Good afternoon.

Good afternoon.

It's four o'clock.

Today is Wednesday, May 27th, and I'm calling to order the finance committee of the city of San Diego City Council.

Madam, would you please take the rule?

After each agenda item is presented, the mayor will ask for committee member comments and then take public comment.

You will have two minutes for your comment.

The countdown timer will appear for the convenience of the speaker and attendees.

And we also take rule to establish coordinate.

Councillor Right there?

Present.

And by saying that also is not intended.

We will continue to our first item.

Item 2A, the pension trust, and we have financial almost 100%.

Thank you.

Good afternoon.

Good afternoon, mayor, members of the finance committee.

This afternoon I will present the city of St.

Landro's pension trust analysis.

And I'm joined here today by one of our consultants, the city's actuary, Boster Foster, Drew Ballard.

Thank you.

So today we're gonna provide a bit of an update on the city's pension trust.

So the city assembly does have a pension trust that we do provide regular updates to both the finance committee as well as to the full council.

We will be taking specific review based on direction from the finance committee to analyze a pension trust drawdown to help mitigate budget challenges.

And so that's um kind of a highlight of what we'll talk about today as far as it relates to the city's pension trust.

So just want to give a little bit of background context around the pension trust.

So what is a Section 115 supplemental trust?

Um it is often referred to in the context of an IRS section 115, it's an irrevocable tax exempt trust established by government entities like the city of San Leandro.

Um we often uh use it to prefund post-retirement employee benefits such as OPEP or retiree medical or um pensions, and so today when we're talking about a section 115 trust, we're talking about the city's pension trust.

And so, what can uh that trust be used for?

Um, it can be used to reimburse uh cities for CalPERS contributions or their annual payments, um, and you can also make direct payments to Calpers out of your trust fund.

Um, the trust pension cannot be used for any other expenses not related to pension reimbursement or payments directly covers.

So, why establish a pension one uh 15 or pension trust that the city of San Landro has?

Uh, again a pension trust helps stabilize um pension costs, mitigates budget challenges, and ensures uh future financial obligations are met for its employees.

Pension trust does allow for more flexibility and control over investment strategies and risk tolerance and is more visible.

So by the city establishing a pension trust that allows us to determine the investment strategies and when uh it chooses to draw down on that pension trust to pay for those Calper's expenses.

Um the city established a pension trust to ensure adequate funding for future obligations, specifically during the peak of CaliPers' required annual payments, and that trust was established by the city of San Landro any project, so since its inception, uh this is a chart that shows the pension trust contributions and the current asset balance.

So the city uh made its first contribution in June of 2022, about 6.5 million, have made meaningful contributions every year up until this current fiscal year, where we have contributed about a half a million based on positive performance over the last several years.

This the trust has grown not only by the contributions made by the city but also the investments are and so currently the uh balance in the trust for our pension is 38.6 a month.

Um, this provides a projection of assumed um uh performance of our trust benefit uh student our trust pension uh based on known factors today with no drawdown.

So as you can see, we have a balance of 41.1 million currently in the trust projected at the end of 2027.

Um, should the city not draw down on this pension trust with a continued uh conservative growth of about 5% each year.

Um, we have a projected balance of 99.1 million by 2045.

So I talked a little bit about CalPERS annual payments and why the trust was established.

And so I want to talk a little bit about what those CalPERS payments look like and how they can potentially vary from year to year.

So what is a CalPERS annual payment?

CalPERS annual payment is often referred to as the actually determined contribution.

You'll hear acronyms such as an ADC.

So ADC is determined as the sum of the following.

There's the normal cost, which is a percent of your current payroll.

It's an annual cost of pension benefits burned by active employees representing the current cost of workforce, paid as a percentage of the payroll.

This is paid through both a combination of contributions by both the employer and the employee.

And that's a fixed dollar amount.

And what that represents is the shortfall between the projected benefits to be paid, so our promise, our obligation that we have made to employees, and the assets that the city currently holds in the pension trust.

This just provides a little bit more of a graphical detail of what an ADC is.

As I stated, an ADC is a required annual contribution to a pension plan like CalPERS.

It's calculated by a plan actually and it's designed to provide benefits as they come due and fund the plan over the long term.

And so what's included in that ADC we talked about in the previous slide, which is the normal cost, the amortization payment for the UAAL, and then there's also some costs associated with administration, as well as any changes based on asset gains and losses and other factors.

And so why is this important and why does it matter and why we focus on it?

So the ADC again is the actuary's required funding amount that helps maintain the long-term financial health and security of the city's pension obligations.

So this just provides another kind of graphical to show that EDC is how it works.

So in combination of the four components here, we get to our AEC.

Again, the goal is to ensure pension plan has sufficient resources to pay promised benefits today and in the future.

So unfunded actual accrued liability, the UAAL, is the amount of which a pension plan promised benefits exceed the current assets that it has set aside.

So what is that calculation looks like?

Again, we take that AAA, which is the actual accrued liability, so the total projected pension obligation that we have today, minus the actual value of assets, so the assets available to pay those benefits.

And so essentially the UAA, excuse me, the UAAL represents the funding gap that the city has between its publications and its current assets.

So another just graphical visual representation, you'll see in the red bar chart here, that represents these are for electron purposes only.

This is not represent the city's current liabilities.

So that AAL is the projected pension obligation.

And in this picture, we'll see we have an obligation of 500 billion with ABA or assets available to pay those benefits representing in that green bar 420 million.

And so that difference of that gap, so you can see that light pink shade is the UAAL, which represents 80 million, and that's that funding gap based on the promises that we made and the obligations we have versus the actual assets we have to pay for those.

The goal is to reduce this gap over time with your contributions and investment project.

So the table here provides projected CalPERS annual payments.

The blue bar above shows the combination of our annual payments for both the miscellaneous and public safety plans.

The purple represents the obligations, the annual payments for the miscellaneous, and then that orange bar represents public safety and obligations.

So what really brought us here today was to really provide some analysis around what a drawdown might look like from the city's pension trust and what that would do necessarily specifically to the city's pension trust, but also potential future obligations.

So as a reminder, during the fiscal year 2027 mid-cycle budget process, the finance committee directed staff to explore and analyze potential drawdown scenarios from the city's pension trust.

The intent of the analysis is to understand the impacts on civil life in both the city's financial budgetary challenges, but also ensuring that the city has the ability to pay for its long-term obligations.

So the drawdown scenario that we're going to talk about today is as follows.

So the city makes the annual ADC, so that's that annual required payment to CalPers, which is the normal cost plus the unfunded liability portion.

In this scenario, the city's projected annual ADC for fiscal years 27 through 2037 ranges from 27.9 million to 30.4 million.

So the scenario that we will discuss today and look at in just a minute, it assumes that the city funds annually from city accounts 25.5 million.

So for example, 25.5 million from the channel funds from city owned accounts.

The balance owed would be on annual basis, an annual withdrawal from the pension trust, so bridging that annual payment would range anywhere from about half a million to 4.9 million.

The trust fund also assumes a reflection of investment returns of about 5%.

So this is a table that shows what the potential drawdown would look like if we stabilize the city's annual payment at 25.5 million.

And so in fiscal year 27, if the city chose to contribute 25.5 million and bridge the annual requirement with a drawdown for the trust, that drawdown would be 2.7 million.

So again, as a reminder, at the lowest point of the drawdown would be about half a million in 2037, and at the peak at 2031 would be 4.9 million.

So the projected CalPERS payment forces, so this is again more of a depiction of the table that we just saw in the previous slide.

So the orange bars here you'll see 25.5 million stabilized from the city's account shown in the orange bars through 2035, and a little bit into 2037.

The yellow bars represent the payment from the section 115 trust, so from the pension trust.

And so this just provides a depiction of the stabilization of the city's financial contribution towards the annual CalPRS payment and the difference or the balance owed would be a drawdown from the city's pension draft.

So we wanted to provide a little bit of kind of comparison of what the pension trust balance would look like with and without a drawdown.

So the balance with no drown down, which we talked about in the previous slides, show a growth again on that blue line from 4.1 to 41.1 million with a growth factor of no drawdowns and no additional contributions, bringing the projected balance to 99.1 million.

The orange bar is the estimated balance based on a drawdown that we discussed in the previous slide.

So again, if the drawdown occurred beginning in 2027, the balance would be brought down to 38.4, and at its lowest, 13.7 million in 2037, and then we start to see it grow again as we assume that there'll be no more withdrawals, and that this would just be growth based on market performance.

So potential risks with a drawdown approach at this point is funding status.

Not using the pension trust to accelerate pay down of the UAL could cause a decline in the aggregated funding status.

It may go against what the initial purpose was.

The initial purpose was originally established to help mitigate significant future increases in pension payments due to the fluctuation in investment performance as well as assumptions.

And then a significant risk would be the unpredictability of investment performance.

Based on recent CalPERS investment performance, projected annual payments trends over the next five to ten years are currently more stable than it was previously anticipated.

We have had conversations about the change in the peak of those payments, and that is often derived from the performance of CalPERS investments.

This would have a direct increase in the city's annual CalPERS payments.

And so we'll talk a little bit about that in a few slides as well.

So what are some of the advantages of a drawdown scenario?

One, it could help the city currently mitigate some of the budget challenges while ensuring future obligations are still met.

The city remains in control over the timing of those withdrawals and strategically can change course at any given point to respond to any changes in the economic conditions that we see today and into the future.

So impacts of potential changes in CalPERS.

I did note that that's a risk.

Should the city choose to draw down at this point, it is a risk whether the city chooses not to draw down.

So the current rates right now are represented on that blue line.

And so we did start in 2024 and took out to 2036.

As you can see, by 2028 2029, we start to see a difference.

Again, it is the orange line representing potential changes in CalPERS.

So in the event that there is a change in discount rate or that reflects the potential poor performance of investments for CalPERS, as I mentioned, has a direct impact on the annual required contributions from the city.

And so we can see in scenarios in the event that there is a change in discount rate based on performance and/or assumptions by CalPERS that the city's annual required payment could reach 40.2 million by 2036 in this scenario.

As we see today, the city's payment could drop to 27.9 million by the same year 2036.

So final considerations.

Early drawdown could diminish available funds that would be necessary if CalPERS were to experience poor investment returns, resulting in city rates or the annual city payment increasing beyond the bill and obligations to do.

There are legal mandates to meet that obligations, and we could talk a little bit about those.

And it's a little too risky today, but we do believe that we should continue to monitor and evaluate when is the appropriate time to draw down from the city's pension trust.

And some of those things that we would look at and weigh in on are changes in the market performance impacts from uh from the pension reform for PEPRA.

So as we start to see less and less uh classic CalPers and more PEPRA, that could impact the city's annual payment as well.

And so really monitoring the change in a number of members within within the city's plan as well as um changes in our market performance.

So in conclusion, you know, at this point, trust pension pension trust drawdown is not necessary at this time.

Um, as I mentioned before, I think it's important that we continue to monitor both the city's annual required payments to CalPers as well as the performance of the city's pension trust.

Um the city successfully addressed its 11.6 million dollar deficit during the 2027 mid-cycle budget process with the city's financial forecast assuming the fully um required annual payment for CalPERS.

So our uh financial forecast assumed the city would be paying for the full required contribution to CalCors each year without any uh drawdown uh from the city's pension trust.

At this time, um, it's recommended to refrain from pension trust withdrawals, reserving for a time a significant economic downturn or large scale change in the annual CalPERS payment requirement.

I just wanted to provide um just a reminder of where we uh ended the fiscal year 27 mid-cycle um adoption uh just last or uh on May 4th, and so um just wanting to provide a snapshot to show the great work that was done through the fiscal year 27 budget process to stabilize the city's financial um forecast.

With that, um I will pause for discussion and questions.

Thank you for the presentation.

We did not make any cards.

Okay, so we'll close public comment.

Come on to committee members for questions.

Thank you, Mayor.

Um, thank you for the presentation and you know, thank you to everybody's staff with regards to addressing the um the deficit regarding the meds of budget process, and so my question is you know, talk about the legal mandate, um, but my my other concerns, how did we how do we get here?

I know that there's so much right now with Calpers and the liability aspect.

Well, what is what is the legal mandate coming back?

More about that.

Sure.

Um, I will take kind of a high learning and then turn it over to our city um city attorney who's gonna answer some.

There's both um financial risks, right, as well as just legal mandate risks, you know, as it relates to the financial.

I can speak to and then turn it over to kind of the legal mandates, but some of the financial is um just compound interest.

Again, the unview portion is tapped on to that UAL and begin to grow interest in the city's uh discount rate.

There's a negative and participation, excuse me, the city isn't covering the interest um of its debts, um, the total grows every year.

So again, as we're if we're not making regular contributions, that liability just continues to grow.

Um, and it becomes to a point where it becomes so large that it's unattainable for cities to make uh meaningful contributions to its obligations, and so falling behind can can result in the city uh not meeting those obligations, and there's a possibility that the city can't meet those obligations, they start diverting funding that we might receive for example like grant funding to the state.

They start diverting some of those funds uh potential for uh the city's drawdown.

So there is there, not drawdown, excuse me, for the city's required contribution because we do have a requirement to provide those those obligations to our pension um obligations to our employees as well.

You know, I will turn it over to our city generator who might want to provide a little bit more in-depth as far as it relates to the city's legal mandate to provide those services.

Okay, thank you.

Thank you, Nicole, and thank you, Council Member.

Yeah, um, I think what might be helpful is to know kind of what the city's penalty's legal ramifications may be, should it fail to make those annual payments has to provide a highlight a high level overview of what that might mean.

And first off there are um associated penalties under the CalPAR's mandate so the city is late or unable to make these annual payments there is an actual mandated 10% delinquency penalty as well as an additional 10% annual interest.

So if the city was unable to make its payment that um that full outstanding balance within in addition uh continue to recruit 10% annual interest until it's paid in full another thing to consider potential direct legal actions in addition to the CalPars obligations the city would have contractual obligations for any of these representative employees for example and they might have the opportunity to take direct legal action against the city to recover any of those protected retirement benefits of the employees.

CalPers also holds a statutory authority to enforce collections they could possibly intercept any state or federal funds that the city receives they would intercept those before the city received those or would until that pension pool was that that debt was satisfied so that's another legal risk the city could take of course there's the general operational risk which is the tax exempt status itself of a 115 um tax exempt pension fund the city has to make sure that it is properly accounting for the expenditures using for its intended purposes of these government term is right how it's essential government functions so if he's for any other purpose it could risk also losing the taxes and the status of that trust and then lastly long term considerations if the city were in a position where it wasn't able to make these payments for a long period of time it was in that subject to legal action or any of the other possible remedies it could of course be depleted to a point where we have to consider increasing that's a very long term risk analysis.

So that's kind of a high level I hope that I understood thank you so much for for um mentioning that.

And if I could just clarify um to the record that it couldn't necessarily divert grant funds it's uh revenue shared so cities um sales tax so state revenue shares um gas tax allocations could be um intercepted and used as payments towards the city's helper's contributions and have you seen any other cities who have been in that situation I have not been aware of a city that has not been able to make its caliper payments um you know without you know competently speaking that if a city file for bankruptcy then yes it would kind of it would sit in that kind of default status that um it did not have the funds to meet um essential services to provide to its community including its um its debt obligations understood thank you Nicole those are my questions okay um I just want to inform you here on page six the assumed rate of return is five percent you have a slide by our actual who can uh provide some uh some more detail it is a conservative use we don't have built into the model recessions or significant fluctuations in investment returns it is a stable five percent growth but I'm happy to have our actuary provide additional context if you're it is that because that's our target right now.

Um I don't know that that's our target.

Let me turn it over to our actuary yes.

So there's kind of two rates of returns that are used in our model.

One is the CalPRS rate, which is their long term expectation on how they invest their portfolio, which is currently 6.8%.

For your the city's one fifteen trust, oh, just three partners, right?

The way that cars invest that, um, can't remember exactly, it would be like 55% equities, 45% fixed income.

We're assuming on average of the long term, that's going to produce 5% earnings, but for this illustration, it's basically showing if it if it grew exactly 5% per year, what would that look like?

Or you know, put it in the volatility, but in these in this example, just for the illustration, assuming it compounds at 5% based on the investment portfolio.

Um who determines the normal cost?

Is it the caliper's actuaries and then their board?

Yes, caliper's actuaries uh produce an annual valuation report, and part of their calculations is determining that normal cost rate, which is uh different for your classic members and your paper members, suppose I started a city today.

And then I have a pension obligation at the end of the year based on the employees and uh what has been promised for cowper session employees.

If I paid the normal cost for me in my brand new city, if I paid the normal cost, would I be 100% funded?

So the way that that normal cost rate is determined is let's say you were starting from inception, right?

Uh no, only for future service, right?

There's no current liability, there's no assets, and you contributed the normal cost rate on behalf of each employee during their period of employment, the normal cost rate is designed such that assuming all assumptions hold true that that would fully fund the benefit would be 100% funded when each member retires.

Assuming people retire when they think they'll retire, then as long as they think they'll have calipers earned 6.8% on any given year, that is correct.

That is the theoretical foundation line.

Okay, that's good because I've I've heard different interpretations of what that number means, and so the interpretation that we get here is if I did this for 20 years, and you know, the long term, then we're 100% funded, and any one year it might be 92 or 95 or 106, but you know, the longer that I go on average, I'm going to be 100% funded.

If I'm just paying the normal cost for brand new city.

Right.

The other thing I would say, that would also assume assumptions never change and uh benefits never change either.

Um page nine.

Why is that on my word?

And oh, and find the plan over the long term up at the very top of the page.

I think that's what I just tried to clarify.

So I'm paying um, if I'm paying the full ADC now, so it's everything, that gets me to 100% funded on average in expectation.

Yeah, so I think I mean if you think about where the city's pension plan sits today, there's a normal cost rate, plus there's that unfunded liability because experience has not matched assumptions, and calipers has changed their discount rate over the year that used to be 7.75% not too long ago, now it's 6.8%.

Whenever you change those assumptions, uh it's no longer just the normal cost, right?

There's an unfunded liability component.

So the normal cost is paying the benefits that are being earned.

Uh, and then the unfunded liability is to really to fund that plan over the long term to make up that funding gap.

So you jump to my next question.

How has the uh discount rate, the rate of return, state rate return, changed for the last 20 years?

Um, it's just not gone down.

Yeah, oh yeah.

Um uh I wish I'd use that this is 10 years ago for sure.

Yeah, because I'm turning it just into an ask, can we from CalPers just get this?

Because, you know, I think that to some degree, um, we bear some of the pain from the perspective of our residents.

Uh and I said it's state of the city, and I can I believe it to be true that a large chunk of this falls on CalPers for having overestimated the rate of return that they thought that they could get.

And to be able to explain that a number 80 million dollars of our unfundedness is because discount rate has changed from 7.7 or 8.2 or whatever it used to be down to 6.8.

I think that's very important from storytelling perspective, and informing our residents that it's not that we've been asleep at the switch, but that as CalPERS has continued to fail to meet their objectives, we bear the burden of their decisions.

And so just that's a comment more than a question that the request would be can we get that information over the last 20 years so that we can build that story?

I think I'll try to say that's okay.

I think I had not so that we're set on that.

Um page 10.

Oh, that's patient.

For examples like this, uh I think it's always useful to have illustrations, but half our numbers is extra helpful.

So uh slide 10A would have been nice if we can do that in the future.

Uh, this goes to city council, for example, and I have the same comment on page 12.

Um page 18, same comment.

Um, going back to the change in discount rates, it is my sense, but I don't have the data to prove it.

The peak payment, they currently says that about 2032, the year 2032, it's my sense that that has been sliding outward.

But I don't have the actual data to show that.

How hard would that be for us to get?

Um the number of theirs where they project where they assume that they're gonna earn 6.8% each and every year when that peak would occur.

I think that the one thing that Nicole and I looked at was we did a similar analysis a year ago.

Uh what we knew since then is that CalPers actually earned 12% in fiscal 2025, but you have not received your June 3025 report yet.

You'll get that this summer.

So we updated our analysis to show the impact of that positive return, and that we did come down or came earlier, and then after that started to come down quicker rather than last year.

I think we showed it kind of continuing to increase.

Um, so I'm not sure.

I think I think the nature of my question is maybe a little bit different, because again, if Calpers has kept dropping its discount rate, uh, meaning that cities have a much bigger burden to carry as a result of increasing unfunded liabilities, that's one aspect.

But when we tell residents, trust me, the pain is almost done, things are gonna get better, but I'd like to be able to know factually speaking, is whether that um that finish line, so to speak, has kept stretching.

So if I go back to when PEPRA was put in place in 2008 or something, okay, 2013, and they were doing the modeling, and they said, look at what's going to be happening, and when's the peak, and by doing this, we save the world.

What exactly has happened in the last 13 years to that peak?

Um, this isn't just an academic exercise, the focus really is on what we tell our residents, and what other other cities tell their residents because there's a certain expectation, and that keeps stretching and getting worse.

Um that's not a good thing.

And to make matters even worse, if we tell them we're just six years away, and then in four years we tell them we're just five years away.

Yeah, right.

That's that's how government loses credibility.

And I just want to make sure that we're able to be uh documenting that story, so that we tell our residents that this is what the state of California is telling us.

I see which you can get in there, so at least uh I think it's an excellent point.

I think it's something that we're tracking is to really see, we have seen a peak shift, right?

At one point, it was 2028, 2029, and just keep pushing out.

Um, and so a lot of that really is indicative based on those actuarials that we're getting for cowpers, right?

And so CalPERS tells us how much we have to pay, and you're right, the discount rate has gone, as Drew mentioned from 7.75 down to 6.8.

Um, part of that change in discount rate happened because the city risk or the CalPers experienced double-digit returns, but then the following year significantly lower, and then back up again to very positive now again.

Um when Drew and I were looking at the modeling last year, there was a projection that CalPRS was going to have a negative return, and it ended with a 12.9% positive return.

And so it's really um you know, coming on us to just kind of track some of those performances and changes because those changes and assumptions um are what's really impacting the city's required payment.

That's a nice question.

I under the impression that their discount rate, their target reflected an expectation form over 20 years, and so there's gonna be ups and downs in any given year, but the discount rate wouldn't move that quickly because it's uh it's a moving 20 year moving average.

So I'm just starting with that.

Is that correct?

Uh let me answer a part of that.

So um, yeah, so when they have the a number of years ago and they uh experienced double-digit return that triggered by their policies that said they needed to look at that discount rate and whether or not that discount rate needed to be adjusted.

And at that time, I believe it went from seven percent to six point eight percent.

Um, uh as far as their assumptions for 20 years, perhaps Drew can kind of uh speak uh more about kind of what those long-term Calcur's protections are like, sorry, short and uh so kind of the philosophy behind the discount rate that's being used.

Um that's one way that's classified the other way that's classified is what's the long-term expected return on their assets, right?

Caliper's has a very sophisticated investment portfolio, uh they have a lot of you know, access to other investments that you know you might not as a city private real estate, private equity.

Um what they're trying to accomplish in that discount rate or that long-term expensive return on assets is how much money will the assets earn each year on average until the last benefit would become due based on the current population, right?

Which would be 50 plus years from now.

Um, so it's it's but they get kind of capital market assumptions that are 20 plus year assumptions.

What they what CalPers does is every four years they go through their ALM process, the asset liability management process, and they review their strategic uh investment allocation, they review the discount rate and they make a decision whether they want to change it or not in November of 2025, the last time they finished that four year study, they elected to maintain that 6.8% discount rate.

So unless they change the mind, we believe they will stay at 6.8% until for 40 until the next four-year review comes up and they'll do it again.

But that's kind of a term expectation.

Perfect.

Thank you so much for that uh additional information.

Um that's good for me.

At this point in time, you've provided us information, as we have in the comments, discussions.

You provide us information to give us some things to think about.

I don't think that there's any action for us to provide at this time.

Um we decided to move on, perfect.

Thank you.

So we'll close this item.

Appreciate the time that went into this presentation.

Great questions.

Let's go to item two B.

Is it open trust?

Through March 31st, 2026.

We've done this defendance director of Lucia Silva presenting.

Let's see if this would be 2022.

Okay, um, Felicia Silva.

This is my circuit here to present the calendar year 2026 um first quarter investment report or the OPIB and pension trust, and uh again calendar year.

So we're looking at January through March 31st, 2026.

All right.

So we have the two sides of the trust that OPEP um primarily related to the retirement medical um benefits and then the pension trust.

And we did get off to a bit of a sluggish start to the year.

Um so uh negative uh returns for the quarter of uh a little under uh five percent, so negative 0.46 percent for the OPEP trust, um, taking our um assets from 24.6 million to 24.5 million, but again looking at uh the longer term view, we've got returns of 8.86 looking at the year and then inception to date at uh a little under 5% of 4.92 percent.

Heading over to the pension trust, um again, slowly start to the uh to the year, um primarily related to the geopolitical conflict in the middle east um impacting the markets and uh decrease of um about negative 0.8 percent, taking um the value down from three 37.4 million to 37.1 million.

Again, looking at the longer-term horizon, uh one year return of 11.71 percent, and then inception to date return of 4.2%.

And with that, uh, we're recommending that the finance committee accept the uh calendar year Q1, um the calendar year 2026 first quarter OPEP and pension trust reports, and forward to the full city council for review acceptance.

We're also here to answer um any questions.

Councilman.

Uh thank you, Mary Gaza.

Uh thank you for the presentation.

Well, my my question was with regards to on here on this on the slide previously before this um the open trust versus the pension trust.

You're mentioning that the one year return was 8.86%, but the inception to date return is 4.92.

Is that from the fiscal year?

Is that what is that start?

Uh the one-year return.

Well, the inception to date.

The exception to date, I think the OPEB uh trust was established in 2015.

That's the measurement date for that, and it's uh measuring it from that inception in 2015 all the way to um this current report.

Okay, that's my question.

Thank you.

I have the same question.

So the pension trust is 2021.

I believe, yes.

Thank you.

And what public comment on the side.

We do not need to look on that.

Okay.

So we'll close public comment on this item.

Any final recommendation?

This is what we're seeing.

Final direct condition.

Okay.

So to see Project Elevates.

I've been waiting for this.

Are we ready?

So the manager Glenn.

Yes, uh, good afternoon, Mayor and Councilman Ragnar, uh, assistant city manager, my speech.

Uh happy to be here to present to you an update on Project Late.

Uh I am joined by the Stering Committee for Project Elevate, which includes Finance Director and Paul McGonas, uh, IT manager Reggie John, who's project manager for the project, HR director Emily Ho, and I'm pleased to introduce to you uh the new chief technology officer for the city at least yeah, and as day two of the job as uh member of the subcommittee as well.

Uh I'm also excited uh to be here for two reasons.

Number one, I'm doing something that I have not done for two years since I've been the assistant city manager, which is to present to you from this lecture here.

Um but secondly, I am very excited to share with all of you that project elevate is on schedule.

We are on schedule to go live on July 1st of 2026, uh less than six weeks away.

Um, and I will share with you the timeline that we have gone through and are about to go through down the home stretch here.

So you'll see on the very far left here, up until May 18th, just a couple of weeks ago, thousands of cases were tested in the workday system.

As a reminder, this project basically is to transition our legacy enterprise resource planning system or ERP system called Eden to a new system from Workday, who is an industry leader in ERPs.

So when we got to the point of completing the testing of thousands of cases, we gave the green light to our implement or cognizant and workday, the product to proceed with the final build of that system.

That final build is going to take place over a series of four weeks between May 18th to June 12th.

When that final build is done, we will get it and have a few days to do a quick turnaround to give them a decision on whether we are a go or a no-go for July first go live.

Assuming that we are a go and we give that go to them, then on June 26, that final build will move to the production environment.

And once that takes place, we have about nine days or so to do some final cleanup and preparation work before we do an official go live on July 1st.

Now the reason why we share that with you is because with all projects and timelines, there are risks and challenges.

So some of the risks and challenges you'll see are listed in the boxes under the very timeline that you just saw.

The risks and challenges that we have going up until May 18th in our testing was we could have discovered some wrong pay calculations.

There could have been some failures with the integrations that are tied to workday.

And we could have discovered that some of the business processes were misaligned with the capabilities of workday.

Thankfully, we have moved past all those challenges, which we were able to then green light the final build of the system.

But in the final build of the system, there's also some challenges and risks that exist.

There is the possibility of scope read where we may identify some things that we want to go into the build.

Well, if the workday and cognizant team are teams are busy with the build, we certainly don't want to disrupt that progress.

So that is a risk of new scope group.

There could be some system bugs that are incompatible.

What we had in that testing stage, it could be incompatible with the final build that they're doing.

There could be some bad data that migrated over into the final build.

And we could have, we could discover that some of the testing that we did prior to May 18th was actually deficient and not working well in this final bill.

But assuming that does not take place and we do move forward with a go-no-go decision.

When we're faced with that decision, once we receive that final build back, we could discover once again that system bugs and bat data are challenges.

But another thing that we have to keep in mind is we have for the past seven months have had three different uh people serve in our payroll technician position.

That's unusual for us.

This is a position that has had stability over the past several years.

However, we have had turnover the past seven months and have our on our third staff personal in that position.

That staff person started yesterday.

So the challenge for us is to make sure that she is well-versed in workday and is comfortable running payroll in workday to be prepared for a July 1 go live.

Assuming that we work through all those risks and challenges and we do move to production on June 21st.

Once again, as we play with the system in the production environment, we will want to make sure that there are no system bugs and that all the data is clean coming into the system.

And assuming that that is that those challenges are overcome and we move into the final cleanup and preparation stage, we do want to look at the system once again to make sure that all pay calculations are accurate.

One of the worst things we can do is pay our people wrong, and we certainly want to avoid that for a July 1.0 live.

But we also want to make sure that all of our integrations are intact and working properly.

And we also want to make sure that just a few days, excuse me, before we go live, that all of the securities, security roles are in place and we don't have any vulnerability there because we want to ensure integrity and the security of the new ERP system.

Assuming that all of that goes well, we overcome all those challenges and we do do a July 1 go live, then all of a sudden we face a new set of challenges from going live.

Those challenges being technical and performance stress, we want to make sure that our systems can support this new ERP, but we also want to make sure that the performance of our staff, our users, are minimized as much as possible from an ERP.

I will tell you that this is the fourth major enterprise-wide system that I've been involved with in my career, the third ERP.

And all four systems, the three, well, excuse me, the two prior ERPs that I've been involved with, and the other enterprise system have not gone smoothly at implementation because they are messy.

And the reason why they're messy is because you are taking what staff know and what have known for years and have developed the comfort level of them.

And you are telling them to set all that aside and learn this completely new system completely new business processes.

That's what will get messy.

And I will give you a very brief example from uh 16 years ago when I was with the city and county of San Francisco and implemented a new ERP there.

San Francisco used a legacy ERP system that was homegrown and written software developed in 1959 called COAP.

In 1959, there were no personal computers.

That's 12 years before the first personal computer was introduced.

So as a result, they did not use this thing called a mouse, and everything that was done in that cobalt system was with a series of codes, hitting function keys on your keyboard and knowing how to work your tab and arrow keys to be able to navigate the different pages that you need to get to.

Well, in 2010, and being in an area 46 miles away from Silicon Valley in San Francisco, we never imagined that one of the greatest challenges when we went live with the modern new ERP system would be user acceptance of using a mouse.

That was something that we overlooked, and it was something that we took for granted because the mouse by then had been introduced for almost two decades.

So there will be user acceptance issues, and we will need to work through those because once again we are taking users out of their comfort zone, out of a system that they have used for many many years with business processes for many years, and ask them to adopt completely new business processes in a different looking system that, yes, while new is unfamiliar with them.

So we need to make sure that we are doing our part to uh get users to accept the system while minimizing any operational slowdowns that may come from user acceptance challenges.

However, assuming that we are we will be successful to work through all those risks and challenges, we will start crossing out some of these challenges like we just did with that green X there on that first box because on May 18th we did green light the final bill.

That means we crossed we uh overcame those challenges, and we certainly hope to be able to do the same thing as we reach the remaining stages of this final home stretch to July 1st.

So, as we do work toward a July 1st implementation, the main focus for us will be twofold.

Number one, first and foremost, we want to make sure that we are doing what we can to support the transition workday.

As I had just mentioned, there will be a lot of user acceptance challenges.

We want to make sure we have the adequate level of support to get our city staff through all of that.

But number two, we need to also migrate historical data from our legacy EIN system to work day.

So, in order to do that, we will be bringing to council an item in early July a $300,000 contract amendment request with our integrator cognizant.

They have a service called Continuous value Services that will assist with troubleshooting with integrations and with reporting for the support of this new system to the city team.

But also they will do an evaluation and design for how to migrate that historical data from Eden into workday.

The good news here is no new funding is needed.

We anticipated that this would be needed when we put that project budget together.

So we will be seeking merely contract authority from existing funds that council has already appropriated for this project.

Just wanted to give you a brief overview of those funds that council have approved.

Now this is broken out into two sections, and I'll explain why.

The top is staffing and the bottom is everything else.

The software, the services, the consulting, the training equipment.

And the reason why it's broken out twofold is because for staffing, those numbers are what they are, and at the end of the year, if there are unused funds in staffing, they don't carry forward into the following year.

They simply revert back to the technology internal service fund.

Whereas everything else, the box below, whatever's unused at the end of every fiscal year, that is carried forward to use for the remainder of the project, and that is because we don't necessarily uh control the main deliverable timeline for what is needed, mostly from services and consulting.

So if it's unused from one fiscal year, we want to make sure we are able to carry that forward into another fiscal year for use for the remainder of the project.

So you'll see here just the overview fiscal year 24 for staffing, $700,000, and then $1.1 million in both subsequent years since then, with the copy being that the current fiscal year, those numbers are only through uh May 15th of 2026 when this uh staff report was put together.

Uh and then for everything else, for the what we term the operational cost, software services consultant training equipment.

There's a 5.4 million dollar budget, we've expended 4.8 million dollars.

So that remaining 700,000 dollars, that is where that 300,000 requests uh to amend the contract will come from, uh assuming that council authorizes that contract amendment.

So for next steps, uh staff will continue to work with workday and cognizant to make sure that we stay on schedule.

Uh, of course, to to address any challenges and risks that come up.

Uh, but assuming that all that goes well to prepare for July 1 go live, we want to make sure that we continue to do more testing, more validation, and also to uh commence with our user training to make sure that all of our staff who need who will touch this system are comfortable as much as they can be in July when this new system uh goes in place.

As I mentioned earlier, we will bring a council item for contract authority for that CBS service through copies and with already budgeted funds.

Um, workday will go live on July 1st if this all goes well.

We believe it should, and we then will continue user training.

Undoubtedly, there will be a list of punchless items that will need to be addressed, and we will work through those, and we will continue to address any change actions that may occur.

So, that I'm happy to take any questions that you have.

Okay, we'll be on some right now.

Thank you, Mary Results.

Thank you, Michael, for this presentation.

I think this is long overview.

I know there are going to be some growing things with this implementation process.

Um, and I appreciate your story about the transition that San Francisco did.

Um, so you mentioned, I'm sorry, I kind of like was thinking about other things when you were discussing this on page, or you mentioned the $300,000 contract amendment.

We're on page five.

What is that going to be taken?

And then we're we budgeted for this, we have to go to council for approval.

But is this to be taken out of the software service consultant training?

That's exactly right.

So the $300,000 on page four will come out of the lower right-hand box, if you will, the remaining $700,000 that exists in that budget.

So once we approve that contract, we'll be left with $400,000.

That's correct.

Gotcha.

Okay.

Um, those are my questions.

Thank you.

Thank you.

So the final build of system.

What does that mean?

So what that means, um, the technical term there that our partners are using is the gold build.

So that is basically taking everything that has been in the test environment and then incorporating taking all of the changes that we've identified that need to be made in the final system, and then building that gold build.

So taking to to really uh use simplified terms is to take what works in the test system and then incorporate what we have uh informed them need to be fixed in the test system to develop one final system.

The way I assume that this is working is that we had a system that was operating in a test bed, and then the last step because we're tweaking it, we're tweaking or not.

The last step is you literally put the pipes to new data sources.

In an ideal world, that is correct.

Um, but in a world of a technology project, a lot is identified that it does not work correctly in a test system.

So the final build is really the opportunity to correct all of what did not work properly.

Um, so that is that's what's going on in that final build.

It's taking the the test system, keeping everything that works, and then fixing everything that the city team has identified does not work through all the testing that was done.

Most of those do not work because we have unique processes here.

Uh it's it could it's a combination.

Uh it can be unique processes, it can be because uh work is as you are aware, is a uh was founded as a private sector solution, but they are branching into the public sector world now.

The public sector world, there are things that you don't encounter in the private sector world.

Um in our case, we have a handful of uh labor organizations and therefore different rules per uh employee depending on which classification they're in and how that goes into payroll, for instance.

Um, those all need to be incorporated as well.

Um, and some of the testing uh that is an example of something that could not have been or could have been not functioning properly that where we've identified what needs to be fixed, and then they will go ahead and incorporate that in the file.

Isn't that a sort of ultimately it's my expectation that if we hired a software vendor that plays in the government space and city space in particular, that they have accommodations built and to handle these sorts of things, and so I so we don't expect to see change orders for things that would be to be expected in a city government?

You're absolutely right, mayor.

And um to to be very clear, there are they are not change orders.

Uh they are basically uh clarifying to them what our requirements are, and if if what they provided in the test system is not consistent or aligned with our requirements, it's getting them to fix the system so they do meet our requirements.

And our requirements, there's an ask about anomalous processes or anomalous standards, is it I don't think of us as an unusually complex city compared to, say something like San Francisco or other geography.

I just want to make sure that the the expectation is that if you provide software for government functioning in cities that these these things are at best tweaks, and that we're not we're not done.

We're not inventing the wheel.

Um, you want to go for your time?

Thank you, Mayor.

Though I um this isn't the city manager, you may have done as a private and four, but this is my third.

I'm a little further away as city manager in this process.

But I also, I've also never done one before where it's perfect as owned in work day though, we have to believe it's an amazing system, and the city will be better for having it.

Is newer in the government space?

They are branching sensors.

We're not their first government client at all.

Every other system I've done before this has been with companies that only hit government, and there were those same type of issues as well.

So it's not data migration issues.

What was sort of data migration issues?

Are we experiencing or do expecting experience?

I think for this question, I will point to, I will ask uh IT manager Reggie John to come up to give you kind of a more technical explanation.

Thank you.

Thank you.

Thank you, Ben.

So data migration is one of the key components of this code build process.

So even the build process, I think as Mike mentioned, right?

So they avoid the configuration.

Something called a code, and then we avoid all the data that we have this time.

So there is 34 different flights.

So it's a like e2-2 process, which is happening right now.

It started in around the board register.

But my question was not what is a migration.

My question is what types of challenges will you expect to see?

So the risk is more like in our specific case, right?

So are we missing certain data?

So are we missing retirement data?

Is the data that getting moved from even to what did cover it?

So what we do is from Eden, we provide them the flight, they load it, then there's something called a pre-validation and post-validation.

So the team validates it all over and see if it's covered or not.

If it is incorrect, they didn't go back.

So there's a little bit back and forth that happens.

So that is the risk is not getting the correct data or not getting all the data.

It's less data corruption and more data selection.

Perfect.

Thank you.

That's useful.

Wrong A.

I know that we have tested for months on this, and I suspect that by this point in time out of the however many employees that we have, then we've got to be less than a handful.

I will tell you with confidence that we have worked out all of our wrong pay calculations.

Is you never know if something will be misaligned or mispointed once the system moves into current shape.

So you need to do that.

That's right.

That sounds like more of a data issue than a pay algorithm issue.

Yes.

Thank you.

Um, the first two weeks are going to be chaotic.

Maybe the first two months.

Um so who can have a little bit about the all hands-on deck mentality that we're implementing to make sure that police feel loved and cared for?

Uh that's an excellent question, Mayor.

So that is something that uh we are actively working on now.

Uh, now that all the testing is has been completed, we are spending some time uh trying to prepare for what is coming.

Um, so I will say that um what we are planning includes some sort of uh a ribbon cutting, if you will, uh, to really celebrate the achievement on July 1st, but then we also plan on uh some personal visits to the multiple locations in the city to do some more celebrating, but also to let our staff know that we are not just implementing and walking away, uh, that we will still be here, that we will still have a physical location for a little time after go live for if anyone wants to come in with their laptop and be able to pull up something and work on it together, um, or if they want to do it over for all or teams, that's fine as well.

Um but uh the goal is to make sure that we are there for our staff and employees, and that we are uh adequately responding to their issues and questions.

We still have some details to work through on how to best set up some sort of uh help desk and triage process, but that is something that we are actively discussing.

Thank you.

So does the city in general use wiki's at all?

No, I mean, we mostly use SharePoint and okay.

So in that spirit, um as employee A learns a trick that how to solve a problem, it would be great if we do some knowledge sharing in uh in a systematized way.

I always think of things in terms of wikis, but it could be used by whatever method, a word document that has global air quotes access, or it could just be populating ideas because then it's searchable knowledge.

Um the other thought that comes to mind is uh some kind of focus groups, you know, seven days in one person, two people from each department, or they collect a career problems that we're having, um, just so that that's something we percolated up very quickly.

Uh so mayor, those are two excellent points.

We do have a SharePoint site uh dedicated to this project, which will continue after goal live, and we can certainly look at putting some sort of information exchange on that SharePoint site.

Um, to your second point on uh user groups.

We do have a group of what we call workday champions who are city employees uh who have been helping with the project.

Our we really took the philosophy uh a couple months ago that the more people that we can expose to work day now and help us test and navigational experience and all that, the better.

Uh that group will continue after go live to really help us carry out the message, but uh to really establish a bench of folks that fell employees can turn to if they have any questions or concerns about work there.

Thank you so much.

Um, so this whole concept of risk of user acceptance, I think that you know that the map story is really cute, but that the principle is correct.

Um, so the more people you can get exposed to it, the faster.

Um, assuming we're just turning off the old systems, uh eventually in terms of user access, yes.

I think they can't enter things into accounts uh like to make a purchase order in the old system.

Well, a certain group will, and what I mean, it's the group in this room, the finance team will need to because they need some time to close out the books for the old fiscal year, and that's all going to be done in the Licy system, but for the most part, yeah.

So for example, no new purchase orders in the old system, right?

Yes, not technically.

Okay, so good for you to help help me out because you know, I like precision.

I know where you're going, but because I want to make sure this is accurate, there's this is well later July.

Finance team is still dealing with, which is fiscal year 27, they are still dealing with fiscal year 26 in July no matter what system we have or what year be.

The fiscal year we're in today, which is fiscal year 26, will still need to be dealt with in July, maybe even August, which means things will be happening in the old system.

So I don't want on the record saying nothing will happen because things happen.

The thing is that come July 1, things that are meant for July 1 into the future will have into the future system.

We're currently, and it will be done in the old system.

Right, and that will be restricted purely to the folks in this room.

And that's fine, but I picked my example with specificity purchase orders.

Like there should be no purchasing activity in July for things that should have happened in 2026, fiscal year 26.

So no new purchase orders, I'll use your example.

No new purchase orders will be um created in EN after July 1st.

However, there'll be some transactions.

So there might be an open purchase of our purchase order in place in Eden and the invoice for June comes in July, but no new purchase orders will be created in.

Perfect.

Perfect, exactly.

And of course, we might do the journal entry to clean something up and all that stuff.

Okay, perfect.

Uh so it sounds like we're making amazing progress.

Um, that answered my question about dual systems.

Um yeah, how our employees doing?

People working on LAP.

Are they broken yet?

Are they doing good?

I will say that uh we have an incredible group of employees working on this project who are very, very resilient.

Amen.

Are they broken yet?

I will say no, but are they tired?

Absolutely.

I just want to make sure that we recognize the sacrifice that they are making, that we provide them the love and attention and support, and that when this thing is done at a natural finish point, i.e.

July 1st, that we have a heck of a celebration.

And I know that we're government, and if we find funding from other sources, that's fine too.

But to me, this is an amazing accomplishment.

Implementing a new ERP in two realms is a big big deal.

And so I just want to make sure that we take time to celebrate and that we really, really, really do not just say, oh well, next, so that the people have that opportunity to uh see the outcome, the fruits of their labor.

Point well taken.

That's certainly our intention.

Okay, then the very last thing that I have is uh you talked about the punch list.

I'm assuming that the punch list is part of our budget.

Yes, so um as you see here, so the the request coming to council for contract authorities $300,000, which will take be taken out of the remaining 700 available.

Um that leaves us 400,000 to address anything else that comes up like a bunch of the side.

To the extent that it's outside of our predetermined scope.

Yes, because if it was supposed to be delivered, it didn't get delivered.

Yes, no new budget for that.

That's correct.

Thank you.

This has been just really really good news.

Obviously, our biggest concern as the council is the risk and the budget timeless.

Those are just like the big picture things, and sounds like you're uh firing on all cylinders.

So thank you for all the hard work to all the team leads that are here to our project manager, everyone that's involved.

Thank you for what you're doing.

So at this point in time, we will go to public comment on non-agenda items.

Do we have any public comment?

Yeah.

Okay, so close public comment on non-agenda items.

Any uh committee one more comment?

Yeah, what we've talked about.

Okay.

Uh the only thing that I'll add is uh I'll just add my regular comment that when we invest at an expected rate of five percent and caliper's discounting at 6.8%.

We are literally planning to lose money.

We're literally planning to fall further and further behind before I came into the city council and made public statements from that lecture and said that we should invest our money at at least the same expected rate of return as caliper's, because otherwise we fall further behind.

And until someone can explain why our strategy is a good strategy.

I will continue to say this incessantly, um, because I I just feel very adamantly that we've had plenty of time to begin to address this in some way.

Um and we we can bite at it, I think in December of 204.

We had a really complicated presentation that came that made no sense, and the person couldn't answer questions, so we stopped that discussion.

Um, the opportunity is here for us to have this discussion a real way.

It can be start in like a small group and then come to committee and then go to full council.

I don't care how we do it, but we need to have an explanation of our dedication to a five percent rate of return.

I invest a hundred million dollars, I get five million.

Caliper is expecting six point eight million in the way that they invest money, so therefore I'm falling further behind the caliper's performance.

I could instead just be having my money with calipers uh and getting their weight of return.

So I'll just I'll keep harping on that after that.

We will go to adjournment and our time is five seventeen and we are returned.