph below represents the UAAL amortization portion of the ARC necessary to pay down the unfunded liability given the prescribed amortization period CCCSD OPEB Funding Sensitivity Normal funding of LAN_ Amortization at 6.25% return Assumes UAAL. Amortization at 9.90% return 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Years $5.859 Million Contribution & 4.40% Return • $5.859 Million Contribution & 6.25% Return © 2016 The PFM Group •$5.859 MiUion Contribution & 9.90% Return 24 CCCSD OPEB UAAL Funding Strategy Pre fund CaPital Pmiects Sensitivity & Savings Fund/Establish Reserves Pay down UAAL • Based on a 4A% investment return and a $5.859 million contribution, the required adjustment to the annual payments would create negative savings of approximately $24.3 million • Assuming contributions based on a 9.9% investment return, it would create savings of approximately $61.0 million (i) 0 70 60 50 40 30 20 10 0 -10 -20 -30 1 CCCSD OPEB Funding Sensitivity 4.40% return 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Years $5.859 Million Contribution & 9,90% Return $5.859 Mi ion Contribution & 6.25% Return • $5.859 Million Contribution & 4.40% Return © 2016 The PFM Group 25 1 1 CCCSD OPEB UAAL Funding Strategy •PrefundCapital Projects Fund/Establish Reserves Pay down UAAL Shorter Amortization • If $5.859 million is applied to the unfunded OPEB liability, the District could shorten the amortization period to 18 years, and the UAAL amortization portion of the ARC would be approximately $90,000 more than the current contribution schedule 6 c 0 E 5 4 3 2 0 CCCSD OPEB Funding Compar son 'e.ulrei on n u ton — 1 Alr mo iza ion orri onen 1 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Years $5.659 MiUion Contribution and 18 -Year Funding Period 'No Additional Contribution • $5.859 Million Contribution © 2016 The PFM Group 26 1 CCCSD OPEB UAAL Funding Strategy • Pre fund Capital Projects Fund/Establish Reserves Shorter Amortization & Savings Pay down UAAL • Savings associated with an 18 -year amortization period will be negative for the 18 -year timeframe due to the slightly increased cost • However, because CCCSD would not be responsible for UAAL contributions during periods 19 to 22, a reduced amortization period creates a higher gross cash flow savings of approximately $20.8 million vs $10.3 million CCCSD OPEB Funding Savings Comparison -5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 Years $5,859 Million Contribution • $5.859 Million Contribution and 18 -Year Funding Period ilkILLLAJALA 0 2016 The PFM Group 27 Recommendation © 2016 The PFM Group 28 Term Recommendation: Allocate Available Funds To Reduce UAAL Paying down District Pension URAL and OPEB liability has greatest, long-term financial impact on the District — Contribution savings due to potential higher return on investment — Potential budgetary flexibility Pre -funding capital projects has minimal financial impact — Based on current estimates, dollars currently available would represent less than —1% of capital plan — Greater return potential on other options Effect of $3.359 million Effect of $5.859 million Annual Total Debt Service Cost UAAL Savings OPEB Savings OPEB Savings 20 years -11 years 22 years 18 years ($235k) $450k - $770k $470k ($90k) ($4.67M) $10.7M $10.3M $20.8M • Increasing reserves would not have a significant impact on the District given the current liquidity position — Strong reserves — Favorable relative to peers 'All -In True Interest Cost is 3.50%. Includes financing fees estimated at $175,000 (bond counsel, financial advisor, underwriter, etc.) 2016 The PFM Group 29 Recommended Allocation Amongst Available Options "Best" use dependent on management priorities as well as quantitative analysis • CCCERA Near-term cash savings relative to OPEB Modest increase in funded status Higher potential of negative experience • OPEB Reduce amortization period to 18 years Total estimated long-term cash savings of $15.4 million ($16.8 million savings if contribution is $3.359 million) Increase in funded status from 32.4% to 34.8% (35.7% if contribution is $3.359 million) • Pension Trust Budgetary control tool to mitigate anticipated CCCERA contribution volatility; long-term flexibility Reduces CCCERA URAL on balance sheet, improving Net Pension Liability Greater control over broader universe of investment options 0 2016 The PFM Group $2.5 million—budgeted URAL payment $3.359 million— unrestricted FY15/16 favorable variances 30 establishing Section 115 Pension Rate Stabilization Trust 2016 The PFM Group 31 Establishing a Section 115 Pension Trust Multiple -employer trust - Very easy, create governance/oversight committee, resolution to adopt the trust, complete paperwork, approve an investment policy statement, make contribution Single -employer trust — a bit more complicated to set-up, create governance/oversight committee, select custodian and investment advisor, review trust document, resolution to establish the trust, approve investment policy, make contribution Primary difference is in the set-up of trust 2016 The PFM Group 32 Process to Set -Up Section 115 Trust 1. Set -Up Plan Governance • Client creates committee or board to oversee trust and develops governance documents 0 2016 The PFM Group 2. Create or 3. Investment Adopt Section Policy and 115 Trust Strategy • Complete paperwork adopt multiple employer trust, or • Create unique trust, select administrator, advisor and trustee bank • Client establish guidelines for asset allocation permissible investments and funding . Portfolio should be monitored for IPS compliance Single -Employer Trust • Client selects trust administrator, bank trustee - and collaborate to create unique trust for CCCSD 4. Strategy Execution and Communication Plan administrator/ad visor executes strategy agreed upon Client receives communications about strategy/ manager r\.. adjustments Multiple -Employer Trust 4e • Client adopts established trust sponsored by trust administrator and bank 4 trustee/custodian 5. Reporting • Client receives detailed and reconciled monthly statements • Client receives quarterly performance reports J 33 Annual Estimated Cost of Section 115 Pension Trust Estimated Fee Schedule for $5 million* Percentage Trustee/Custodian Fee Investment Advisory Fee Estimated Total Fee 0.05 — 0.13% 0.45 — 0.60% 0.50 — 0.73% Annual Fee $2,25046,000 $22,500 — $30,000 $25,000 - $36,500 Underlying Investment Management Fee 0.20% - 0.80% *Estimated costs based on industry averages for similar sized portfolios. The District may incur additional legal fees especially if establishing a single -employer trust. 0 2016 The PFM Group 34 1 Appendix © 2016 The PFM Group Assumptions for Monte Carlo Return Projections for CCCERA, OPEB and Section 115 Pension Trust • CCCERA Portfolio target allocation = 70% growth, 30% fixed • CCCERA discount rate = 7%1 • OPEB Portfolio target allocation = 50% growth, 50% fixed • OPEB discount rate = 6.25%2 • Pension Trust target allocation = 30% growth 70% fixed • Pension Trust rate of return = 5%3 • Returns, standard deviations and correlations provided by PFMAM 2016 Capital Market Assumptions 1 CCCERA Annual Actuarial Report, December 31, 2015 2 CCCSD PARS OPEB Report June 30, 2015 3 Assumed target allocation and rate of return for Pension Trust 0 2016 The PFM Group 36 PFMAM's 2016 Capital Market Assumptions Forward -Looking Based on Economic Fundamentals Intermediate: Next 5 Years Long Term Projections Expected Return Expected Risk Expected Return Expected Risk US Equity International Developed Equity Emerging Markets Equity Core Bonds 7.1% 7.3% 17% 18% 6.5% 24% 8.1% 1.5% 4% 5.5% 7.7% 7.7% 16% 17% 20% 5% Intermediate 2.6% 6% 6.3% 7% Investment Grade Emerging Markets 4.4% 1O% 7.3% 10% Debt High Yield 5.7% 10% 6.8% 10% Bank Loans 4.5% 6% 5.2% 6% REITs 5.5% 12% 6.4% 12% Private Equity Real Estate 6.8% 15% 7.7% 15% Commodities 3.O% 16% 5.3% 16% Hedge Funds 6.5% 15% 7.4% 15% Private Equity 9.5% 25% 9.8% 25% Cash 1.0% 1% 3.3% 1% For the intermediate term (up to 5 years), our capital market assumptions are derived from our assessment of current economic conditions, including corporate profits, balance sheets, etc., and current valuations for various asset classes. Our long-term assumptions are derived using an economic building block approach that projects economic and corporate profit growth and takes into consideration the fundamental factors driving long-term real economic growth, our expectation for inflation, productivity and labor force growth. Please refer to PFMAM's 2016 Capital Market Assumptions for a complete description of the methodology used to develop these assumptions and important disclosures. I Au, illaNNMAXINWINOWIRMY © 2016 The PFM Group 37 Glossary 2016 The PFM Group 38 Key Terms Defined Present Value of Benefits (PVB) - The value of all benefits from the past, the present, and the future that are expected to be owed to employees Normal Cost (NC) - The present value of future benefits that employees accrue over the course of a year for their service • Actuarial Accrued Liability (AAL) - The present value of benefits that have accrued during prior periods • Unfunded Actuarial Accrued Liability (UAAL) - The excess of the Actuarial Accrued Liability over the actuarial value of assets that is pledged to make benefit payments • Annually Required Contribution (ARC) - The Normal Cost plus an amortized payment of the Unfunded Actuarial Accrued Liability for a particular year 2016 The PFM Group 39 Disclosures This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities. 2016 The PFM Group 40 STAFF RECOMMENDATIONS FOR ITEM C • Use of Year End Funds: • Pay $2.5M to UAAL for OPEB • Establisi a 115 Pension Fund Trust for remaining amount $3.359M