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HomeMy WebLinkAboutReso 20-2014RESOLUTION NO. 20-2014 CITY COUNCIL, CITY OF SOUTH SAN FRANCISCO, STATE OF CALIFORNIA A RESOLUTION AUTHORIZING THE MAYOR AND THE CITY MANAGER TO EXECUTE DOCUMENTS RELATED TO PARTICIPATING IN THE CALIFORNIA EMPLOYERS' RETIREE BENEFIT TRUST (CERBT), INCLUDING SELECTION OF A CERBT INVESTMENT STRATEGY OPTION; AMENDING THE 2013 -14 BENEFITS FUND OPERATING BUDGET; AND DIRECTING THE FINANCE DIRECTOR TO MAKE PAYMENTS TOTALING $13.5 MILLION INTO THAT TRUST WHEREAS, the City of South San Francisco ( "City ") has, like many other municipalities in California, a contractual liability for retiree health costs, also known as Other Post Employee Benefits ( "OPEB "); and WHEREAS, currently, the City has only been contributing to OPEB on a "pay as you go" basis; and WHEREAS, the City Council had previously authorized City staff, via Resolution 133 -2011, to rely on the request for proposals process for professional services undertaken by the County of San Mateo ( "County ") in order to select an OPEB Trust provider for the City; and WHEREAS, the County conducted a selection process and selected the California Employers' Retirement Benefit Trust administered by the California Public Employees' Retirement System (Ca1PERS), also known as the Retiree Benefit Trust ( "CERBT "); and WHEREAS, the City Council considered various funding strategies to pay off the City's OPEB liabilities, including pay as you go, depositing City reserve funds into the Trust, and /or contributing an additional annual amount to that Trust; and WHEREAS, data from the actuarial firm Bartel Associates and additional analyses by City staff using that data presented to the City Council have estimated that: • the OPEB liability currently totals $86 million; • by depositing thirteen million five hundred thousand dollars ($13,500,000) into a CERBT Trust, the City of South San Francisco will realize approximately $37 million to $43 million in net present value savings and will have health care premium payments reduced approximately 43 -45 years earlier than otherwise would happen through pay as you go; and WHEREAS, the City Council hereby finds that it makes good financial and business sense to pay down the OPEB liability on a shorter timeframe than would be possible if payments are limited to pay as you; and WHEREAS, the City Council also finds, after consultations between the City's investment advisor, Chandler Asset Management, City staff, and the Budget Subcommittee of the City Council that it is beneficial for City staff to begin depositing thirteen million five hundred thousand dollars ($13,500,000) into the Trust over a period of approximately one year so that the deposits will take advantage of dollar cost averaging and therefore will not be adversely impacted by normal market swings; and WHEREAS, the City Council has also reviewed materials from staff that show that additional contributions into the CERBT trust on an annual basis result in a net present value savings to taxpayers over time. NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of South San Francisco that the City Council hereby approves Agreement and Election of the City of South San Francisco to Prefund Other Post - Employment Benefits through the CERBT. BE IT FURTHER RESOLVED that the Mayor and the City Manager and the City Clerk are hereby authorized to execute the following documents on behalf of the City Council of the City of South San Francisco in order to establish the CERBT: 1. CERBT Contract Agreement, attached hereto and included by reference as part of this Resolution, "The Agreement and Election of the City of South San Francisco to Prefund Other Post - Employment Benefits Through CalPERS " (Exhibit A to this Resolution), and 2. Delegation of Authority to Request Disbursements (Exhibit B to this Resolution), with the following City staff hereby delegated to request disbursements from the Trust Fund in the future: the City Manager, Assistant City Manager, and /or Finance Director. BE IT FURTHER RESOLVED that the City Council elects to enroll the City in CERBT investment strategy 1 as shown on Exhibit C -1 to this Resolution as the appropriate investment vehicle for the placement of the City's deposits into CERBT and authorizes the City Manager and/or his designee to execute the necessary documents to enroll in the investment strategy; and BE IT FURTHER RESOLVED that the Finance Director is hereby authorized to make a total of twenty seven (27) total deposits every two weeks into CERBT of $500,000 each, for a total cumulative deposit of thirteen million five hundred thousand dollars ($13,500,000) (the "Deposits "), beginning in approximately March 2014 and ending in approximately March 2015 depending on the timing of final acceptance by Ca1PERS of the City's Trust documents and Ca1PERS timing ability to accept the City's first deposit; and BE IT FURTHER RESOLVED that the deposit schedule listed in Exhibit D is shown as an example of the deposits only, and the schedule may be adjusted as described in the previous paragraph and may be adjusted on an ongoing basis by up to five working days due to holidays, staffing vacancies, or cash flow timing issues at the Finance Director's discretion in a manner consistent with the intent of this resolution; and BE IT FURTHER RESOLVED that additional deposits may be authorized by the City Council during the budget process or via a budget amendment resolution; and BE IT FURTHER RESOLVED that the Health and Benefits Fund Operating Budget is hereby amended by thirteen million five hundred ($13,500,000), and Reserve balances in the Health and Benefits Fund are hereby reduced by the same amount; and BE IT FURTHER RESOLVED that the Mayor, City Manager, Assistant City Manager, and/or Finance Director are hereby authorized to take any other required action consistent with the intent of this resolution; and BE IT FURTHER RESOLVED that the Council states it is in the City's interest to prioritize funding for additional annual contributions into the CEBRT Trust as part of the budget process, and staff is directed to make additional annual funding of at least $250,000 a priority in the operating budget. I hereby certify that the foregoing Resolution was regularly introduced and adopted by the City Council of the City of South San Francisco at a regular meeting held on the 12'b day of February, 2014 by the following vote: AYES: Councilmembers Mark N Addiego Pradeep Gupta and Liza Normandy Vice Mayor Richard A Garbarino and Ma o� r KgUI Matsumoto NOES: None ABSTAIN: None ABSENT: ATTEST: ' LbAAV-Kj Anna Brown, Deputy City Clerk P4 EXHIBIT A CALIFORNIA EMPLOYERS' RETIREE BENEFIT TRUST PROGRAM ( "CERBT ") AGREEMENT AND ELECTION OF Citq of South San Francisco (NAME Of EMPLOYER) TO PREFUND OTHER POST EMPLOYMENT BENEFITS THROUGH CaIPERS WHEREAS (1) Government Code Section 22940 establishes in the State Treasury the Annuitants' Health Care Coverage Fund for the prefunding of health care coverage for annuitants (Prefunding Plan); and WHEREAS (2) The California Public Employees' Retirement System (Ca1PERS) Board of Administration (Board) has sole and exclusive control and power over the administration and investment of the Prefunding Plan (sometimes also referred to as CERBT), the purposes of which include, but are not limited to (i) receiving contributions from participating employers and establishing separate Employer Prefunding Accounts in the Prefunding Plan for the performance of an essential governmental function (ii) investing contributed amounts and income thereon, if any, in order to receive yield on the funds and (iii) disbursing contributed amounts and income thereon, if any, to pay for costs of administration of the Prefunding Plan and to pay for health care costs or other post employment benefits in accordance with the terms of participating employers' plans; and WHEREAS (3) City of South San Francisco (NAME OF EMPLOYER) (Employer) desires to participate in the Prefunding Plan upon the terms and conditions set by the Board and as set forth herein; and WHEREAS (4) Employer may participate in the Prefunding Plan upon (i) approval by the Board and (ii) filing a duly adopted and executed Agreement and Election to Prefund Other Post Employment Benefits (Agreement) as provided in the terms and conditions of the Agreement, and WHEREAS (5) The Prefunding Plan is a trust fund that is intended to perform an essential governmental function within the meaning of Section 115 of the Internal Revenue Code as an agent multiple - employer plan as defined in Governmental Accounting Standards Board (GASB) Statement No. 43 consisting of an aggregation of single - employer plans, with pooled administrative and investment functions; Rev 9/3/2013 1 P5 EXHIBIT A NOW, THEREFORE, BE IT RESOLVED THAT EMPLOYER HEREBY MAKES THE FOLLOWING REPRESENTATION AND WARRANTY AND THAT THE BOARD AND EMPLOYER AGREE TO THE FOLLOWING TERMS AND CONDITIONS: A. Representation and Warranty Employer represents and warrants that it is a political subdivision of the State of California or an entity whose income is excluded from gross income under Section 115 (1) of the Internal Revenue Code. B. Adoption and Approval of the Agreement; Effective Date; Amendment (1) Employer's governing body shall elect to participate in the Prefunding Plan by adopting this Agreement and filing with the CaIPERS Board a true and correct original or certified copy of this Agreement as follows: Filing by mail, send to: CaIPERS Affiliate Program Services Division CERBT (OPEB) P.O. Box 1494 Sacramento, CA 95812 -1494 Filing in person, deliver to: CaIPERS Mailroom Affiliate Program Services Division CERBT (OPEB) 400 Q Street Sacramento, CA 95811 (2) Upon receipt of the executed Agreement, and after approval by the Board, the Board shall fix an effective date and shall promptly notify Employer of the effective date of the Agreement. (3) The terms of this Agreement may be amended only in writing upon the agreement of both CaIPERS and Employer, except as otherwise provided herein. Any such amendment or modification to this Agreement shall be adopted and executed in the same manner as required for the Agreement. Upon receipt of the executed amendment or modification, the Board shall fix the effective date of the amendment or modification. (4) The Board shall institute such procedures and processes as it deems necessary to administer the Prefunding Plan, to carry out the purposes of this Agreement, and to maintain the tax exempt status of the Prefunding Plan. Employer agrees to follow such procedures and processes. Rev 9/3/2013 2 P6 EXHIBIT A C. Other Post Employment Benefits (OPEB) Cost Reports and Employer Contributions (1) Employer shall provide to the Board an OPEB cost report on the basis of the actuarial assumptions and methods prescribed by the Board. Such report shall be for the Board's use in financial reporting, and shall be prepared at least as often as the minimum frequency required by GASB 43. This OPEB cost report may be prepared as an actuarial valuation report or, if the employer is qualified under GASS 45 and 57, may be prepared as an Alternative Measurement Method (AMM) report. (a) Unless qualified under GASB 45 and 57 to provide an AMM report, Employer shall provide to the Board an actuarial valuation report. Such report shall be for the Board's use in financial reporting, and shall be prepared at least as often as the minimum frequency required by GASB 43 and 57, and shall be: 1) prepared and signed by a Fellow or Associate of the Society of Actuaries who is also a Member of the American Academy of Actuaries or a person with equivalent qualifications acceptable to the Board; 2) prepared in accordance with generally accepted actuarial practice and GASB 43, 45 and 57; and, 3) provided to the Board prior to the Board's acceptance of contributions for the valuation period or as otherwise required by the Board, (b) If qualified under GASB 45 and 57, Employer may provide to the Board an AMM report. Such report shall be for the Board's use in financial reporting, shall be prepared at least as often as the minimum frequency required by GASB 43 and 57, and shall be: 1) affirmed by Employer's external auditor, or by a Fellow or Associate of the Society of Actuaries who is also a Member of the American Academy of Actuaries or a person with equivalent qualifications acceptable to the Board, to be consistent with the AMM process described in GASB 45; 2) prepared in accordance with GASB 43, 45, and 57; and, 3) provided to the Board prior to the Board's acceptance of contributions for the valuation period or as otherwise required by the Board. (2) The Board may reject any OPEB cost report submitted to it, but shall not unreasonably do so. In the event that the Board determines, in its sole discretion, that the OPEB cost report is not suitable for use in the Board's financial statements or if Employer fails to provide a required OPEB cost report, the Board may obtain, at Rev 4/312013 3 P7 EXHIBIT Employer's expense, an OPEB cost report that meets the Board's financial reporting needs. The Board may recover from Employer the cost of obtaining such OPEB cost report by billing and collecting from Employer or by deducting the amount from Employer's account in the Prefunding Plan. (3) Employer shall notify the Board of the amount and time of contributions which contributions shall be made in the manner established by the Board. (4) Employer contributions to the Prefunding Plan may be limited to the amount necessary to fully fund Employer's actuarial present value of total projected benefits, as supported by the OPEB cost report acceptable to the Board. As used throughout this document, the meaning of the term "actuarial present value of total projected benefits" is as defined in GASB Statement No. 45. If Employer's contribution causes its assets in the Prefunding Plan to exceed the amount required to fully fund the actuarial present value of total projected benefits, the Board may refuse to accept the contribution. (5) No contributions are required. If an employer elects to contribute then the contribution amount should not be less than $5000 or the employer's annual required contribution (ARC), whichever amount is lower. Contributions can be made at any time following the seventh day after the effective date of the Agreement provided that Employer has first complied with the requirements of Paragraph C. D. Administration of Accounts, Investments, Allocation of Income (1) The Board has established the Prefunding Plan as an agent plan consisting of an aggregation of single - employer plans, with pooled administrative and investment functions, under the terms of which separate accounts will be maintained for each employer so that Employer's assets will provide benefits only under employer's plan. (2) All Employer contributions and assets attributable to Employer contributions shall be separately accounted for in the Prefunding Plan (Employer's Prefunding Account). (3) Employer's Prefunding Account assets may be aggregated with prefunding account assets of other employers and may be co- invested by the Board in any asset classes appropriate for a Section 115 Trust. (4) The Board may deduct the costs of administration of the Prefunding Plan from the investment income or Employer's Prefunding Account in a manner determined by the Board. (5) Investment income shall be allocated among employers and posted to Employer's Prefunding Account as determined by the Board but no less frequently than annually. (S) If Employer's assets in the Prefunding Plan exceed the amount required to fully fund the actuarial present value of total projected benefits, the Board, in compliance with applicable accounting and legal requirements, may return such excess to Employer. Rev 9/3/2013 4 Y8 EXHIBIT A E. Reports and Statements (1) Employer shall submit with each contribution a contribution report in the form and containing the information prescribed by the Board. (2) The Board shall prepare and provide a statement of Employer's Prefunding Account at least annually reflecting the balance in Employer's Prefunding Account, contributions made during the period and income allocated during the period, and such other information as the Board determines. F. Disbursements (1) Employer may receive disbursements not to exceed the annual premium and other costs of post employment healthcare benefits and other post employment benefits as defined in GASES 43. (2) Employer shall notify CaEPERS in writing in the manner specified by CaIPERS of the persons authorized to request disbursements from the Prefunding Plan on behalf of Employer. (3) Employer's request for disbursement shall be in writing signed by Employer's authorized representative, in accordance with procedures established by the Board. The Board may require that Employer certify or otherwise establish that the monies will be used for the purposes of the Prefunding Plan. (4) Requests for disbursements that satisfy the requirements of paragraphs (2) and (3) will be processed monthly. (5) CaIPERS shall not be liable for amounts disbursed in error if it has acted upon the written instruction of an individual authorized by Employer to request disbursements. In the event of any other erroneous disbursement, the extent of CaIPERS' liability shall be the actual dollar amount of the disbursement, plus interest at the actual earnings rate but not less than zero. (G) No disbursement shall be made from the Prefunding Plan which exceeds the balance in Employer's Prefunding Account. G. Costs of Administration Employer shall pay its share of the costs of administration of the Prefunding Plan, as determined by the Board. H. Termination of Employer Participation in Prefunding Plan (1) The Board may terminate Employer's participation in the Prefunding Plan if: Rev 9/3/2013 5 Y9 EXHIBIT A (a) Employer gives written notice to the Board of its election to terminate; (b) The Board finds that Employer fails to satisfy the terms and conditions of this Agreement or of the Board's rules or regulations. (2) If Employer's participation in the Prefunding Plan terminates for any of the foregoing reasons, all assets in Employer's Prefunding Account shall remain in the Prefunding Plan, except as otherwise provided below, and shall continue to be invested and accrue income as provided in Paragraph D. (3) After Employer's participation in the Prefunding Plan terminates, Employer may not make contributions to the Prefunding Plan, (4) After Employer's participation in the Prefunding Plan terminates, disbursements from Employer's Prefunding Account may continue upon Employer's instruction or otherwise in accordance with the terms of this Agreement. (5) After the Employer's participation in the Prefunding Plan terminates, the governing body of the Employer may request either: (a) A trustee to trustee transfer of the assets in Employer's Prefunding Account; provided that the Board shall have no obligation to make such transfer unless the Board determines that the transfer will satisfy applicable requirements of the Internal Revenue Code, other law and accounting standards, and the Board's fiduciary duties. If the Board determines that the transfer will satisfy these requirements, the Board shall then have one hundred fifty (150) days from the date of such determination to effect the transfer. The amount to be transferred shall be the amount in the Employer's Prefunding Account as of the date of the transfer (the "transfer date ") and shall include investment earnings up to an investment earnings allocation date preceding the transfer date. In no event shall the investment earnings allocation date precede the transfer date by more than 150 days. (b) A disbursement of the assets in Employer's Prefunding Account; provided that the Board shall have no obligation to make such disbursement unless the Board determines that, in compliance with the Internal Revenue Code, other law and accounting standards, and the Board's fiduciary duties, all of Employer's obligations for payment of post - employment health care benefits and other post - employment benefits and reasonable administrative costs of the Board have been satisfied. If the Board determines that the disbursement will satisfy these requirements, the Board shall then have one hundred fifty (150) days from the date of such determination to effect the disbursement. The amount to be disbursed shall be the amount in the Employer's Prefunding Account as of the date of the disbursement (the "disbursement date ") and shall include investment earnings up to an investment earnings allocation date Rev 9/3/2013 6 NO EXHIBIT A preceding the disbursement date. In no event shall the investment earnings allocation date precede the disbursement date by more than 150 days. (6) After Employer's participation in the Prefunding Plan terminates and at such time that no assets remain in Employer's Prefunding Account, this Agreement shall terminate. (7) If, for any reason, the Board terminates the Prefunding Plan, the assets in Employer's Prefunding Account shall be paid to Employer after retention of (i) amounts sufficient to pay post employment health care benefits and other post employment benefits to annuitants for current and future annuitants described by the employer's current substantive plan (as defined in GASB 43), and (ii) amounts sufficient to pay reasonable administrative costs of the Board. (8) If Employer ceases to exist but Employer's Prefunding Plan continues to exist and if no provision has been made by Employer for ongoing payments to pay post employment health care benefits and other post employment benefits to annuitants for current and future annuitants, the Board is authorized to and shall appoint a third party administrator to carry out Employer's Prefunding Plan. Any and all costs associated with such appointment shall be paid from the assets attributable to contributions by Employer. (9) If Employer should breach the representation and warranty set forth in Paragraph A., the Board shall take whatever action it deems necessary to preserve the tax- exempt status of the Prefunding Plan. I. General Provisions (1) Books and Records. Employer shall keep accurate books and records connected with the performance of this Agreement. Employer shall ensure that books and records of subcontractors, suppliers, and other providers shall also be accurately maintained. Such books and records shall be kept in a secure location at the Employer's office(s) and shall be available for inspection and copying by CalPERS and its representatives. (2) Audit. (a) During and for three years after the term of this Agreement, Employer shall permit the Bureau of State Audits, CalPERS, and its authorized representatives, and such consultants and specialists as needed, at all reasonable times during normal business hours to inspect and copy, at the expense of CaIPERS, books and records of Employer relating to its performance of this Agreement. (b) Employer shall be subject to examination and audit by the Bureau of State Audits, CaIPERS, and its authorized representatives, and such Rev 9/3/2013 7 PH EXHIBIT A consultants and specialists as needed, during the term of this Agreement and for three years after final payment under this Agreement. Any examination or audit shall be confined to those matters connected with the performance of this Agreement, including, but not limited to, the costs of administering this Agreement. Employer shall cooperate fully with the Bureau of State Audits, CalPERS, and its authorized representatives, and such consultants and specialists as needed, in connection with any examination or audit. All adjustments, payments, and /or reimbursements determined to be necessary by any examination or audit shall be made promptly by the appropriate party. (3) Notice. (a) Any notice, approval, or other communication required or permitted under this Agreement will be given in the English language and will be deemed received as follows: Personal delivery. When personally delivered to the recipient. Notice is effective on delivery. 2. First Class Mail. When mailed first class to the last address of the recipient known to the party giving notice. Notice is effective three delivery days after deposit in a United States Postal Service office or mailbox. 3. Certified mail. When mailed certified mail, return receipt requested. Notice is effective on receipt, if delivery is confirmed by a return receipt. 4. Overnight Delivery. When delivered by an overnight delivery service, charges prepaid or charged to the sender's account, Notice is effective on delivery, if delivery is confirmed by the delivery service. 5. Telex or Facsimile Transmission. When sent by telex or fax to the last telex or fax number of the recipient known to the party giving notice. Notice is effective on receipt, provided that (i) a duplicate copy of the notice is promptly given by first -class or certified mail or by overnight delivery, or (ii) the receiving party delivers a written confirmation of receipt. Any notice given by telex or fax shall be deemed received on the next business day if it is received after 5:00 p.m. (recipient's time) or on a nonbusiness day. 6. E -mail transmission. When seat by e -mail using software that provides unmodifiable proof (i) that the message was sent, (ii) that the message was delivered to the recipient's information processing system, and (iii) of the time and date the message was delivered to Rev 9/3/2013 8 P12 EXHIBIT A the recipient along with a verifiable electronic record of the exact content of the message sent. Addresses for the purpose of giving notice are as shown in Paragraph B.(1) of this Agreement. (b) Any correctly addressed notice that is refused, unclaimed, or undeliverable because of an act or omission of the party to be notified shall be deemed effective as of the first date that said notice was refused, unclaimed, or deemed undeliverable by the postal authorities, messenger or overnight delivery service. (c) Any party may change its address, telex, fax number, or e-mail address by giving the other parry notice of the change in any manner permitted by this Agreement. (d) Alf notices, requests, demands, amendments, modifications or other communications under this Agreement shall be in writing. Notice shall be sufficient for all such purposes if personally delivered, sent by first class, registered or certified mail, return receipt requested, delivery by courier with receipt of delivery, facsimile transmission with written confirmation of receipt by recipient, or e-mail delivery with verifiable and unmodifiable proof of content and time and date of sending by sender and delivery to recipient. Notice is effective on confirmed receipt by recipient or 3 business days after sending, whichever is sooner. (4) Modification This Agreement may be supplemented, amended, or modified only by the mutual agreement of the parties. No supplement, amendment, or modification of this Agreement shall be binding unless it is in writing and signed by the party to be charged. (5) Survival All representations, warranties, and covenants contained in this Agreement, or in any instrument, certificate, exhibit, or other writing intended by the parties to be a part of their Agreement shall survive the termination of this Agreement until such time as all amounts in Employer's Prefunding Account have been disbursed. (6) Waiver No waiver of a breach, failure of any condition, or any right or remedy contained in or granted by the provisions of this Agreement shall be effective unless it is in writing and signed by the party waiving the breach, failure, right, or remedy. No waiver of any breach, failure, right, or remedy shall be deemed a waiver of any other breach, failure, right, or remedy, whether or not similar, nor shall any waiver constitute a continuing waiver unless the writing so specifies. Rev 9/3/2013 9 P13 EXHIBIT A (7) Necessary Acts, Further Assurances The parties shall at their own cost and expense execute and deliver such further documents and instruments and shall take such other actions as may be reasonably required or appropriate to evidence or carry out the intent and purposes of this Agreement. A majority vote of Employer's Governing Body at a public meeting held on the 12th day of the month of February in the year 2014, authorized entering into this Agreement. Signature of the Presiding Officer: Printed Name of the Presiding Officer: Karyl Matsumoto, Mayor Name of Governing Body: City Council Name of Employer: City of South San Francisco Date: February 12, 2014 BOARD OF ADMINISTRATION CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM BY RAND ANDERSON AFFILIATE PROGRAM SERVICES DIVISION CALIFORNIA PUBLIC EMPLOYEES' RETIREMENT SYSTEM To be completed by CaIPERS The effective date of this Agreement is: Rev 9/3/2013 10 EXHIBIT B DELEGATION OF AUTHORITY I, TO REQUEST DISBURSEMENTS Ca1PERS RESOLUTION OF THE City Council (GOVERNING OF THE City of South San Francisco (NAME OF EMPLOYER) The City Council delegates to the incumbents (GOVERNING BODY) in the positions of City Manager_ and (TITLE) Assistant City Manager and/or rnTLE) Finance Director authority to request on (TITLE? behalf of the Employer disbursements from the Other Post Employment Prefunding Plan and to certify as to the purpose for which the disbursed funds will be used. Title Mayor Witness Date OPEB Delegation of Autho* (1113) P14 P15 EXHIBIT C -1 December 31, 2013 Objective The objective of the CERBT Strategy 1 portfolio is to seek returns that reflect the broad investment performance of the financial markets through capital appreciation and investment income. There is no guarantee that the portfolio will achieve its investment objective. Strategy The CERBT Strategy 1 portfolio is invested in various asset classes in percentages approved by the CaIPERS Board. The specific percentages of portfolio assets allocated to each asset class are shown under "Composition ". Generally, equities are intended to help build the value of the employer's portfolio over the long term while bonds are intended to help provide income and stability of principal. Also, strategies invested in a higher percentage of equities seek higher investment returns (but assume more risk) compared with strategies invested in a higher percentage of bonds. Compared with CERBT Strategy 2 and Strategy 3, this portfolio consists of a higher percentage of equities than bonds and other assets. Historically, equities have displayed greater price volatility and therefore this portfolio may experience greater fluctuation of value. Employers that seek higher investment returns, and are able to accept greater risk and tolerate more fluctuation in returns, may wish to consider this portfolio. CaIPERS Board may change the list of approved asset classes, in composition as well as targeted allocation percentages and ranges at any time. Assets Under Management As of December 31, 2013, the aggregate total of assets under management for all CERBT Strategies was $3,192,870,806. Composition Asset Class Allocations and Benchmarks The CERBT Strategy 1 portfolio consists of the following asset classes and corresponding benchmarks: Asset Target Target Benchmark 0 fie 1 Range Returns before expenses' Global Equity 66% ±5% MSCI All Country World Index a\�QJwa \0 13.44% 4.12% EMI net Fixed Income 18 %4 } 5% Barclays Capital Long Liability 9.26 ° /4 13.34% 3,64% Index Inflation- Linked Bonds 5% ° * 2 �0 Barclays Capital Global: US "ILBs" TIPS Index Real Estate Investment 8% +2% FTSE EPRAINAREIT Trusts "REITs" Developed Liquid index net Commodities 3% + 2% S &P GSCi Total Return Index Portfolio Benchmark The CERBT Strategy 1 benchmark is a composite of underlying asset class market indices, each assigned the target weight for the asset class it represents. Target vs. Actual Asset Class Allocations The following chart shows policy target allocations compared with actual asset allocations as of December 31, 2013. CaIPERS may overweight or underweight an allocation to a particular asset class based on market, economic, or CaIPERS policy considerations. 70.0 60.0 50.13 40.0 30.0 20.0 10.0 0.0 r I i 0 Target __.__. ..._ Actual CERBT Strategy 1 Month 1 Performance 3 Months Fiscal YTD 0 fie f 5 Years* Since Inception* June 1, 2007 Returns before expenses' 1.20% 4.71% 10.83% 14.17% a\�QJwa \0 13.44% 4.12% Benchmark returns 1.00% 4.41% 10.48% 13.61% CERBT Strategy 1 Month 1 Performance 3 Months Fiscal YTD of . 1 Year 3 Years* f 5 Years* Since Inception* June 1, 2007 Returns before expenses' 1.20% 4.71% 10.83% 14.17% 9.34% 13.44% 4.12% Benchmark returns 1.00% 4.41% 10.48% 13.61% 9.26 ° /4 13.34% 3,64% "Returns for periods greater than one year are annualized. 1 See the Expenses section of this document. EXHIBIT C -1 P16 December 31, 2013 General Information Information Accessibility The CERBT Strategy 1 portfolio consists of assets managed internally by CalPERS and /or external advisors. Since it is not a mutual fund, a prospectus is not available nor is information available from a newspaper source. This summary is designed to provide descriptive information. CaIPERS provides a quarterly statement of the employer's account and other information about the CERBT. For total market value, detailed asset allocation, investment policy and current performance information, including performance to the most recent month -end, please visit our website at: www.calpers.ca.gov. Portfolio Manager Information The CaIPERS Investment Committee and Board of Administration directs the investment strategy and investments of the CERBT. Under that direction, CalPERS Investment staff manages fixed income, inflation- linked bonds and commodities assets; and State Street Global Advisors (SSgA) manages the global equity and real estate investment trust assets. Custodian and Record Keeper State Street Bank serves as custodian for the CERBT. Northeast Retirement Services serves as record keeper. Expenses CERBT is a self- funded trust in which participating employers pay for all administrative and investment expenses. Expenses reduce the gross investment return by the fee amount. The larger the fee, the greater the reduction of investment return, Currently, CERBT expenses are accrued at an annual rate of 0,15% and charged daily to employer accounts. In addition, SSgA may charge administrative and other expenses deducted directly from the Global Equity and REITs commingled funds. CERBT's actual expenses may differ from the amount currently being accrued due to factors such as changes in average fund assets of market conditions. The expense accrual rate may change without notice in order to reflect changes in average portfolio assets or in expense amounts. The CaIPERS Board annually reviews the operating expenses and changes may be made as appropriate. Even if the portfolio loses money during a period, the fee is still charged. What Employers Own Each employer choosing CERBT Strategy 1 owns a percentage of this portfolio, which invests in pooled asset classes managed by CalPERS and /or external advisors. Employers do not have direct ownership of the securities in the portfolio. Price The value of the portfolio changes daily, based upon the market value of the underlying securities. ,lust as prices of individual securities fluctuate, the portfolio's value also changes with market conditions. Principal Risks of the Portfolio The CaIPERS CERBT Fund provides California government employers with a trust through which they may prefund retiree medical costs and other post - employment benefits. CERBT is not, however, a defined benefit plan. There is no guarantee that the portfolio will achieve its investment objectives nor provide sufficient funding to meet these employer obligations. Further, CalPERS will not make up the difference between actual health care premiums for payment of future benefits provided to retirees should CERBT assets not be sufficient to cover future obligations. An investment in the portfolio is not a bank deposit, and it is not insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC), CaIPERS, the State of California or any other government agency. There are risks associated with investing, including possible loss of principal. The portfolio's risk depends in part on the portfolio's asset class allocations and the selection, weighting and risks of the underlying investments. For more information about investment risks, please see the document entitled "CERBT Principal Investment Risks" located at www.calpers.ca.gov. Fund Performance Performance data shown on page 1 represents past performance and is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an employer's units, when redeemed, may be worth more or less than their original cost Current performance may be higher or lower than historical performance data shown. For current performance information, please visit www.calpers.ca.gov and follow the links to California Employer Retirees' Benefit Trust, CERBT Strategy Risk Levels CaIPERS offers employers the choice of one of three investment strategies. Risk levels among strategies vary, depending upon the target asset class allocations. Generally, equities carry more risk than fixed income securities. Asset Class Target Allocations Strategy 1 � Strategy 2 � Strategy 3 Strategy 1 Global Equity 66 % 50% 32% Less tunservattve More conservative Fixed Income 18% 24% 42 % fl Ination- Linked Bonds 5 °/0 15% 15% strategy 2 Real Estate Investment Trusts 8 °/° 8% 8% Less conservative More conservative Commodities Strategy S Less conservative More conservative 3% 3% 3% P17 EXHIBIT G-2 December 31, 2013 Objective The objective of the CERBT Strategy 2 portfolio is to seek returns that reflect the broad investment performance of the financial markets through capital appreciation and investment income. There is no guarantee that the portfolio will achieve its investment objective. Strategy The CERBT Strategy 2 portfolio is invested in various asset classes in percentages approved by the CalPERS Board. The specific percentages of portfolio assets allocated to each asset class are shown under "Composition ". Generally, equities are intended to help build the value of the employer's portfolio over the long term while bonds are intended to help provide income and stability of principal. Also, strategies invested in a higher percentage of equities seek higher investment returns (but assume more risk) compared with strategies invested in a higher percentage of bonds. Compared with other asset allocation strategies, this portfolio consists of a moderate allocation of equities, bonds, and other assets. Historically, funds with a higher percentage of equities have displayed greater price volatility. Therefore, this portfolio may experience comparatively less fluctuation of value compared to CERBT Strategy 1 but more fluctuation of value compared to CERBT Strategy 3. Employers that seek a moderate approach to investing may wish to consider this portfolio. CaIPERS Board may change the list of approved asset classes, in composition as well as targeted allocation percentages and ranges at any time. Assets Under Management As of December 31, 2013, the aggregate total of assets under management for all CERBT Strategies was $3,1 92,870,806. Composition Asset Class Allocations and Benchmarks The CERBT Strategy 2 portfolio consists of the following asset classes and corresponding benchmarks: Asset Class Target Target • Fiscal YTD of December 1 1 Year 3 Years` 5 Years' Allocation Range - Global Equity 50% ± 5% MSCI All Country World Index - 12.51% Benchmark returns IMI net Fixed Income 24% + 5% Barclays Capital Long Liability - 12.28% Index Inflation- Linked Bonds "ILBs" 15% ± 4% Barclays Capital Global: US TIPS Index Real Estate Investment "REITs" 8% ± 2% FTSE EPRAINAREIT Trusts Develo ed Liquid Index (net) Commodities 3% ± 2% S &P GSCi Total Return Index Portfolio Benchmark The CERBT Strategy 2 benchmark is a composite of underlying asset class market indices, each assigned the target weight for the asset class it represents. Target vs. Actual Asset Class Allocations The following chart shows policy target allocations compared with actual asset allocations as of December 31, 2013. CalPERS may overweight or underweight an allocation to a particular asset class based on market, economic, or CaIPERS policy considerations. 60 T--- - e 50 - - - 40 - — -.. _....... i 30 f - -° -- - -- - -- -- 20 - 16 ! - �\ 1 Q F oa�QS far 4° a Target Actual CERBT Strategy 1 Month 3 Months • Fiscal YTD of December 1 1 Year 3 Years` 5 Years' Since Inception' October 1, 2011 Returns before expenses' 0.77% 3.34% 8.11% 9.16% - - 12.51% Benchmark returns 0.51% 3.00% 770% 8.48% - - 12.28% 'Returns for periods greater than one year are annualized. 'See the "Expenses" section of this document. Pis EXHIBIT C -2 December 31, 2013 General Information Information Accessibility The CERBT Strategy 2 portfolio consists of assets managed internally by CalPERS and /or external advisors. Since it is not a mutual fund, a prospectus is not available nor is information available from a newspaper source. This summary is designed to provide descriptive information. CaIPERS provides a quarterly statement of the employer's account and other information about the CERBT. For total market value, detailed asset allocation, investment policy and current performance information, including performance to the most recent month -end, please visit our website at: www.calpers.ca.gov. Portfolio Manager Information The CaIPERS Investment Committee and Board of Administration directs the investment strategy and investments of the CERBT fund. Under that direction, CaIPERS Investment Office staff manages fixed income, inflation - linked bonds (ILBs), and commodities assets; and State Street Global Advisors (SSgA) manages the global equity and real estate investment trust assets. Custodian and Record Keeper State Street Bank serves as custodian for CERBT. Northeast Retirement Services serves as record keeper. Expenses CERBT is a self - funded trust in which participating employers pay for all administrative and investment expenses. Expenses reduce the gross investment return by the fee amount. The larger the fee, the greater the reduction of investment return. Currently, CERBT expenses are accrued at an annual rate of 0.15% and charged daily to employer accounts. In addition, SSgA may charge administrative and other expenses deducted directly from the global equity and REITs commingled funds. CERBT's actual expenses may differ from the amount currently being accrued due to factors such as changes in average fund assets or market conditions. The expense accrual rate may change without notice in order to reflect changes in average fund assets or in expense amount. The CaIPERS Board annually reviews the operating expenses and changes may be made as appropriate. Even if the portfolio loses money during a period, the fee is still charged. What Employers Own Each employer choosing CERBT Strategy 2 owns a percentage of this portfolio, which invests in pooled asset classes managed by CalPERS and /or external advisors. Employers do not have direct ownership of the securities in the portfolio. Price The value of the portfolio changes daily, based upon the market value of the underlying securities. Given that prices of individual securities fluctuate, the portfolio's value also changes with market conditions. Principal Risks of the Portfolio The CaIPERS CERBT Fund provides California government employers with a trust through which they may prefund retiree medical costs and other post - employment benefits. CERBT is not, however, a defined benefit plan. There is no guarantee that the portfolio will achieve its investment objectives nor provide sufficient funding to meet these employer obligations. Further, CalPERS will not make up the difference between actual health care premiums for payment of future benefits provided to retirees should CERBT assets not be sufficient to cover future obligations. An investment in the portfolio is not a bank deposit, and it is not insured nor guaranteed by the Federal Deposit Insurance Corporation (FDIC), CaIPERS, the State of California or any other government agency. There are risks associated with investing, including possible loss of principal. The portfolio's risk depends in part on the portfolio's asset class allocations and the selection, weighting and risks of the underlying investments. For more information about risks, please see the document entitled "CERBT Principal Investment Risks" located at www.calpers.ca.gov, Fund Performance Performance data shown on page 1 represents past performance and is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an employer's units, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than historical performance data shown. For current performance information, please visit www.calpers.ca.gov and follow the links to California Employer Retirees' Benefit Trust. CERBT Strategy Risk Levels CaIPERS offers employers the choice of one of three investment strategies. Risk levels among strategies vary, depending upon the target asset class allocations. Generally, equities carry more risk than fixed income securities. 8% Asset Class Target Allocations Strategy I Strategy 2 Strategy 3 Strategy t Global Equity 66% 50% 32% Less conservative More conservative Fixed Income 18% 24% 42 % Inflation- Linked Bonds 5% 15% 15% Strategy 2 Less conservative More conservative Real Estate investment Trusts Strategy 3 Less conservative More conservative 8% 8% 8% Commodities 3 °/° 3% 3% Pl9 Exhibit D: CEBRT Deposit Schedule Examples of 27 3/11/15 $ 500,000 1 $ 13,500,000 * The deposit dates are approximate and used for example. approx. Deposit Deposit Deposit Cumulative # Dates * Amt. Deposits 1 3/12/14 $ 500,000 $ 500,000 2 3/26/14 $ 500,000 $ 1,000,000 3 4/9/14 $ 500,000 $ 1,500,000 4 4/23/14 $ 500,000 $ 2,000,000 5 5/7/14 $ 500,000 $ 2,500,000 6 5/21/14 $ 500,000 $ 3,000,000 7 6/4/14 $ 500,000 $ 3,500,000 8 6/18/14 $ 500,000 $ 4,000,000 9 7/2/14 $ 500,000 $ 4,500,000 10 7/16/14 $ 500,000 $ 5,000,000 11 7/30/14 $ 500,000 $ 5,500,000 12 8/13/14 $ 500,000 $ 6,000,000 13 8/27/14 $ 500,000 $ 6,500,000 14 9/10/14 $ 500,000 $ 7,000,000 15 9/24/14 $ 500,000 $ 7,500,000 16 10/8/14 $ 500,000 $ 8,000,000 17 10/22/14 $ 500,000 $ 8,500,000 18 11/5/14 $ 500,000 $ 9,000,000 19 11/19/14 $ 500,000 $ 9,500,000 20 12/3/14 $ 500,000 $ 10,000,000 21 12/17/14 $ 500,000 $ 10,500,000 22 12/31/14 $ 500,000 $ 11,000,000 23 1/14/15 $ 500,000 $ 11,500,000 24 1/28/15 $ 500,000 $ 12,000,000 25 2/11/15 $ 500,000 $ 12,500,000 26 2/25/15 $ 500,000 $ 13,000,000 27 3/11/15 $ 500,000 1 $ 13,500,000 * The deposit dates are approximate and used for example. P20 o n U � oR�� Staff DATE: January 15, 2014 TO: Honorable Mayor and City Council FROM: Jim Steele, Finance Director SUBJECT: STUDY SESSION UPDATING THE CITY COUNCIL ON THE MOST RECENT ACTUARIAL STUDY OF THE CITY'S OTHER POST - EMPLOYMENT BENEFITS (OPEB) RECOMMENDATION It is recommended that the City Council review the information in this staff report and direct staff to come back with a formal resolution which would take the next steps in funding the City's retiree health liability, known as Other Post - Employment Benefits (OPEB). BACKGROUND/DISCUSSION OPEB refers to the cost of funding lifetime retiree health premiums for employees who retire from the City with at least five years of City service completed. Unlike CalPERS, where the City sets aside dollars each pay period to cover, with expected investment earnings, the future retirement costs of employees, the City only pays for current year's retiree health premiums. It has set aside no dollars in a formal Trust fund that qualifies those funds to be invested at higher investment returns. As a result, the OPEB liability grows annually. At a Budget Subcommittee meeting on December 16, 2013, the following topics were discussed with the Subcommittee (Vice Mayor Garbarino and Councilmember Addiego) with regards to the City's OPEB liability: 1. Selection of one of three offered investment options available to employers participating in the California Public Employees' Retirement System's (CalPERS) California Employers' Retiree Benefit Trust Program ( "CERBT "). A decision on this item is needed so that the City can deposit, at a minimum, the $197,600 in funds made available from the former Redevelopment Agency (RDA) Property Tax Fund (RPTTF), as authorized by the former RDA Oversight Board and approved by the State Department of Finance. 2. The updated actuarial study by Bartel Associates of the City's OPEB liability showing a total OPEB liability of $86 million. 3. Investment of the dollars already set aside in the City's non- General Fund Reserves into the CERBT trust and future contributions. P21 Staff Report Subject: Study Session on OPEB Page 2 of 5 Each topic is discussed in more depth below. Selection of an Investment Strategy with CalPERS On September 11, 2013, the City Council passed a resolution authorizing staffto sign documents with the California Public Employees' Retirement System (CaIPERS), to join the California Employers' Retiree Benefit Trust Program ( "CERBT "). CERBT offers three investment options /strategies, and one option must be selected in order to deposit funds into the CERBT Trust. Staff is returning to Council because there is a policy decision to be made on which investment option will be selected, for which the full Council's input is requested, with a recommendation below. There are three investment options available for the investment with CERBT, and CalPERS requires that each entity select only one investment option. Those three options were reviewed in more detail with the Budget Subcommittee in December, at which time the City Treasurer and the City's investment advisor, Chandler Asset Management, also participated. All parties at the meeting expressed consensus that CERBT Strategies 1 and 2 (shown in more detail on attachment pages 1 -8 to this report) would be appropriate, and would match the overall time long term horizon to pay down the OPEB liabilities (longer than 20 years). Strategy 3, with a much higher percentage ofthe portfolio invested in fixed income bonds, was not considered appropriate for a long term investment, as it is too conservative a mix of investments for a long term investment horizon. The two appropriate investment strategies reviewed by the Subcommittee are as follows: 1. CERBT Strategy 1, which most closely replicates the investments CalPERS already makes on behalf of the City's retirement payments. It is designed to return 7.61% annually over time, and is comprised 213 with stocks. 85% of the roughly 350 agencies that currently invest in CERBT have selected this option. 2. CERBT Strategy 2, which is made up of 50% stocks, and is designed to return 7.06% annually overtime. 10% of the roughly 350 agencies that currently invest in CERBT have selected this option. Strategy 3, which is not recommended, is made up of only 31.6% stocks. Only 5% of the roughly 350 agencies that currently invest in CERBT have selected this option. This option is expected to return 6.39% annually. All three options are shown in more detail on the first set of attachments (pages 1 -$) to this staff report. After discussion in December, the Budget Subcommittee agreed that CalPERS Strategy 1 would be the best choice, since it is closest to the CalPERS retirement fund investments, and to the longer time horizon. Strategy 2 would be acceptable, but as Jayson Schmitt from Chandler Asset Management stated at the meeting, Strategy 1's investment options are most closely aligned with actuarial assumptions about earnings over the longer term. With Council concurrence, staff will return to the City Council with a resolution directing staff to select Strategy 1. P22 Staff Report Subject: Study Session on OPEB Page 3 of 5 Related to this, the Oversight Board of the former Redevelopment Agency and the State Department of Finance have formally approved the use of former Redevelopment Agency property taxes to pay for that portion of the OPEB liability associated with services provided by staff supporting the former Redevelopment Agency. For this current Redevelopment Property Tax Trust Fund ( RPTTF) period, a total of $197,600 has been provided from RPTTF funds to the City for deposit. The deposit cannot be made until an investment option is selected. Updated Actuarial Study of City's OPEB Liability In December 2013, the City's actuary, Bartel Associates, updated the City's OPEB liability report (pages 9 -40) as required by governmental accounting rules. The City's OPEB liability was calculated to be $86 million as of June 30, 2012 (page 22 of attachments). As staff has reported previously, because we are currently only funding retiree health premiums on a "pay as you go" basis, our OPEB liability is growing at a much faster rate than City revenues in general or other employee costs. That is because by only funding "pay as you go ", we are in a situation similar to making only the minimum payments on a large credit card bill, meaning the outstanding principal balance grows each year due to the much higher interest costs associated with that credit card liability. In the case of OPEB, because health costs increase at a high rate compared to City revenues, those liabilities accelerate over time if all that is funded is "pay as you go ". That is, until we begin to pay that obligation down, similar to what we fund for retirement costs, a growing percentage of the City's General Fund budget will go towards OPEB. Two options to consider are the initial investment into the CERBT from funds the City has already set aside, and recurring investments over and above "pay as you go ". Investment of the $13.5 million already set aside into CERBT As the Council will recall, a total of $12.5 million had been set aside through June 30, 2013 both through the budget process and from year -end savings over the past several years. Those funds are segregated from the General Fund but Council is not prevented from redeploying those funds to another purpose. An additional $1.0 million has been budgeted in 2013 -14 as well, for a total of $13.5 million on hand by June 30, 2014. The power of paying down the OPEB liability is demonstrated in data and charts (pages 41 -42) that Bartel modeled for us showing various payment scenarios: 1. Current "pay as you go" funding only would be the most expensive, costing the City a total of $378 million, with required payments not falling below $2.0 million until 2073); 2. Investing the already set aside funds in the CERBT Trust but continuing "pay as you go" would save $95 million over time compared to "pay as you go" Option 1 above. An OPEB Trust is expected to earn 7.61 % earnings over time, much like CalPERS has done with the City's retirement portfolio. 3. Placing funds in the CERBT Trust would dedicate them exclusively to retiree medical payments and the funds could not be used for any other purpose. If a future Council wished to access the funds due to economic or budget constraints or changed Council priorities, they could only use funds already deposited to pay for subsequent retiree health premiums. For P23 Staff Report Subject: Study Session on OPEB Page 4of5 example, $13.5 million would pay for 3 -4 years of health premiums, meaning a future Council decision to access these funds would take 3 -4 years to fully draw them down. Note that options a, b, and c below assume an additional annual contribution towards the Trust: 3a: Adding $250,000 annually to the Trust would save in excess of $200 million over time compared to Option 1; 3b: Adding $500,000 annually to the Trust would save $218 million over time compared to Option 1; and 3c: Adding $1.0 million annually to the Trust would save $239 million over time compared to Option 1. Charts showing the impact of these strategies are included after the staff report (pages 41 -42). As demonstrated below the greatest savings, relative to the additional impact on the budget, seems to be from the initial deposit plus an annual contribution of $250,000: Pay as you Go Pay -Go Plus Initial Only Trust De (Current) only) Total City payments $ 378,000 $ 283,000 over time (000's) Number ofyears that payments exceed 60 58 $2.0 million Final year in which payment exceeds $2.0 million 2073 2071 Initial Deposit Plus an additional annual contribution of: $0.25 Million $0.55 Million $1.0 Million $ 174,000 $ 159,000 $ 139,000 28 26 22 2041 2039 2035 The Budget Subcommittee agreed that it makes sense for staffto invest the full $13.5 million set aside for OPEB in the Ca1PERS Trust. It was agreed not to invest it all at once, but the question arose as to how quickly the funds should be invested. Jayson Schmitt from Chandler stated that a three year monthly investment window was too long, as that began to mirror an entire investment cycle (ups and downs over three to five years); he also stated that the biggest risk was to not invest the dollars, as the liability wouldn't begin to be paid down until the City starts contributing. Finally, the point was made P24 Staff Report Subject: Study Session on OPEB Page 5 of 5 that once a decision is made, a twelve month investment plan ($.5 million every two weeks) was a good period over which to ladder in the investment contributions. CONCLUSION Staff recommends that the Council: 1. Direct staff to return with a resolution to: a. Formally select CalPERS' CERBT investment Strategy; b. Direct staff to invest $13.5 million already set aside in equal payments to Ca1PERS every two weeks until the $13.5 million is fully invested over approximately one year; and 2. Continue to consider prioritizing an ongoing annual funding of OPEB in the 2014 -15 budget of $250,000. Jim t ele Fi e Director F Attachments: Approved: Steven T. Mattas Interim City Manager - CERBT Asset Allocation Strategies (Pages 1 -2) - CERBT Investment Strategies 1 -3 (Pages 3 -8) - Bartel Associates June 30, 2012 GASB 45 Actuarial Valuation (Pages 9 -40) - Charts from Bartel Associates (Pages 41 -42) JSISTM:ed