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whether reduced sales tax revenues is part of a short-term (recessionary) trend or a long term trend. Sales Tax Rates. The City collects a percentage of taxable sales in the City (minus certain administrative costs imposed by the State Board of Equalization) pursuant to the Bradley-Burns Uniform Local Sales and Use Tax (the “Sales Tax Law”), as shown below. As part of the State’s Fiscal Year 2003-04 Budget, the State Legislature authorized, and the voters of the State approved, a redirection to the State from local jurisdictions (including the City) of sales revenues in the amount of 0.25% of the basic 1.0% local sales tax rate, starting July 1, 2004. The State of California uses such revenues to pay the State’s economic recovery bonds. Under the California Economic Recovery Act, which includes legislation commonly referred to as the “Triple Flip,” the State redirected certain property taxes in the ERAF to local governments, including the City, to compensate for this redirection of sales taxes on a “dollar for dollar” basis. Under this legislation, along with the guarantees provided by the passage of Proposition 1A in November 2004, the City expects that there will A-20 not be any significant fiscal impacts on the City resulting from the “Triple Flip.” See also “CONSTITUTIONAL AND STATUTORY LIMITATIONS ON TAXES AND APPROPRIATIONS – Proposition 22.” At an election held on November 2, 2010, the voters of the City approved (by a majority vote) “Measure Z”, which increased the sales tax in the City by 0.25%, to be used by the City for general purposes. The tax is scheduled to expire in 2018. Currently, taxable transactions in the City are subject to the following sales and use tax, of which the City’s share is only a portion. The State collects and administers the tax, and makes distributions on taxes collected within the City, as follows: TABLE 12 CITY OF SAN LEANDRO SALES TAX RATES Fiscal Year 2012-13 State (General Fund) 5.000% State (Fiscal Recovery Fund) 0.250 State (Local Revenue Fund) 0.500 State (Local Public Safety Fund) 0.500 Local (City and County Operations) 0.750 Local (County Transportation Funds) 0.250 Total State-Wide Tax Rate 7.250% Alameda County Essential Health Care Services Transactions and Use Tax (ACHC) 0.500 Alameda County Transportation Authority (ACTA) 0.500 Bay Area Rapid Transit District (BART) 0.500 City of San Leandro Transactions and Use Tax (SLGF) 0.250 Total City of San Leandro Tax Rate 9.000% Source: California State Board of Equalization. Sales and use taxes are complementary taxes; when one applies, the other does not. In general, the statewide sales tax applies to gross receipts of retailers from the sale of tangible personal property in the State of California. The use tax is imposed on the purchase, for storage, use or other consumption in the State of tangible personal property from any retailer. The use tax generally applies to purchases of personal property from a retailer outside the State of California where the use will occur within the State of California. The Sales Tax is imposed upon the same transactions and items as the statewide sales tax and the statewide use tax. A-21 Certain transactions are exempt from the State sales tax, including sales of the following products: • food products for home consumption; • prescription medicine; • newspapers and periodicals; • edible livestock and their feed; • seed and fertilizer used in raising food for human consumption; and • gas, electricity and water when delivered to consumers through mains, lines and pipes. This is not an exhaustive list of exempt transactions. A comprehensive list can be found in the State Board of Equalization’s June 2005 Publication No. 61 entitled “Sales and Use Taxes: Exemptions and Exclusions,” which can be found on the State Board of Equalization’s website at http://www.boe.ca.gov/. Sales Tax Collection Procedures. Collection of the sales and use tax is administered by the California State Board of Equalization. According to the State Board of Equalization, it distributes quarterly tax revenues to cities, counties and special districts using the following method: Using the prior year’s like quarterly tax allocation as a starting point, the Board of Equalization first eliminates nonrecurring transactions such as fund transfers, audit payments and refunds, and then adjusts for growth, in order to establish the estimated base amount. The State Board of Equalization disburses 90% to each local jurisdiction in three monthly installments (advances) prior to the final computation of the quarter’s actual receipts. Ten percent is withheld as a reserve against unexpected occurrences that can affect tax collections (such as earthquakes, fire or other natural disaster) or distributions of revenue such as unusually large refunds or negative fund transfers. The first and second advances each represent 30% of the 90% distribution, while the third advance represents 40%. One advance payment is made each month, and the quarterly reconciliation payment (clean-up) is distributed in conjunction with the first advance for the subsequent quarter. Statements showing total collections, administrative costs, prior advances and the current advance are provided with each quarterly clean-up payment. Under the Sales and Use Tax Law, all sales and use taxes collected by the State Board of Equalization under a contract with any city, city and county, or county are required to be transmitted by the Board of Equalization to such city, city and county, redevelopment agency, or county periodically as promptly as feasible. These transmittals are required to be made at least twice in each calendar quarter. Under its procedures, the State Board of Equalization projects receipts of the sales and use tax on a quarterly basis and remits an advance of the receipts of the sales and use tax to the City on a monthly basis. The amount of each monthly advance is based upon the State Board of Equalization’s quarterly projection. During the last month of each quarter, the State Board of Equalization adjusts the amount remitted to reflect the actual receipts of the sales and use tax for the previous quarter. A-22 The Board of Equalization receives an administrative fee based on the cost of services provided by the Board to the City in administering the City’s sales tax, which is deducted from revenue generated by the sales and use tax before it is distributed to the City. See “City Economic and Demographic Information, Taxable Sales,” below, for further detail regarding the City’s sales tax receipts. Other Taxes and Revenues. Utility User’s Tax. The utility users tax is the third largest revenue source for the City. The utility users tax is comprised of a tax on utilities, including electric, wired telecom, wireless telecom, natural gas, and cable. The City’s history of enactments regarding its Utility Users Tax is summarized as follows: TABLE 13 CITY OF SAN LEANDRO UTILITY USERS TAX HISTORY Utility Covered Rate Electric*, Gas*, TV, Telephone 6.0% Cable 6.0 Telecommunication 5.7 * Exemption on first $34 of gas or electric charges for residential properties. Source: City of San Leandro. The City’s initial Utility Users Tax (the 5% tax on electric, gas, cable television and telephone utilities with the exceptions noted above) became effective on July 1, 1970, Thereafter, the Utility Users Tax was increased without voter approval in 1993 to 6% for non-residential users. On November 4, 2008, the City’s voters approved Measure RR, which authorized application of the Utility Users Tax to situations where there have been changes in technology and laws. Post-1984 technology had rendered the City’s telephone tax less effective in taxing communication services that have, to a significant extent, replaced traditional telephone service. Unless precluded by federal law, Measure RR updates the City’s existing telephone tax to apply to all types of telecommunication, video communication, text messaging, and paging services in addition to the telephone, cellular telephone and voice over internet protocol (“VOIP”) services which are already taxed. Measure RR does not apply to digital downloads (e.g., games, ringtones, music and books). Federal court decisions in other states had recently created a concern as to whether the City’s ordinance, as written prior to adoption of Measure RR, could be properly applied to long distance, cellular, VOIP and bundled telephone services. A-23 Transient Occupancy Tax. The City currently levies a transient occupancy tax on hotel and motel bills equal to 10%. The transient occupancy tax is a tax paid by hotel and motel guests who spend fewer than 30 consecutive days in a hotel or motel in the City. Recently, the operators of nine hotels in the City challenged the ordinance levying the transient occupancy tax, on various grounds including that it was unconstitutionally vague and a violation of equal protection. In a decision filed on September 18, 2007, the California Court of Appeals for the Sixth District upheld the validity of the ordinance against such challenge. No appeal was filed. Franchise Fee. Prior to the passage of State Bill AB 2987, the "Digital Infrastructure and Video Competition Act of 2006,” Federal and State laws allowed cities to grant franchises to cable companies to use the public right-of-way to install and provide video service. Under the current franchise agreement, the cable company pays San Leandro an annual franchise fee of 5% of gross revenues. In addition, the City of San Leandro also receives revenue from Electric & Gas Franchises, as well as Refuse & Recycling. Electric/Gas franchise fees are based on gross receipts for the sale of electricity or gas within the City, and is the greater of these two calculations: 1. Electric or Gas Franchise Ordinance: 2% or gross receipts attributable to miles of line operated; or 2. 1937 Act Computations: gross receipts within the City multiplied by 1%. Refuse & Recycling franchise fee calculations include complex calculations based on a variety of basis such as per ton or percent of gross receipts between 10-12%. Most of the fees are adjusted annually by CPI. A-24 General Fund Obligations. Set forth below is a table presenting the long-term obligations payable from the City’s General Fund, excluding the Bonds and the Refunded Certificates, followed by summary descriptions of each issuance. TABLE 14 CITY OF SAN LEANDRO LONG-TERM DEBT OBLIGATIONS Obligation Principal Amount Interest Rate Range 2007 Certificates of Participation (1) $23,435,000 4.00% to 4.375% 2005 Lease/Purchase Agreement 3,048,260 3.40% to 3.70% 2011 Lease/Purchase Agreement 461,717 Fixed at 3.80% 2012 Pension Obligation Bonds (2) 18,305,000 1.14% to 5.54% (1) Interest payable semiannually on each May 1 and November 1, principal payable annually on November 1. (2) Interest payable semiannually on each June 1 and December 1, principal payments payable annually on June 1. Source: City of San Leandro. 2007 Certification of Participation. In 2007, the City issued $23,435,000 principal amount of 2007 Certificates of Participation (the "2007 COPs"). The purpose of the 2007 COPs was to provide funds to refund the outstanding 1999 Certificates of Participation (Library and Fire Stations Project) of the City of San Leandro and the San Leandro Public Financing Authority. Interest rates vary from 4.00% to a maximum of 4.375% and are payable semiannually on each May 1 and November 1. Principal payments are payable annually on November 1. The COPs evidence fractional interest of the owners in lease payment to be made by the City for use and occupancy of San Leandro Libraries and San Leandro Fire Stations. The balance outstanding as of June 30, 2012 was $_____. [Carla to confirm if this is paid off: 2005 Master Equipment Lease/Purchase Agreement. In 2005, the City entered into a Lease/Purchase Agreement with Bank of America to Lease/Purchase Equipment in the amount of $3,048,260. The Equipment was for the Police Departments computer upgrades for servers, mobile laptops, and computer aided dispatch and records management system. The interest rates range from 3.40% to 3.70% payable in seven years. The balance outstanding as of June 30, 2012 was $____.] 2011 Master Equipment Lease/Purchase Agreement. In 2011, the City entered into a Lease/Purchase Agreement with Oshkosh Capital to Lease/Purchase Equipment in the amount of $461,717. The Equipment was for a 2011 Triple Combination Pumper Truck for the Fire Department. The interest rate is 3.80% payable in five years. The balance outstanding as of June 30, 2012 was $_____. 2012 Pension Obligation Bonds. In 2012, the City issued $18,305,000 principal amount of 2012 Taxable Pension Obligation Bonds (the "2012 POBs"). The purpose of the 2012 POBs was to refund the side fund obligation of its PERS Safety Plan (as such is described in “-Retirement System,” below). Interest rates vary from 1.14% to a maximum of 5.54% and are payable semiannually on each June 1 and December 1. Principal payments are payable annually on June 1, commencing June 1, 2013. A-25 Estimated Direct and Overlapping Bonded Debt. The estimated direct and overlapping bonded debt of the City as of [DATE] is set forth below. TABLE 15 CITY OF SAN LEANDRO DIRECT AND OVERLAPPING BONDED DEBT as of [DATE TO BE DETERMINED] A-26 Risk Management. The City uses a program of self-insurance for workers’ compensation and general liability claims to minimize losses. The City also participates in a multi-agency joint powers authority to provide excess insurance coverage for liability coverage. The multi-agency joint powers authority and the City rely on estimates prepared by professional actuaries to set aside funds adequate to meet potential future losses. See “APPENDIX B – AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2012, Note 12” for additional information about the City’s risk management practices. Retirement System. All full time employees of the City are members of the California Public Employees Retirement System (“PERS”), an agent multiple-employer public employee defined benefit pension plan. PERS provides retirement and disability benefits, annual cost-of-living adjustments, and death benefits to plan members and beneficiaries. PERS acts as a common investment and administrative agent for participating public entities within the State of California. Benefit provisions and all other requirements are established by state statute and city ordinance. PERS maintains two pension plans for the City: a Safety Plan (the “Safety Plan") and a Miscellaneous Plan (the “Miscellaneous Plan” and, together with the Safety Plan, the “PERS Plans”). The City contributes to PERS amounts equal to the recommended rates for the PERS Plans multiplied by the payroll of those employees of the City who are eligible under PERS. Benefit provision and all other requirements are established by State statute and City ordinance. Funding Policy. Contributions to PERS are divided into employee and employer shares. City employees are required to contribute 9% of annual covered salary for safety employees. 8% of annual covered salary for all other employees hired before January 1, 2010, and 7% of annual covered salary for all other employees hired after January 1, 2010 as the employee share. The City is required to contribute to PERS at an actuarially determined rate (based on annual covered payroll); the Fiscal Year 2011-12 rate was ___% for safety employees (for both its side fund and multiple-employer plans) and ___% for miscellaneous employees. The City makes the contributions required of City employees on their behalf and for their account, which amounted to $____ for the year ended June 30, 2012. Annual Pension Cost. For Fiscal Year 2011-12 the City’s annual pension costs of $10,185,143 for PERS was equal to the City’s required and actual contribution. The required contribution rate for the Fiscal Year 2011-12 was determined as a part of the June 30, 2010, actuarial valuation which used the entry age normal actuarial cost method with the contributions determined as a percent of pay. The actuarial assumptions included (a) 7.75% investment rate of return (net of administrative expenses); (b) projected salary increases that range from 3.25% to 14.45% for miscellaneous members, and from 3.25% to 14.45% for safety members; (c) an inflation component of 3%, and (d) 2% per year cost-of-living adjustments for retirees. The actuarial values of assets of the Miscellaneous Plan and Safety Plan were determined using a technique that smooths the effect of short-term volatility in the market value of investments over a fifteen-year period. PERS unfunded actuarial accrued liability is being amortized as a level of percentage of projected payroll on a closed basis. The City’s annual pension costs for the Fiscal Years 2008-09, 2009-10, 2010-11 and 2011-12 are shown in the following tables: A-27 Information for City of San Leandro Safety Plan Fiscal Year Ended Annual Pension Cost June 30, 2009 $4,374,571 June 30, 2010 4,254,064 June 30, 2011 4,162,075 June 30, 2012 4,106,138 Information for City of San Leandro Miscellaneous Plan Fiscal Year Ended Annual Pension Cost June 30, 2009 $3,306,405 June 30, 2010 3,085,779 June 30, 2011 2,790,203 June 30, 2012 3,598,318 Unfunded Actuarial Accrued Liability. The table below shows the recent history of the actuarial value of assets, accrued liability, their relationship, and the relationship of the unfunded liability to payroll for the City, all through the City’s June 30, 2010 PERS valuation report, which is the most recent available. See also “APPENDIX B – AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2012, Note 15 and Item 2” for additional information. Because the City has less than 100 active members in the Safety Plan as reported in one valuation in the June 30, 2003 PERS valuation and since June 30, 2004, the City is required to participate in a risk pool with other cities and agencies with less than 100 members in their own plans. An actuarial valuation of this single risk pool has been performed, and, standalone information of the schedule of the funding progress for any pooled individual entity's plan, including the City's Safety Plan is not available. A separate, standalone financial statement has been prepared for the City's Safety Plan Side Fund (which was refunded by the 2012 POBs). TABLE 16 A-28 CITY OF SAN LEANDRO TREND INFORMATION FOR PERS Safety and Miscellaneous Plans Valuation Date Actuarial Accrued Liability (AAL) Actuarial Value of Assets Unfunded AAL/Excess Assets Funded Ratio Annual Covered Payroll UAAL as a % of Covered Payroll Safety (1) 6/30/2008 $8,700,467,733 $7,464,927,716 $1,235,540,017 …85.8% $914,840,596 …135.1% 6/30/2009 ..9,721,675,347 ..8,027,158,724 .1,694,516,623 82.6 ..973,814,168 174.0 6/30/2010 10,165,475,166 ..8,470,235,152 .1,695,240,014 83.3 ..955,980,815 177.3 Miscellaneous 6/30/2008 ..$187,424,677 …$173,324,193 ….$14,100,484 …92.5% .$23,605,301 ….59.7% 6/30/2009 ….205,208,780 …..179,247,735 …...25,961,045 87.3 …23,510,790 110.4 6/30/2010 ….214,152,551 …..183,903,259 …...30,249,292 85.9 …19,694,872 153.6 (1) The Valuation Date for the Safety Plan is set according to the City's participation in PERS' Safety 3% @50 Risk Pool, which is the pool into which it has been assigned as a result of enrolling fewer than 100 employees, all as described above. Pursuant to the Safety 3% @50 Risk Pool, eligible employees may retire at 50 years of age, with benefits calculated according to 3% of the applicable salary and number of years service. Information set forth above is from PERS Safety 3% @50 Risk Pool documentation. Source: City of San Leandro The following table shows City contributions to PERS (including both the City portion as well as employee contributions paid by the City) for Fiscal Years 2008-09 through 2011-12, as well as the expected contribution for Fiscal Year 2012-13. A-29 TABLE 17 CITY OF SAN LEANDRO CITY PAYMENTS – PENSION PLAN Fiscal Year Ended June 30 FY Ended June 30 2009 2010 2011 2012 2013 Safety Employee-Employer Paid $1,026,013 $1,010,099 $1,018,017 $638,555 $584,960 Employee-Employee Paid 406,075 419,340 Employer 2,749,845 2,677,415 2,824,761 3,520,851 3,498,290 Subtotal $3,775,858 $3,687,554 $3,842,778 $4,565,481 $4,502,590 Miscellaneous Employee-Employer Paid $548,255 $505,652 $514,472 $285,242 $260,660 Employee-Employee Paid 165,615 152,840 Employer 980,743 857,257 900,513 833,481 856,530 Subtotal $1,528,998 $1,362,909 $1,414,985 $1,257,338 $1,270,030 TOTAL $5,304,856 $5,050,463 $5,257,763 $5,822,819 $5,772,620 As of June 30, 2010, the most recent actuarial valuation date, the Safety Plan was 76.0% funded on an actuarial value basis and 59.6% funded on a market value basis; the Miscellaneous Plan was 86.1% funded on an actuarial basis and 67.2% funded on a market value basis. The actuarial accrued liability for benefits was approximately $122 million for the the Safety Plan and $134 million for the Miscellaneous Plan. The actuarial value of assets were approximately $93 million for the Safety Plan and $115 million for the Miscellaneous Plan; resulting in an unfunded actuarial accrued liability (UAAL) of $29 million for the Safety Plan and $19 million for the Miscellaneous Plan. The market value of assets were approximately $73 million for the Safety Plan and $90 million for the Miscellaneous Plan; resulting in an unfunded liability (market value basis) of $49 million for the Safety Plan and $44 million for the Miscellaneous Plan. The covered payroll (annual payroll of active employees covered by the plans) were $11 million for the Safety Plan and $18 million for the Miscellaneous Plan, and the ratio of the UAAL to the covered payroll was 258.2% and 104.3% for the Safety and Miscellaneous plans, respectively. PERS Rate Adjustments. On March 14, 2012, the PERS Board voted to reduce its discount rate, which rate is attributable to its expected price inflation and investment rate of return (net of administrative expenses), from 7.75% to 7.5%. As a result of such discount rate decrease, among other things, (i) the amounts of PERS member state and schools employer contributions will increase by 1.2 to 1.6% for Miscellaneous plans and 2.2 to 2.4% for Safety plans beginning fiscal year 2012-13 and (ii) the amounts of PERS member public agency contributions will increase by 1 to 2% for Miscellaneous plans and 2 to 3% for Safety plans beginning fiscal year 2013-14. More information about the PERS discount rate adjustment can be accessed through PERS's web site at www.calpers.ca.gov/index.jsp A-30 ?bc=/about/press/pr-2012/mar/discount-rate.xml. The reference to this internet website is shown for reference and convenience only, the information contained within the website may not be current and has not been reviewed by the City and is not incorporated herein by reference. The PERS Board adjustment has been undertaken in order to address underfunding of the PERS funds, which arose from significant losses incurred as a result of the economic crisis arising in 2008 and persists due to a slower than anticipated, subsequent economic recovery. The City is unable to predict what the amount of PERS liabilities will be in the future, or the amount of the PERS contributions that the City may be required to make. Although not quantified at this time, this is also expected to result in increased City contributions. In addition to this expected increase, there can be no assurances that the City’s annual contributions to PERS will not significantly increase in the future. The actual amount of any increases will depend on a variety of factors, including but not limited to investment returns, actuarial assumptions, experience and retirement benefit adjustments. Pension Reform Act of 2013 (Assembly Bill 340). On September 12, 2012, Governor Brown signed AB 340, a bill that will enact the California Public Employees’ Pension Reform Act of 2013 (“PEPRA”) and that will also amend various sections of the California Education and Government Codes, including the County Employees Retirement Law of 1937. AB 340 (i) increases the retirement age for new State, school, and city and local agency employees depending on job function, (ii) caps the annual PERS pension benefit payout, (iii) addresses numerous abuses of the system, and (iv) requires State, school, and certain city and local agency employees to pay at least half of the costs of their PERS pension benefits. PEPRA will apply to all public employers except the University of California, charter cities and charter counties (except to the extent they contract with PERS.) The provisions of AB 340 will go into effect on January 1, 2013 with respect to State employees hired on that date and after; local government employee associations, including employee associations of the City, will have a five-year window to negotiate compliance with AB 340 through collective bargaining. If no deal is reached by January 1, 2018, a city, public agency or school district could force employees to pay their half of the costs of PERS pension benefits, up to 8 percent of pay for civil workers and 11 percent or 12 percent for public safety workers. PERS predicts that the impact of AB 340 on employers, including the City, and employees will vary, based on each employer’s current level of benefits. To the extent that the new formulas lower retirement benefits, employer contribution rates could decrease over time as current employees retire and employees subject to the new formulas make up a larger percentage of the workforce. This change would, in some circumstances, result in a lower retirement benefit for employees than they currently earn. Additionally, PERS notes that changes arising from AB 340 could ultimately have an adverse impact on public sector recruitment in areas that have historically experienced recruitment challenges due to higher pay for similar jobs in the private sector. More information about AB 340 can be accessed through PERS’s web site at www.calpers.ca.gov/index.jsp?bc=/member/retirement/pension-reform A-31 impacts.xml&pst=ACT&pca=ST. The reference to this internet website is shown for reference and convenience only; the information contained within the website may not be current and has not been reviewed by the City and is not incorporated herein by reference. The City is unable to predict what the amount of PERS liabilities will be in the future or the amount of the PERS contributions which the City may be required to make, all as a result of the implementation of AB 340, and as a result of negotiations with its employee associations. See also “APPENDIX B – AUDITED FINANCIAL STATEMENTS OF THE CITY FOR THE FISCAL YEAR ENDED JUNE 30, 2012, Note 9” for additional information to the City’s retirement plans. Other Post-Employment Retirement Benefits. General. In April 2004, the GASB issued Statement No. 43, Financial Reporting for Post-employment Benefit Plans Other Than Pension Plans. Statement No. 43 establishes uniform financial reporting standards for post-employment healthcare and other nonpension benefits (“OPEB”) plans. The approach followed in Statement No. 43 is generally consistent with the approach adopted for defined benefit pension plans with modifications to reflect differences between pension plans and OPEB plans. Statement No. 43 became applicable to the City for the Fiscal Year ending June 30, 2009. Subsequently, in June 2004, GASB issued Statement No. 45, Accounting and Financial Reporting by Employers for Post-employment Benefits Other Than Pensions, which addresses how state and local governments should account for and report their costs and obligations related to OPEB. Statement No. 45 generally requires that employers account for and report the annual cost of OPEB and the outstanding obligations and commitments related to OPEB in essentially the same manner as they currently do for pensions. Statement No. 45’s provisions may be applied prospectively and do not require governments to fund their OPEB plans. An employer may establish its OPEB liability at zero as of the beginning of the initial year of implementation; however, the unfunded actuarial liability is required to be amortized over future periods. Statement No. 45 also establishes disclosure requirements for information about the plans in which an employer participates, the funding policy followed, the actuarial valuation process and assumptions, and, for certain employers, the extent to which the plan has been funded over time. As required, the City adopted GASB 43/45 beginning