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Home My WebLink AboutD-2 Staff Report - Sanitation DistrictSCHEDULED ITEM D-2 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL VIA: SERGIO GONZALEZ, CITY MANAGER FROM: NICO DE ANDA-SCAIA, DEPUTY CITY MANAGER DATE: MARCH 15, 2021 SUBJECT: CONSIDERATION OF LOS ANGELES COUNTY SANITATION DISTRICT BOARD OF DIRECTORS PROPOSAL TO USE LANDFILL POST-CLOSURE MAINTENANCE RESERVES TO PAY OFF UNFUNDED ACCRUED LIABILITY (UAL) BACKGROUND: Los Angeles County Sanitation District Boards are in the process of considering a proposal for the use of $468 million of landfill post-closure maintenance reserves to pay off the full amount of the Sanitation Districts of Los Angeles County Unfunded Accrued Liability (UAL) for the California Public Employees’ Retirement System. The joint agreement will be presented to each of the Sanitation District Boards during their meetings in February and March. On February 24, 2021, County Sanitation District No. 22 Board of Directors began discussion of this issue. At the March 1, 2021 City Council meeting, Council Delegate to the Sanitation District and Mayor Robert Gonzales requested a formal item be added to the subsequent Council meeting agenda for formal discussion and direction. RECOMMENDATION: Staff recommends the City Council take the following action: 1)Consider and provide direction to Council Delegate to the Sanitation District, Mayor Gonzales. ANALYSIS: The agendas for the upcoming meetings of the Boards of Directors for each of Los Angeles County’s Sanitation Districts will contain an item recommending approval of a proposed joint agreement for the payment of the County Sanitation Districts of Los Angeles County Unfunded Accrued Liability with the California Public Employees’ Retirement System (CalPERS). The Unfunded Accrued Liability (UAL) is the outstanding pension liability owed by the Districts for past service by District employees, and results from CalPERS investments underperforming or demographic assumptions that have shifted resulting in higher retirement liabilities than expected. APPROVED CITY COUNCIL 3/15/2021 Sanitation District Proposal March 15, 2021 Page 2 The proposed agreement among the 24 Districts would effectuate the payment of the Districts’ UAL obligation with CalPERS using $468 million in reserves set aside for Districts’ Solid Waste System landfill post-closure maintenance costs. Post-closure maintenance funds are those set aside by Districts to generate interest revenue to fund maintenance of the two closed District-owned landfills: Spadra and Puente Hills. Per an earlier agreement between Districts which formed the Solid Waste System, the System is required to maintain environmental control systems at the landfills until they no longer pose a threat to the public health, safety, and environment. In return for the use of post-closure maintenance reserves and in lieu of making CalPERS UAL payments, Districts would pay a reduced annual fee into a new “Fee-In-Lieu Fund”. The “Fee-In-Lieu Fund” would be available for use by the Solid Waste System to pay for landfill post-closure maintenance costs. Payments into the fund would continue as needed until the total payments made are equal to the payments that would have been made on Pension Obligation Bonds. It is projected that the proposal will result in a cumulative $250 million in savings for all Districts in interest that would accrue on the UAL under the CalPERS payment schedule, and provide a more certain funding source for post-closure maintenance costs. For further details, a letter describing the proposed exchange and presentation slides are attached to this report. This item is consistent with the Districts’ Guiding Principles of commitment to fiscal responsibility and prudent financial stewardship, and to plan for both short-term and long-term needs to minimize the need for significant rate increases in the future. Next Steps: The joint Agreement will be presented to each of the District Boards for independent consideration and approval. Actions in the Agreement would not begin until CalRecycle approves a revised Pledge of Revenue Agreement (anticipated for March or April). Once agreements have been approved and executed by District Boards, post-closure maintenance funds would be used to pay off the UAL accrued through June 20, 2020. Payment of UAL would occur through September 2021 as post-closure reserve fund investments are liquidated and final UAL totals are determined by CalPERS. Any additional future UAL will be addressed separately and is not part of this Agreement. FISCAL IMPACT: There is no immediate or direct fiscal impact to the City associated with the recommended action. Current projected and future fiscal impacts to County Sanitation Districts shall continue to be assessed. Prepared by: Reviewed and Approved: Nico De Anda-Scaia Sergio Gonzalez Deputy City Manager City Manager Attachments: 1) Letter from Robert C. Ferrante, Chief Engineer and General Manager of the Los Angeles County Sanitation Districts – February 19, 2021 2) Board Presentation - CALPERS Unfunded Accrued Liability (UAL)/Post Closure Maintenance Funding Exchange DOC 6063387 February 19, 2021 Boards of Directors County Sanitation Districts of Los Angeles County Directors: Agreement for Payment of the Districts’ Unfunded Accrued Liability (UAL) The agendas for the upcoming meetings of the Boards of Directors contain an item recommending approval of a proposed Joint Agreement for the Payment of the County Sanitation Districts of Los Angeles County Unfunded Accrued Liability for the California Public Employees’ Retirement System (Agreement), which is an agreement among the 24 Districts that effectuates the payment of the Districts’ UAL obligation with CalPERS using funds set aside for Solid Waste landfill post-closure maintenance costs. In return, all Districts will contribute to a “Fee-In- Lieu Fund” that will be available for post-closure maintenance costs. The proposal will result in a cumulative $250 million in savings from avoided interest for all Districts and provide a more certain funding source for post-closure maintenance costs. The Personnel Committee had four meetings on the proposed exchange and endorsed presenting the Agreement to each of the Boards for approval. UAL The UAL is the outstanding pension liability owed by the Districts for past service by District employees, and results from CalPERS investments underperforming or demographic assumptions that have shifted resulting in higher retirement liabilities than expected. The UAL is determined annually by CalPERS. The Districts are required to make annual payments to pay down the UAL and these payments are calculated using a 7% interest rate. As of April 1, 2021, the Districts’ UAL is approximately $468 million and the annual payments over the next 22 years result in $390 million in interest cost. CalPERS allows and encourages additional payments above the minimum payment amount, including full payoff of the UAL at any time. A common practice for agencies is to pay the UAL off by issuing Pension Obligation Bonds (POBs), which would carry a lower interest rate than the 7% used for UAL payments. An even better alternative is to use available reserves to pay off the UAL. LANDFILL POST-CLOSURE MAINTENANCE RESPONSIBILITIES Fifteen of the 24 Districts are signatory to an agreement that formed the Solid Waste System (SW System). As parties to the agreement, these 15 Districts own the Districts’ solid waste facilities including two closed landfills: Spadra and Puente Hills. The SW System is required to maintain environmental control systems at the landfills until they no longer pose a threat to the public health and safety and the environment. In order to provide funding for these post-closure maintenance responsibilities, approximately $585 million has been set aside to provide interest revenue for post-closure maintenance costs, which are currently approximately $14 million per year. Earnings on the reserves is currently 1% to 2% and the interest revenue is falling short of maintenance costs. Attachment 1 Board of Directors -2-February 19, 2021 PROPOSAL TO PAY OFF THE UAL The proposed agreement calls for the use of $468 million of the post-closure reserves to pay off the full amount of the current UAL. In return for use of post-closure maintenance reserves, all Districts would pay into a new “Fee-In-Lieu Fund” (Fund) which would be available for use by the SW System to pay for landfill post-closure maintenance costs. The Fund’s purpose, targeted amount, and funding sources are defined in the proposed revisions to the Solid Waste Financial Reserve Policy. Payments into the Fund would continue as needed until the total payments made are equal to the payments that would have been made on POBs. CalRecycle, which requires that the SW System demonstrate and pledge adequate revenue for post-closure maintenance costs, is currently reviewing revisions to the existing pledge of revenue agreement between District No. 2 and CalRecycle that will include the new Fee-In-Lieu fund payments as a source of revenue. BENEFITS OF THE PROPOSAL x The proposed agreement provides significant benefits to all of the Districts: x Saves approximately $250 million in interest that would accrue on the UAL under the CalPERS payment schedule. x The savings translates into an immediate savings across the Districts of approximately $20 million per year. x The payments into the Fund in total will be no more than the payments that would have been made toward POBs, and the Districts will benefit from a longer payback period relative to bonds of approximately 40- 60 years. x The SW System achieves more certainty that funding of post-closure maintenance costs will be available, and in effect receives a higher interest rate than would be earned on its post-closure funds. CONCLUSION /FUTURE ACTIONS The Agreement will be presented to each of the Boards during their meetings in February and March. District No. 2 will also consider approval of the revised Solid Waste Financial Reserve Policy. A new pledge of revenue agreement between CalRecycle and District No. 2 will be executed, pending CalRecycle approval of the new revenue arrangement. After each of the documents has been approved and executed, post-closure maintenance funds will be used to pay off the UAL accrued through June 30, 2020. Any additional future UAL, will be addressed separately and is not part of this Agreement. Very truly yours, Robert C. Ferrante RCF:MAE CALPERS Unfunded Accrued Liability (UAL)/Post Closure Maintenance Funding ExchangeFebruary 2021For Consideration at February and March 2021 Board MeetingsAttachment 2 Introduction and Agenda•Unfunded Accrued Liability (UAL)Amount owed to CalPERS for accrued underfunded pension costs.•Post‐Closure Maintenance FundsMoney set aside to generate interest revenue to fund maintenance of the two closed District‐owned landfills.•The proposalUse landfill post‐closure maintenance funds to pay off Districts’ Unfunded Accrued Liability (UAL), and in return Districts cover post‐closure maintenance costs.2 Pension Liability(Unfunded Accrued Liability or UAL)•Approximately $468 million as of April 2021•Effectively a loan at 7% interest•Minimum payments total $858 million over 22 years (interest is $390 million)•Can be paid off at any time3 UAL Payment Schedule4Includes estimated UAL through June 30, 2020. Post-Closure Maintenance•Two distinct requirements:•Maintain environmental control systems until they no longer pose a threat to the public health and safety and the environment.•Demonstrate to CalRecycle that an ongoing revenue source is available for post‐closure maintenance costs or turn funds over to trust for CalRecycle to manage.•Current Pledge of Revenue Agreement with CalRecycle is that interest revenue generated by post‐closure reserve funds is used as revenue to pay for post‐closure maintenance costs.•Funds invested in accordance with Districts’ investment policy.5 Post-Closure Maintenance - Current Issues•Interest rates are now too low to cover post‐closure maintenance costs.•Unlikely to return to a sustainable level in the near future.•If proposal is not approved and interest revenue does not improve, post‐closure maintenance funds most likely will have to be placed in a trust controlled by CalRecycle.6 Proposal•Use $468 million of landfill post‐closure maintenance funds to pay off UAL accrued through June 30, 2020.•In lieu of paying CalPERS UAL payments, Districts will pay a reduced annual fee into a “Fee‐in‐Lieu” fund.•The “Fee‐in‐Lieu” fund would cover the landfill post‐closure maintenance costs.7 Advantages of Proposed ExchangeJulio Morales, Municipal Advisor, Urban Futures Inc.•Using reserves is ideal for reducing or eliminating UAL.•The proposed exchange is a solution that uses reserves that are currently committed to other purposes.•Pension Obligation Bonds (POBs) are an alternative if no funds are available.•Financial advantages of the proposed exchange over POBs:•Interest would be paid to others instead of supporting District activities.•Payments spread over 40 to 60 years, vs. 20 years for POBs.•Equivalent exchange of obligations – UAL costs vs. post‐closure maintenance costs.8 Annual Cost Comparison9$0$10,000,000$20,000,000$30,000,000$40,000,000$50,000,000$60,000,0002022 2027 2032 2037 2042 2047 2052 2057 2062 2067 2072Fee‐In‐LieuCalPERS UAL PaymentPension Bond Payment Short-Term Annual Savings by DistrictApproximate annual savings, average for FY 2022 through FY 2026.10Annual Savings Annual SavingsDistrict 1 1,539,959$ District 19 334,442$ District 2 2,336,444 District 20 742,688 District 3 1,724,642 District 21 1,604,202 District 4 15,224 District 22 1,134,377 District 5 2,612,087 District 23 259,766 District 8 1,200,119 District 27 608 District 9 577 District 28 36,863 District 14 862,528 District 29 119,302 District 15 1,814,242 South Bay Cities 535,320 District 16 892,740 Santa Clarita Valley 2,096,851 District 17 119,297 District 34 (123) District 18 1,232,661 Newhall Ranch 55,445 Districts' SW System 3,680,953 Timeline•District Boards to consider approval of the Agreement in February and March 2021.•District No. 2 to consider revisions of the Solid Waste Financial Reserve Policy on February 24, 2021.•New pledge of revenue agreement being reviewed by CalRecycle.•Execution of new pledge of revenue agreement in March or April pending CalRecycle approval.•Payment of UAL to occur through September 2021 as post‐closure reserve fund investments are liquidated and final UAL totals are determined by CalPERS.11 Recommendation12•Approval of the proposed agreement by each District.•Approval of the revised Solid Waste Financial Reserve Policy by District No. 2.•Actions in the agreement will not begin until CalRecycle approves the revised Pledge of Revenue Agreement.