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HomeMy WebLinkAboutApproved Minutes - October 12, 2017Finance Committee Meeting Minutes October 12, 2017 Page 1 of 11 CITY OF NEWPORT BEACH FINANCE COMMITTEE OCTOBER 12, 2017 MEETING MINUTES I. CALL MEETING TO ORDER The meeting was called to order at 3:00 p.m. in the Crystal Cove Conference Room, Bay 2D, 100 Civic Center Drive, Newport Beach, California 92660. II. ROLL CALL PRESENT: Council Member Diane Dixon (Chair), Mayor Kevin Muldoon, Council Member Will O'Neill, Committee Member William Collopy, Committee Member Patti Gorczyca, Committee Member Joe Stapleton, and Committee Member Larry Tucker ABSENT: None. STAFF PRESENT: City Manager Dave Kiff, Assistant City Manager Carol Jacobs, Finance Director/Treasurer Dan Matusiewicz, Deputy Director, Finance Steve Montano, Budget Manager Susan Giangrande, Accounting Manager Rukshana Virany, Purchasing Agent Anthony Nguyen, Fire Chief Chip Duncan, Public Works/Finance Administrative Manager Jamie Copeland, and Administrative Specialist to the Finance Director Marlene Burns OUTSIDE ENTITIES: John Bartel, Bartel Associates, LLC, Mia Corral, Chandler Asset Management, Jayson Schmitt, Chandler Asset Management, and Mark Young KNN Public Finance, LLC MEMBERS OF THE PUBLIC: Mr. Jim Mosher and Ms. Joy Brenner III. PUBLIC COMMENTS Chair Dixon opened public comments. Jim Mosher commented on the City’s debt policy and noted it will also be on the City Council’s Study Session agenda to consider possible solutions to the City’s debt. He stated wisely acquiring debt and spending are two different matters and inquired regarding the audit of the Civic Center project. He spoke about spending money for salaries and contracts, noting the “Voice of OC” publication has been reporting about various municipal contracts, and referenced the City of Laguna Niguel, whose contracts are being reviewed by their version of the Finance Committee. The review found no funds were missing, pursuant to a report from their Interim City Manager. He mentioned it is common for contracts to come back to the Newport Beach City Council for amendments to account for money that had already been spent in relation to the contract and expressed curiosity of the amendments are a “red flag.” He inquired as to the reason for the numerous instances where contracts are returning to Council for amendments. Chair Dixon closed public comments. Finance Committee Meeting Minutes October 12, 2017 Page 2 of 11 IV. CONSENT CALENDAR A. MINUTES OF SEPTEMBER 14, 2017 Recommended Action: Approve and file. MOTION: Committee Member Gorczyca moved and Council Member O'Neill seconded, to approve the September 14, 2017, Finance Committee Minutes, as amended. The motion carried, (5 – 0, 2 abstentions Muldoon, Collopy). V. CURRENT BUSINESS A. INVESTMENT PERFORMANCE REVIEW Summary: Staff and/or investment advisor will provide a brief economic update; review the performance of the City's investment portfolio and potential strategies moving forward. Recommended Action: Receive and file. Finance Director Matusiewicz introduced Jayson Schmitt from Chandler Asset Management, who provided an economic update for the period ending September 30, 2017. Council Member O’Neill further noted the City’s two current economic advisors alternate each year in providing the investment report to the Finance Committee. Committee Member Gorczyca observed that Chandler has provided the economic update the past three times. Mr. Schmitt displayed a PowerPoint Presentation and provided additional documentation related to the investment report. Highlights included the Federal Open Market Committee’s notification that it will be raising interest rates, the economy continues to grow, and the Federal Reserve has taken away some monetary accommodation. The Federal Reserve has started to reduce their balance sheet; in October they will not be reinvesting principal and interest payments, and will increase up to about $50 billion. They will reduce their balance sheet to around 2.5 to 2 trillion dollars. The unemployment rate is at 4.2 percent and wages rose to 2.9 percent. He further reviewed the unemployment rate and noted an increasing labor participation rate. The last report was very healthy and indicative that the Federal Reserve will likely increase rates. The CPI has started to increase and the Federal Reserve will begin looking at personal consumption expenditures. At the time of the report, they were worried about deflation. Mr. Schmitt presented further slides related to the economic update which included Nonfarm Payroll, Unemployment Rate, Consumer Price Index, Personal Consumption Expenditures, Retails Sales YOY % Change, Consumer Confidence, Leading Economic Indicators (LEI), Chicago Fed National Activity Index (CFNAI), Housing Starts S & P/CaseShiller 20 City Composite Home Price Index, Institute of Supply Management Purchasing Manager Index, and Capacity Utilization, and Gross Domestic Product. He detailed the current financial market and investment landscape, noting on October 13, 2017, there will be three vacancies on the Federal Reserve Board, the balance sheet reduction begins October 2017, and Board Chair Yellen’s four-year term will end on February 3, 2018. These changes will likely reshape the direction of interest rates and Federal Reserve policies visible December 2017 through March 2018. Collopy inquired as to how the Federal Reserve makes decisions. Finance Committee Meeting Minutes October 12, 2017 Page 3 of 11 Mr. Schmitt responded that Chair Yellen has traditionally been the voice of the Committee and the meetings are not recorded. They follow a more free flowing discussion model where they review a theme they are already testing, including the correction of interest rates. The Chair typically has a larger influence; however, the other Committee members are also influential in final decision-making. The Chair is typically the voice to the public and the votes are public. Occasionally, Committee members will speak out regarding dissenting positions. Mr. Schmitt further noted that dissenting positions are rare, and the most dissenting positions he has seen on any particular issue is three. Committee Member Gorczyca inquired as to how the Committee members are appointed. Mr. Schmitt provided a general overview of the appointment process including Presidential appointments, the non-Presidential appointments of district bank presidents, and concluded the system has served well over the long history of the Federal Reserve. He resumed the review of the current financial market and investment landscape noting that interest rates have moved off their extreme historical lows mitigating some of the risks related to rising rates on bond portfolios. He reviewed the low yields over the last 10 years including the 2-Year US Treasury note that was at 0.16 percent as reported on September 19, 2011, and the 5-Year US Treasury note that was at 0.54 percent, as reported on July 24, 2012. He explained keeping a shorter-term strategy with the City’s portfolio, which can be stretched for higher potential earnings from any rate increases. Mr. Schmitt reviewed the current Federal Open Markets Committee 2017 members and alternate members and their responsibilities. He also reviewed the Federal Reserve’s balance sheet and noted the balance sheets are big. Finance Director Matusiewicz commented that a bounce back in interest rates is an opportunity to regain investment earnings, which have been slumping for the past decade. Council Member O’Neill stated the earnings could offset the potential reduction in property taxes as a result of any increase in interest rates. Mr. Schmitt reviewed various bond yields including the US Treasury Note yields and then shifted toward the City’s portfolio review. He highlighted the components of the total portfolio, including the liquidity portfolio and the reserve portfolio, each which have separate characteristics. The liquidity portion of the portfolio is composed of LAIF and money market funds, matching maturities to known expenditures. These are ultra-short-term investments. The reserve portion of the portfolio is targeted to a higher duration to enhance the potential to increase earnings. He noted the opportunities are better than they were three to five years ago. Finance Director Matusiewicz stated the City’s investment goal of the ultra-short-term portfolio is to be 30 basis points or more above the LAIF rate. Committee Member Gorczyca stated the State LAIF is notoriously inexpensive. Collopy inquired as to how many bonds are held to maturity. Mr. Schmitt responded that less than 5 percent of the City’s bonds are not held to maturity, further noting that all securities are subject to price differentials over that period of time. The benchmarks are a good metric by which to measure the investment manager to ensure they are doing a good job relative to a like set of securities. Chair Dixon opened public comments. Noting there were no individuals who elected to speak, Chair Dixon closed public comments. Finance Committee Meeting Minutes October 12, 2017 Page 4 of 11 This item was received and filed by the Finance Committee. B. INVESTMENT ADVISOR CONTRACT DISCUSSION Summary: Committee Member Gorczyca requests that the Finance Committee reconsider its recommendation to award investment advisor contract, solely, to Chandler Asset Management. Recommended Action: Receive and file. Committee Member Gorczyca expressed her desire to reconsider this item, which resulted from reflection after the last meeting. She began by stating that she had received no documentation regarding the actions that took place in August, in particular referencing the lack of documentation relating to the various numbers in the terms of each bidders final fee proposal. Finance Director Matusiewicz stated that the original request for proposals required bidders to provide rates for managing a portfolio of up to $400 million dollars and prospective bidders were aware of the possibility they may wind up managing the entire fund. Bidders were asked specifically asked to describe the advantages and disadvantages of the City having one versus two investment advisors and bidders. As part of the secondary interview [step in the process], the bidders were asked whether they would come down in price (once the top three bidders were determined) and were provided with several questions in advance of the interview. Those questions included inquiring about the City having one versus two advisors. Mr. Matusiewicz expressed confusion as to the assertions made by Committee Member Gorczyca. Purchasing Agent Anthony Nguyen displayed a PowerPoint Presentation and additional documentation related to the procurement process overview of Request for Proposal 16-55, Investment Advisory Services. He explained his presentation was provided to evaluate whether the City was unclear in its RFP documents as to advising potential bidders that the City may retain one or multiple investment advisors and whether the bid proposers understand the City was looking into retaining one or possibly multiple investment advisors. Mr. Nguyen provided the history of the process including the utilization of a consultant (Portfolio Services for Government, LLC); the procurement was conducted as a Request for Proposal (RFP), using a Qualifications-Based Selection (QBS) process, and the process phases included proposal analysis, cost analysis, and interview analysis. Six firms submitted proposals in response to the procurement, three of which advanced to the interview stage. Chandler Asset Management and PFM Asset Management, LLC, were identified as the most-qualified proposers. He further stated the process questions, which included whether the City was unclear regarding the potential of retaining one or possible multiple investment advisors and did the proposers understand the City was looking into retaining one or possibly multiple investment advisors. Mr. Nguyen acknowledged the model of utilizing two advisors is less common for most municipalities; however, the procurement documents included language that the City reserved the right to return to that model at its discretion. The RFP questionnaire contained questions regarding the benefits or disadvantages of retaining one versus multiple investment advisors, called for proposers to submit discretionary fee schedules based on assets under management up to $400 million, and the panel interviews involved a discussion on the merits of a one versus two-investment advisor model. He displayed slides that reflected the actual questionnaire items along with the actual responses from proposers. He concluded with his confidence that all six proposers were aware of the City’s intent. Committee Member Gorczyca commented on the RFP structure and the questions related to how fees would be structured, including categories and amounts. Mr. Nguyen stated that the City has not yet technically awarded this contract and pursuant to policy, he is prohibited from discussing particular details of the proposals. He did mention that the City Finance Committee Meeting Minutes October 12, 2017 Page 5 of 11 may revisit making the fee structure public further along in the process as to roughly how the basis points were tiered. Discussion ensued among the Committee and staff relative to interpreting the slide entitled “Proposer Awareness – Cost Phase.” Mr. Nguyen acknowledged the procurement documents stated that one proposer could ultimately wind up managing a portfolio up to $400 million dollars. Mr. Nguyen stated that at least two, and possibly three, of the proposers could have successfully served as the City’s investment advisor, and the process was not meant to demonize any particular company. The results were that there was one excellent proposer, and two great proposers. Chair Dixon confirmed the technical scores were very close. Finance Director Matusiewicz further explained the estimated savings of $30,000 per year was derived from a base assumption of $200 million of assets under management. The difference in pricing between the two top proposers was approximately $20,000. There was also an additional cost savings of $10,000 per year obtained by utilizing just one advisor explaining that more assets would pierce the lowest tier pricing. Committee Member Gorczyca stated that PFM’s performance was stronger. She referenced various models utilized by various agencies including the trend to use in-house advisors. The models and agencies mentioned included UACC (City of Irvine), FTN (City of Anaheim), and in- house advisors (Santa Ana, Irvine Ranch Water District). Multiple advisors are typically utilized when there are portfolios of over $100 million (OCTA, CALOptima, Riverside Transportation Authority, Moreno Valley). She requested if staff could ask for a written fee proposal as an addendum to the procurement process. She also requested if the City elects to move forward with only one advisor, if the City could prequalify an alternate so the City would not be scrambling in the event the initial advisor did not meet the City’s standards for performance. Ms. Gorczyca also stated that the City could go back out to procurement again at a higher portfolio management number, such as over $180 million and could see different proposers interested than those who were interested at the $85-90 million portfolio range. In conclusion, she did not expect the Committee to change its views on selection of the advisor; however, she would like the City to consider prequalifying PFM as an alternative as a proactive approach. Council Member O’Neill stated the City Council may want to consider prequalification. Purchasing Agent Nguyen affirmed that after the award of the RFP the information is valid for eighteen months. Finance Director Matusiewicz acknowledged that PFM is already qualified to serve as investment advisor. Collopy inquired whether this would turn the process into an IFB (Invitation for Bid). Mr. Nguyen stated the City is not utilizing an IFB in this procurement for an investment advisor because it is a professional service and the City Council can move forward with any of the top three proposers as a result of the RFP process. C. DEBT POLICY Summary: Staff and a municipal advisor from KNN will present a brief history of debt issued by the City and discuss proposed changes to current Debt Policy F-6. Most proposed changes are required per Senate Bill No. 1029 (SB 1029), but the Committee may also wish to address any issues concerning the City’s debt policy. Note that SB 1029 changes require approval by City Council before any new debt can be issued including pending assessment district financings. Finance Committee Meeting Minutes October 12, 2017 Page 6 of 11 Recommended Action: Review, comment and provide further staff direction, if appropriate. Council Member O’Neill reported the City Council discussed the City’s Debt Policy on Tuesday and requested this discussion due to the issues that developed during the recent COP process. Rating agencies knocked our City for not having a comprehensive Debt Policy in place. Chair Dixon introduced Mark Young, municipal advisor from KNN Public Finance, LLC. A PowerPoint Presentation was displayed. Council Member O’Neill outlined several matters related to potential modifications to the City’s Debt Policy including modifications that will be required by SB 1029 (provisions that must be included in the Debt Policy prior to the issuance of any new debt, including pending assessment district financings). He further mentioned that he would like to see the Debt Policy include the terms under which the authorized individuals can sign, a prescriptive policy, process and restrictions, and allow for more public input into debt issuance terms. Mr. O’Neill noted that the circumstances post-COP issuance were largely a question of transparency into the process by which the terms were signed. Discussion ensued among the Committee and staff related to the timing of negotiations and terms when issuing bonds. Restrictions due to the California Brown Act may prohibit an impromptu meeting of the policy makers to be called and whether there is a vehicle, perhaps through the Debt Policy resolution, that could provide parameters of how decisions related to debt issuance will be made. Council Member O’Neill expressed a desire for a resolution that would express the policy and “force” the City Council to take an affirmative action and choose the opposite action if they so desired. This would ensure transparency into the decision-making process as the City Council would have to explicitly choose an alternate to the resolution requirements. Discussion ensued regarding structuring policy to ensure transparency, which could be at the expense of flexibility in decision-making that could impact costs when negotiating and making final bond purchases. The transparency provision may hurt the City’s ability to go out on the market to obtain the best prices and deal. Discussion ensued among Committee Members and staff regarding policy restrictions to not allow “make-whole” call provisions or “lock-out” periods greater than ten years without explicit authorization in the authorizing bond resolution. Chair Dixon inquired as to how other agencies handle “fill or kill” orders. Mr. Young stated there is variability in how various agencies handle “fill or kill” orders. The prior Council’s resolution was structured to be broad to include a tax-exempt piece for refunding. The resolution needed to be very broad to accommodate the decisions of elected officials and authorized staff. Committee Member Gorczyca inquired as to what month the resolution was authorized. Mr. Young responded it was November 10, 2010. In 2010, “BABS” were authorized for two years (2009, 2010) because they were attractive investments. At that time there was a rush to market, between October and December, where it became a “buyers” market. Major issuers who issue more debt and utilize a more sophisticated approach were incorporating PAR calls. Committee Member Gorczyca noted that the State had large offerings in market at the same time. Mr. Young confirmed that it was a buyer’s market and savvy local investors, such as PIMCO, made sure to have bonds in their portfolios for the 30-year terms; the “make whole or call” provisions got Finance Committee Meeting Minutes October 12, 2017 Page 7 of 11 them to write a $70 million dollar check. In hindsight, the City did not have another option except to delay the process or potentially use reserves to get started. Cities are not supposed to be making interest rate bets. Discussion ensued among the Committee and staff about having a policy in place that would prevent situations such as what happened with the Civic Center debt financing and the structure of such a policy. Inquiries were made regarding having a default policy that requires more participation before decisions are made and whether a “make-whole call” provision needs to be included. It was stated that there are timing limitations when looking at spread to treasuries for best yield, to lock-it in. Committee Member Tucker commented he was convinced that the Civic Center debt issuance circumstance is exactly what would have happened even if all the information was known and the process completely transparent. He stated the resolutions should be as broad as possible to give as many opportunities as possible and all the decision-makers should have the information. Discussion ensued among the Committee and staff regarding having a “callable” provision within the resolution. Comments were also made regarding the ability for the City Council to meet in a timely way to maximize pricing. Council Member O’Neill reiterated his desire to structure the resolution where the City Council must act affirmatively to waive any callable feature outlined as the default policy. This would set a situation where the City Council has to be very clear and transparent about the action they are taking at the time. He also spoke about including cost parameters within the body of the resolution. Mr. Young verified the City Council authorized the issuance of the POS, which cannot “hit the street” until it has been officially authorized. The City Council has fiduciary responsibility in their capacity as elected officials, and that responsibility is not on the staff. He discussed the timing required for the POS to be on the market for review especially to appeal to entities like PIMCO, who receive multiple offerings every day, every hour. He described a scenario, which could be outlined in the resolution, whereby the City Council could have oversight/approval of the pricing process via a two-meeting cycle. The first meeting would entail getting the resolution approved, authorizing the POS, and to set the pricing day. He further described the after-authorization process including the underwriters’ responsibilities. Any offer would come back to the City Council to be ratified. He did note that after a verbal award, it would still take the attorneys and staff three to four hours to memorialize the appropriate documents. Discussion ensued regarding “clean-up” language in the resolution, the provision of process language, and the possibility of a charter amendment. Committee Member Gorczyca provided historical perspective regarding the timing of the Civic Center debt issuance circumstance, noting there were other bad deals done that had call provisions, where some had as much as 12-15 percent net present value savings. She stated the market was very crowded at that time, it was not perfect market timing, and would prefer resolution language that would provide stricter guidance on market timing for any future debt financing opportunities going forward. City Manager Kiff mentioned they wanted to go to sooner than later fearing a significant downturn in the labor and materials market. Council Member O’Neill suggested the formation of a Finance Committee subcommittee to bring back clean up language and inquired whether any of the other members had suggestions. He suggested himself, Committee Member Tucker, and Committee Member Gorczyca as the temporary subcommittee membership. Finance Committee Meeting Minutes October 12, 2017 Page 8 of 11 Discussion ensued regarding various elements that could be considered in the resolution language including consideration of the utilization reserve funds (page no. 5), various means of lease financings and the impacts on the General Fund, an internal debt service fund, the various “call” provisions, and the process for COP’s. Mr. Young stated that the revised debt policy will need to comply with SB 1029, and suggested that it be drafted and approved as soon as possible. Discussion ensued regarding flexibility requirements when “make-whole” decisions are being considered. Comments were made regarding how the City Council would be notified regarding each option at each point in time during the offering process and ensuring the offering was as marketable as possible. Mr. Young confirmed that in a typical tax exempt transaction, the normal structure with bonds held over ten years, is to have an option to prepay after ten years. He cited an example of the City of Long Beach making a loan to the Aquarium, who had the option to prepay the loan at any time. That type of situation would have an additional cost. Bonds that are callable have a higher yield than those that are non-callable. Mr. Young described various short-term financing solutions, such as a short-term commercial paper program, to finance certain opportunities. With pure variable rate debt, the City is in a better position to keep terms short and not use derivatives. He would prefer that staff come to the City Council and explain the derivative process and to have the City Council adopt a derivative policy. Discussion ensued among the Committee and staff regarding variable rate loans, the City acting as guarantor in certain situations, included property as assets, and cities’ “moral” obligations to make right any negative impacts of assessment district financing. Mr. Young cautioned that city-wide use of a “Mello-Roos” type financing could impact debt ratios and the City should not consider any actions or policies that would negatively impact the image and rating of the City. Chair Dixon opened public comments. Jim Mosher expressed concerns with the authorization resolutions not being mentioned (page no. 6 of the policy) and referenced Resolution No. 2010-126 and City Charter Section 421. He expressed concern on whether the Mayor/Clerk had to sign off on certain aspects of the debt financing. He referenced “backstop” provisions and commented that under the City’s form of government, certain officials had ministerial responsibilities to authorize certain actions via signing off. Chair Dixon closed public comments. MOTION: Committee Member O’Neill moved, and Committee Member Stapleton seconded, to form an ad-hoc subcommittee to review the existing debt policy and bring recommendations back to the Finance Committee for consideration. The subcommittee would be comprised of Committee Member Tucker, Committee Member Gorczyca and Council Member O’Neill. The motion carried, unanimously. Discussion ensued among the Committee regarding the role of public participation in the debt policy and debt financing process, the potential for a charter amendment or ordinance change, whether this is the appropriate role for the Finance Committee, and the requirements and ramifications of voter approval and participation, or lack thereof. Comments were made regarding the Finance Committee’s role versus the City Council’s role in debt financing decisions, how particular improvements are financed, balance sheet risks, the debt issuance transparency needs, the size Finance Committee Meeting Minutes October 12, 2017 Page 9 of 11 and scope of the type of projects that will be financed, and what issues should be analyzed by the Finance Committee. There was consensus among the Committee members that residents are not likely going to want or need to “sign off” or have voter approval elections on smaller projects and financing. They are mostly concerned with large-scale financing and projects. Council Member O’Neill suggested the elimination of option no. 2, making the point that people are informed about the amounts being financed and obligated, inquired as to what the threshold amount should be, and requested that staff return in the next one or two meetings with an analysis of the pros and cons of options one and three. Mr. Young stated it would be relatively unique to place a self-imposed restriction on the ability to utilize lease financing. As an advisor, he would recommend that if there would be a debt restriction it would limit the City’s ability to act in the event of an unforeseen event, such as the Santa Rosa fires. Discussion ensued among the Committee and staff regarding the goal of ensuring the public is thoroughly aware of large debt financing prospects and allowing for public participation, emergency situations which require immediate financing, not restricting the options available to future City Councils, and to put forth realistic recommendations for the City Council’s consideration. Comments were made regarding which options should be analyzed by staff and brought back to the Finance Committee for consideration. Chair Dixon opened public comments. Jim Mosher stated that his intuition tells him that the public would appreciate analyzing all three options, especially option no. 2, as they are concerned about discretionary projects and the amount of money that is being committed for future obligations. He believed the public should have a mandatory voice, rather than relying on their elected representatives in this matter. Chair Dixon closed public comments. D. BUDGET AMENDMENTS Summary: Receive and file a staff report on the budget amendments for the prior quarter. Recommended Action: Receive and file. Chair Dixon introduced this item. Finance Director Matusiewicz presented a brief review of the quarterly budget amendments and the one item worthy of discussion was actually a budget transfer rather than a new allocation. Council Member O’Neill stated when the City purchased the Fire Station property without using current General Fund money. Chair Dixon opened public comments. Jim Mosher expressed his support of City staff notifying the public when there are amendments to the budget. He did express concern about the City Council reviewing a tree contract on Tuesday and was puzzled how the amount considered ($400,000) was not described as a budget amendment. He stated the online budget seems to be running over and that the amount for this contract was already expended. He inquired how work above and beyond the scope of the contract would not be considered a budget amendment. Finance Committee Meeting Minutes October 12, 2017 Page 10 of 11 Chair Dixon requested staff to provide a response to Mr. Mosher on this matter. Chair Dixon closed public comments. The subcommittee will return to the Finance Committee within the next one or two meetings with recommendations related to the debt policy and staff will begin analysis of all three options. E. PENSION DISCUSSION Summary: Agenda item reserved for discussion regarding the status of the City's pension liability, payment strategies, CalPERS policy updates and or advocacy efforts. Recommended Action: Discussion if applicable. John Bartel, Bartel Associates, displayed a PowerPoint Presentation. He provided information related to the history of CalPERS and the institution of retirement plans and formulas, noting that the members of the CalPERS board who are elected by CalPERS members are usually the more vocal. He provided details as to the historical types of investments that CalPERS has allowed for retirement funds. He also stated that pension reform has been instituted at various points in time and also eliminated. Discussion ensued among the Committee members and Mr. Bartel relative to the 3% @ 50 and other retirement formulas. Retroactivity was also discussed, including noting there was some dispute about how the retroactivity provision was to be interpreted. He further commented that every retirement formula is a result of negotiations between bargaining units and the respective agency. Mr. Bartel stated the City instituted the 3% @ 50 formula in 2000. Committee Member Gorczyca inquired whether an actuarial study was conducted to estimate the long-term costs prior to instituting retroactivity with the formula. Mr. Bartel affirmed it is mandatory to do an actuarial analysis and at the time it was determined the increase in liability would be covered by the excess in assets. In January 2017, there was a report on the cost of divestment and the analysis came back with over thirty years of impact to the system at approximately 7.9 billion dollars. The primary causes included divesting from tobacco and gun stocks, and not investing in South Africa. There has been a recent decision to divest of some coal stocks, but that impact was not included in the last report. Mr. Bartel reported that typically divestment requirements are set by legislative action. Chair Dixon commented on the high turnover of investment staff at CalPERS and inquired as to how CalPERS investments compare with the S&P index. Mr. Bartel responded that CalPERS falls a bit below what the market does. Mr. Bartel reported the City has three options to address the unfunded pension liability including making payments, setting up an internal service fund, or set up a supplemental pension trust via Section 115. He stated that if the City wants flexibility, a Section 115 trust is a good option, but there is a cost for the flexibility in that there will be a lower return on investment. The cost relative to the higher return in CalPERS investing is that you do not have as much flexibility with the funds. He outlined the process involved in setting up the Section 115 trust, noting that more than 100 agencies in California have set up a trust, half of which are municipalities. Mr. Bartel further stated that the City should not expect to do better than CalPERS did and would not recommend setting up a trust with that expectation.