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AC 10-24-2022 PresentationsAudit Committee Regular Meeting October 24, 2022 OPEB & Pension Trust Investment Policies Background OPEB Trust Pension Trust Investment Policies CalPERS Update Comparison of Pension Funding with Neighboring Cities Agenda 2 Background State and CalPERS Control Pension Funding Challenges Underfunded Pension System Volatility Risk Gives City Local Control of Pension Assets Solution: Section 115 Trust Prefunds Future Pension Costs Stabilizes Volatility in Pension Costs Diversifies Pension Assets from CalPERS How is a Pension Plan Funded? Contributions Investment Earnings Retirement Benefits Impact of Investment Returns Retirement Benefits Investment Earnings If the investment return is lower than expected … … the City’s required contributions will increase to cover the shortfall Contributions Impact of Discount Rate Discount Rate Liabilities, Contributions Funded Status Probability of meeting investment return OPEB Trust OPEB Trust Established FY 2009-10 •$19.3M contributions •$31.3M* assets •5.77%* annual return * As of June 30, 2022 $2.0M$0.9M$1.4M $8.0M$7.0M $23.1M $29.4M $38.0M $31.3M$29.8M Contributions, Disbursements, and Assets Contributions Disbursements Total Assets OPEB Plan Status June 30, 2021 Measurement Date June 30, 2022 Measurement Date Accrued Liability $28.6M $29.9M Market Value of Assets $38.0M $31.3M Unfunded Accrued Liability $(9.4)M $(1.5)M Funded Ratio 132.8% 104.9% Pension Trust Pension Trust Established FY 2017-18 •$16.0M contributions •$17.2M* assets •3.94%* annual return * As of June 30, 2022 $8.0M $4.0M $2.0M $2.0M $12.7M $18.5M $17.2M $16.4M Contributions, Disbursements, and Assets Contributions Disbursements Total Assets 80%funded status within 20 years 6.25%discount rate What is our pension funding goal? $16.0M Contributions $17.2M Market Value As of June 30, 2022 $43.9M $51.8M $8.0M $18.5M $17.2M $0.0M $10.0M $20.0M $30.0M $40.0M $50.0M $60.0M 2017-18 2022-23 2027-28 2032-33 Progress Towards Pension Funding Goal 5% Investment Return 6.25% Investment Return Actual Market Value Investment Policies Audit Committee Roles and Responsibilities •Establish, approve, and maintain investment objectives, guidelines, and policies. •Appoint Investment Managers •Monitor investment performance •Review portfolio’s asset allocation and investment structure Investment Manager Roles and Responsibilities •Manage the day-to-day investment of portfolio in accordance with investment policy guidelines and objectives •Exercise full investment discretion and prudence in the selection and diversification of investments •Provide annually to the City’s Audit Committee a commentary and analysis of investment performance Last Year’s Audit Committee Changes •Prohibiting direct or indirect exposure to cryptocurrencies •Prohibiting leveraged securities, other than registered hedged equity and hedged fixed income positions •Limiting registered hedged equity and fixed income positions to 10% of the portfolio “Balanced” Investment Objective Designed to provide moderate current income with moderate growth of capital Asset Class Range Target Equities 50%-70%63% Fixed Income 20%-40%29% Real Estate 0%-15%5% Commodities 0%-10%2% Cash 0%-10%1% CalPERS Update CalPERS Plan Status June 30, 2020 Valuation Date June 30, 2021 Valuation Date Accrued Liability $157.6M $168.4M Market Value of Assets $103.8M $127.1M Unfunded Accrued Liability $53.8M $41.3M Funded Ratio 65.9% 75.5% Investment Returns -6.1% FY 2021-22 6.9% 20-Year -7.2%-6.1% 3.7% 16.6% 12.3%11.8% 19.1% -5.1% -24.0% 13.3% 21.7% 0.1% 13.2% 18.4% 2.4%0.6% 11.2% 8.6%6.7% 4.7% 21.3% -6.1% 2000-01 2005-06 2010-11 2015-16 2020-21 CalPERS Historical Investment Returns Annual Investment Return 6.8% Discount Rate Impact of Investment Return annual costs increase by$2.0M in FY 2028-29 $6.9M $7.7M $5.0M $5.9M $2.9M $7.9M $5.2M $0.0M $1.0M $2.0M $3.0M $4.0M $5.0M $6.0M $7.0M $8.0M $9.0M 2022-23 2027-28 2032-33 2037-38 CalPERS Annual Required Contribution 6.8% Discount Rate 6.8% Discount Rate + FY 2021 Investment Gain 6.8% Discount Rate + FY 2021 Investment Gain + FY 2022 Investment Loss Impact on Contributions (FY 2028-29) Impact of Discount Rate If the discount rate goes down1% annual costs increase by up to$2.9M $7.4M $4.7M $6.9M $10.1M $7.5M $0.0M $2.0M $4.0M $6.0M $8.0M $10.0M $12.0M 2022-23 2027-28 2032-33 2037-38 CalPERS Annual Required Contribution 7.00% Discount Rate 6.00% Discount Rate Comparison of Pension Funding with Neighboring Cities 75%75%77%78%79%81%84%87% Palo Alto Cupertino Milpitas Gilroy Sunnyvale Campbell Mountain View Los Gatos CalPERS Plan Funded Status (CalPERS Assets) June 30, 2021 Source: calpers.ca.gov/page/employers/actuarial-resources/public-agency-actuarial-valuation-reports 78%80%81%81%84%86%88%89% Gilroy Palo Alto Sunnyvale Campbell Mountain View Cupertino Los Gatos Milpitas CalPERS Plan Funded Status (All Pension Assets) June 30, 2021 Source: calpers.ca.gov/page/employers/actuarial-resources/public-agency-actuarial-valuation-reports Questions? Thank you! October 24, 2022 Treasurer’s Investment Report Month ending September 30, 2022 Policies Cash and Investments Investments Compliance Agenda 2 Policies •California Government Code •Municipal Code •Audit Committee Charter •City Investment Policy •Pension Trust Investment Policy •OPEB Trust Investment Policy Policies 4 Cash and Investments General $105,329,003 49% Special Revenue $45,588,397 21% Debt Service $2,682,650 1% Capital Projects $40,034,177 18% Enterprise $12,476,572 6% Internal Service $10,453,792 5% Cash and Investments by Fund Type Cash $30,005,583 14% Cash Equivalents $21,059,752 10% Investments $148,259,206 68% Restricted for Pension $17,240,051 8% Cash and Investments by Account Type $216.6M $216.6M 6 Cash and Investments –General Ledger Balance by Fund As of September 30, 2022 Fund Type Beginning Balance Receipts Disbursements Journal Adjustments Ending Balance General Fund 107,825,771 7,739,191 (9,681,257)(554,702)105,329,003 Special Revenue 47,075,939 354,490 (1,535,428)(306,605)45,588,397 Debt Service 2,682,650 ---2,682,650 Capital Projects 40,550,898 155 (516,876)-40,034,177 Enterprise 12,974,247 130,548 (664,195)35,972 12,476,572 Internal Service 9,882,836 440 (522,469)1,092,986 10,453,792 Total $220,992,342 $8,224,824 $(12,920,225)$267,651 $216,564,592 7 Beginning Balance Ending Balance % of Portfolio Cash in banks and on hand Operating Checking (Wells Fargo)34,386,299 29,966,945 14% Workers' Compensation Checking (Wells Fargo)33,701 25,305 0% Payroll Checking (Wells Fargo)--0% Restricted for Bond Repayments1 (BNY Mellon)8,333 8,333 0% Petty Cash and Change 5,000 5,000 0% Cash Equivalents Local Agency Investment Fund 21,059,752 21,059,752 10% Investments Investments (Chandler)148,259,206 148,259,206 68% Restricted for Pension (PARS)17,240,051 17,240,051 8% Total Cash and Investments $220,992,342 $216,564,592 100% Cash and Investments –General Ledger Balance As of September 30, 2022 1 Cash held by fiscal agent for bond repayments 8 Beginning Balance Ending Balance % of Portfolio Cash in banks1 Operating Checking (Wells Fargo)34,432,707 31,613,882 15% Workers' Compensation Checking (Wells Fargo)36,010 25,694 0% Payroll Checking (Wells Fargo)--0% Restricted for Bond Repayments2 (BNY Mellon)8,333 8,333 0% Cash Equivalents Local Agency Investment Fund 21,099,180 21,099,180 10% Investments Investments (Chandler)148,209,503 145,810,488 68% Restricted for Pension (PARS)17,693,782 16,385,602 8% Total Cash and Investments $221,479,515 $214,943,179 100% Cash and Investments –Bank Balance As of September 30, 2022 1 Unadjusted balance from the bank statement. Does not reflect outstanding checks or deposits in transit. 2 Cash held by fiscal agent for bond repayments 9 Investments Section 115 Trust Equities 66% Fixed Income 28% Real Assets 5%Cash 1% Market Value by Asset Class Asset Class Range Target Equities 50%-70%63% Fixed Income 20%-40%29% Real Estate 0%-15%5% Commodities 0%-10%2% Cash 0%-10%1% 11 Section 115 Trust As of September 30, 2022 Beginning Balance Contributions Earnings/ Losses Expenses Distributions Ending Balance Pension 17,693,782 -(1,302,894)(5,287) -16,385,602 OPEB 32,172,805 -(2,370,361)(9,610)-29,792,835 Total $49,866,587 $-$(3,673,254)$(14,896) $-$46,178,437 Rate of Return * 1-month 3-month 1-year 3-year 5-Year 10-Year City of Cupertino Pension -7.36%-4.87%-20.38%2.06%-- City of Cupertino OPEB -7.37%-4.85%-20.39%0.86%2.46%4.72% 12*Rate is annualized for periods longer than one year Local Agency Investment Fund (LAIF) As of September 30, 2022 Beginning Balance Deposits Interest Earnings* Withdrawals Ending Balance Annual Interest Rate LAIF $21,099,180 $-$-$-$21,099,180 0.75% *Interest is deposited quarterly 13 Investments (Chandler) As of September 30, 2022 Beginning Value Ending Value Market Value 148,209,503 145,810,488 Par Value 155,361,549 155,548,714 Book Value 155,316,485 155,475,533 Average Maturity 2.82 years 2.76 years Average Modified Duration 2.44 2.38 Average Purchase Yield-to-Market 1.56%1.58% Rate of Return* 3-month 1-year 3-year 5-year 10-year City of Cupertino -1.96%-6.61%-0.67%N/A N/A ICE BofA 1-5 Yr US Treasury & Agency Index -2.28%-6.78%-0.97%N/A N/A 14* Rate is annualized for periods longer than one year Compliance 1.All of the City’s investments are in compliance with state law and the City’s Investment Policy 2.In compliance with California Government Code 53646 (b)(3), the City has sufficient funds to meet its expenditure requirements for the next six months Compliance 16 Questions? October 24, 2022 Treasurer’s Report Month ending September 30, 2022 Policies Receipts, Disbursements, and Cash Balance Revenues, Expenses, and Fund Balance Agenda 2 •California Government Code •Municipal Code •Audit Committee Charter Policies 3 4 Receipts, Disbursements, and Cash Balance Beginning Balance Ending Balance Fund Type Fund Number/Name as of August 31, 2022 Receipts Disbursements Journal Adjustments as of September 30, 2022 General Fund 100 General Fund 107,635,775 7,739,191 (9,681,257) (554,702) 105,139,007 General Fund 130 Investment Fund 189,996 - - - 189,996 Special Revenue Funds 210 Storm Drain Improvement 2,224,465 - (15,579) - 2,208,886 Special Revenue Funds 215 Storm Drain AB1600 1,797,747 2,635 - - 1,800,382 Special Revenue Funds 230 Env Mgmt Cln Crk Strm Drain 1,001,745 482 (110,395) (85,695) 806,137 Special Revenue Funds 260 CDBG 695,474 79,706 (12,699) (291) 762,190 Special Revenue Funds 261 HCD Loan Rehab 221,894 - - - 221,894 Special Revenue Funds 265 BMR Housing 5,691,586 350 (56,839) (37,317) 5,597,780 Special Revenue Funds 270 Transportation Fund 14,192,761 256,317 (990,933) (183,303) 13,274,842 Special Revenue Funds 271 Traffic Impact 718,870 - - - 718,870 Special Revenue Funds 280 Park Dedication 20,459,992 15,000 (348,982) - 20,126,010 Special Revenue Funds 281 Tree Fund 71,405 - - - 71,405 Debt Service Funds 365 Public Facilities Corp 2,682,650 - - - 2,682,650 Capital Project Funds 420 Capital Improvement Fund 28,765,475 155 (516,876) - 28,248,755 Capital Project Funds 427 Stevens Creek Corridor Park 165,031 - - - 165,031 Capital Project Funds 429 Capital Reserve*11,620,392 - - - 11,620,392 Enterprise Funds 520 Resource Recovery 5,875,339 119,834 (94,033) (59,466) 5,841,674 Enterprise Funds 560 Blackberry Farm 1,233,928 1,994 (110,388) 31,272 1,156,806 Enterprise Funds 570 Sports Center 2,266,171 - (337,886) 61,149 1,989,435 Enterprise Funds 580 Recreation Program 3,598,809 8,720 (121,888) 3,017 3,488,657 Internal Service Funds 610 Innovation & Technology 4,129,836 - (278,616) 617,183 4,468,402 Internal Service Funds 620 Workers' Compensation 3,669,107 - (4,221) 93,530 3,758,415 Internal Service Funds 630 Vehicle/Equip Replacement 880,817 440 (116,734) 388,731 1,153,253 Internal Service Funds 641 Compensated Absence/LTD 1,553,910 - (8,408) (2,762) 1,542,740 Internal Service Funds 642 Retiree Medical (350,834) - (114,489) (3,696) (469,019) Total 220,992,342$ 8,224,824$ (12,920,225)$ 267,651$ 216,564,592$ 5 Fund Balances/Net Position Beginning Fund Balance Ending Fund Balance Fund Type Fund Number/Name as of August 31, 2022 Revenues Expenditures as of September 30, 2022 General Fund 100 General Fund 96,400,636 4,104,027 11,018,443 89,486,219 General Fund 130 Investment Fund 229,425 - - 229,425 Special Revenue Funds 210 Storm Drain Improvement 2,224,465 - 15,579 2,208,886 Special Revenue Funds 215 Storm Drain AB1600 1,797,747 2,635 - 1,800,382 Special Revenue Funds 230 Env Mgmt Cln Crk Strm Drain 1,014,211 482 184,480 830,213 Special Revenue Funds 260 CDBG 1,302,959 171 12,990 1,290,140 Special Revenue Funds 261 HCD Loan Rehab 221,894 - - 221,894 Special Revenue Funds 265 BMR Housing 5,690,944 350 93,514 5,597,780 Special Revenue Funds 270 Transportation Fund 14,171,105 256,317 1,156,478 13,270,944 Special Revenue Funds 271 Traffic Impact 718,870 - - 718,870 Special Revenue Funds 280 Park Dedication 20,445,582 15,000 334,572 20,126,010 Special Revenue Funds 281 Tree Fund 71,405 - - 71,405 Debt Service Funds 365 Public Facilities Corp 2,682,650 - - 2,682,650 Capital Project Funds 420 Capital Improvement Fund 25,715,685 - 533,299 25,182,385 Capital Project Funds 427 Stevens Creek Corridor Park 165,031 - - 165,031 Capital Project Funds 429 Capital Reserve*11,620,392 - - 11,620,392 Enterprise Funds 520 Resource Recovery 5,242,943 119,834 142,504 5,220,273 Enterprise Funds 560 Blackberry Farm 930,384 54,213 104,591 880,006 Enterprise Funds 570 Sports Center 2,467,115 215,107 142,348 2,539,874 Enterprise Funds 580 Recreation Program 3,259,842 107,103 141,772 3,225,173 Internal Service Funds 610 Innovation & Technology 3,787,537 621,305 288,361 4,120,481 Internal Service Funds 620 Workers' Compensation 2,243,436 109,116 19,807 2,332,745 Internal Service Funds 630 Vehicle/Equip Replacement 2,486,338 392,598 100,979 2,777,957 Internal Service Funds 641 Compensated Absence/LTD 1,553,910 197 11,367 1,542,740 Internal Service Funds 642 Retiree Medical (350,834) - 118,185 (469,019) Total 206,093,672$ 5,998,455$ 14,419,270$ 197,672,857$ Questions?