minutes

Regular Meeting

Governing Board of Sweetwater Authority

May 12, 2004

The Governing Board of Sweetwater Authority held a regular meeting on Wednesday, May 12, 2004, at the Sweetwater Authority Administrative Office, 505 Garrett Avenue, Chula Vista, California. Chair Doud called the meeting to order at 6:00 p.m.

· ROLL CALL

Directors Present: Beauchamp, Doud, Pocklington, Reynolds, and Welsh.

Directors Absent: Alkire and Inzunza.

Others Present: General Manager Bostad, Operations Manager Rogers, Legal Counsel Paula de Sousa, Treasurer Avery, and Board Secretary Farpón-Friedman. Staff members Debra Farrow, Hank Gaus, Bill Olson, Paula Roberts, Jim Smyth, Don Thomson, and Tom Woodrum.

· PLEDGE OF ALLEGIANCE TO THE FLAG
Director Welsh conducted the pledge of allegiance to the flag.

· OPPORTUNITY FOR PUBLIC COMMENT (Government Code Section (54954.3)
There were no members of the public present for comment.

· CHAIR 'S PRESENTATION
There was none. Chair Doud passed around a sign-up sheet for the Del Mar Fair.

ACTION CALENDAR ITEMS

1. Ray Lane, CalPERS Supervising Pension Actuary
Sweetwater Authority CalPERS Retirement Plan

General Manager Bostad introduced Debra Farrow, Finance Administrator of Sweetwater Authority, who provided a brief introduction of Mr. Lane from CalPERS. Mr. Lane has about 22 years of pension and actuarial experience, first as a consultant with Watson Wyatt, and with PERS for the last two and a half years. He is the author of the famous June 26, 2002 "Sluggish Economy and Lower Stock Prices will Cause Public Agency Contributions to Increase Beginning in 2003/04." She said Mr. Lane would be giving a brief presentation on what our pension plan is with PERS and how it works. Mr. Lane said he wanted everyone to understand the nature of the CalPERS retirement plan sponsored for the employees, the promise made by the CalPERS Board and its responsibility to fund that promise.

The PERS plan is a defined benefit plan so that when the employees retire they receive a benefit based on a formula that takes into account their pay and how they worked. The benefit does not depend on how much money is in the fund or how well the stock market is doing. It simply depends on the years of service and pay and the formula that is selected, which in Sweetwater Authority's case is 2 percent at age 55 (to be changed to 2.5% effective July 1, 2004).

The money that comes from the employee contributions is put into a fund and is commingled. There are about $160 billion dollars in total in the CalPERS fund and about 2,000 separate plans. The fund is a qualified trust, which means that it satisfies certain Federal IRS rules. One of the requirements to be a qualified trust is that the money has to be for the exclusive benefit of paying retirement pensions to the employees and it cannot be invested toward achieving some other purpose and funding the retirement pension. The actual cost of the plan is not known until the last person receives the last pension check under the plan. The true cost of the plan is the benefits paid minus whatever the assets earn, and what is remaining is the amount of the contributions. The actuary does a calculation each June 30 of assets versus the liability of the plan and comes up with a schedule of what the contribution should be. If all of the assumptions are realized and people retire, they live as long as they think, and the pay increases are what they have assumed, then that payment schedule will be exactly enough to pay benefits.

Mr. Lane talked about the assumptions, which he said are not guaranteed each year. The assumption is that interest on the earning of the asset will be 8.25 percent over the long term. Each year, as the real earnings are different, there is an adjustment to the rate and a new schedule from that point forward is developed. Improving the plan benefits also increases the cost. Regarding recent discussions in the newspapers about the State of California and that improving the benefits in 1999 was the reason for the high costs, he said that improving the benefits was about one-third of the increase, and the loss in the stock market was about two-thirds.

Mr. Lane displayed and explained several charts of the estimated rates, the value and the liability of the assets, and the costs to Sweetwater Authority. He said that the main driver of the costs is the stock market and the return on the fund, and he talked about the asset returns and the percentages. On average the funds were doing very well up until recently. The 5-year average was 3.75 percent and the ten-year average was 8.25 percent. The effect of the stock market on the fund affects the contribution rate. If the fund earned 8.25 percent consistently, we would never have to put another dollar in. The accrued liability is the value of benefits to date compared to the assets. Mr. Lane explained how the levels of liability and assets affect the cost of the plan. He said that we have just gone from having assets greater than our accrued liability to where just in the last year the assets are less than the liability. When comparing the assets to the accrued liability, they do not use the market value because it moves around. They use a common actuarial technique that is accepted within certain ranges called "actuarial value of assets," which almost everyone uses as a way of leveling out the effect of the changes in the market.

Mr. Lane talked about the present value of benefits. He noted that for a number of years, our assets have been greater than our accrued liability and there was a surplus, but that was gone by June 30, 2002. In 2001 we had a negative 7.2 percent, and a negative 5.9 percent in 2002. This was not caused by the liabilities but by the decrease in assets. It has been a very unusual economic market.

Mr. Lane then displayed a chart with our assets and said that the rule is that the actuarial value can never be less than 90 percent of market or greater than 110 and, presently, it is at 110 percent. He noted that the first year the actuarial value was doing fine; however, two years in a row of decreasing market value was enough to turn it around, and the total loss was almost 30 percent. He stated, in answer to a question from Director Pocklington, that there is no limit to the maximum liability of an agency.

General Manager Bostad asked Mr. Lane to talk about the 2.5 percent at 55 plan that was negotiated as part of the new contract with the employees and which will be effective on July 1, 2004. He said that as part of the negotiations with the employees, Management had to take into consideration what was being negotiated in public agencies around us, and he noted that the Cities of Chula Vista and National City have instituted 3 percent at 60, and that Otay Water District 2.7 percent at 55. He mentioned that Mr. Lane would talk to the different variances.

Mr. Lane said the cost for the current year 2004 was 6.411 percent and the current rate is 2.449 percent. We still have a $4 million worth of surplus as of 2001. He said that changing to the 2.5 at 55 from the 2.0 at 55 costs $2.1 million in additional liability. This would take about half of the surplus that we had in 2001. The normal cost changes because we have reduced our surplus and the plan costs more; therefore it goes from 6.411 percent to 7.564 percent. This change to 7.564 percent for the normal cost is forever and the surplus will be affected as the assets increase or decrease. It was very unusual for the employer contribution to be zero as occurred in the 1990s. The plan should have cost 6.4 percent all along but because there was a run-up in the assets there was no cost for a couple of years. The 2.7 at 55 is the next alternative plan enhancement and the normal cost goes from 6.4 percent to 8.6 percent. It also costs almost all the surplus and this has to be paid back over time. The 3 percent at 60 goes from 6.4 percent to 9.4 percent. The member rate goes from 7 percent to 8 percent on all three plans, which is even more than the surplus as of 2001.

Mr. Lane displayed a chart that showed the rates for the 2.5 percent at 55 for the next three years. Their assumption is that the investment will earn 8.25 percent this year. In 2005, one more year of asset losses hits and as they roll through and the tail of the asset losses go on forever. There need to be gains in the market in order to reduce the employer cost. It will take a long time for it to come back down at 8.25, or a couple of good years of returns.

They are lowering the interest rate assumption from 8.25 to 7.75 percent and changing some of the other assumptions as well. The net result is that some costs go up and some come down. He thinks that, on average, there will be a one percent pay increase in the costs as a result of the change in assumptions, but he will not know exactly what our cost will be for another week.

In response to Director Pocklington, Mr. Lane said that the PERS budget is about $225 million. He also said that for calendar 2003 the CalPERS fund is 23 percent, and for the period July 1, 2003 to March 31, 2004, 16 percent.

Mr. Lane confirmed to General Manager Bostad that we would not see the benefits received in the stock market in 2003 until two years later. He added that if they get 16 percent at the end of 2004, that will not affect our cost until 2006, and it will only be one third of the gain in the first year. He also confirmed Operations Manager Rogers' statement that, even though 2003 and 2004 were good years, we are still paying for the stock market decline of the previous three years. He added that the actuarial value is way above the market value and the difference is the remaining losses yet to roll through, and that ten percent of the market value is still waiting to be recognized.

2. ITEMS TO BE ADDED, WITHDRAWN, OR REORDERED IN THE AGENDA

There were none.

3. APPROVAL OF MINUTES

Director Pocklington made a motion, seconded by Director Doud, that the Board approve the minutes of the Joint Meeting of April 23, 2004 and the minutes of the Regular Meeting of April 28, 2004 . The motion carried.

4. APPROVAL OF DEMANDS AND WARRANTS

Director Reynolds a motion, seconded by Director Beauchamp, that the Board approve Warrants 94224 through 94453 including all voided checks. The motion carried.

5. FINANCE AND PERSONNEL COMMITTEE (Meeting of April 30, 2004)

A. Review of leak adjustment report for the period January 1 through March 31, 2004. This was an information item and no action was required by the Governing Board.

B. Director Pocklington made a motion, seconded by Director Welsh, that the Governing Board approve the Salary Survey as presented by Management and amended for the salary adjustments to the Engineer and Customer Service Supervisor positions.

Director Welsh expressed her frustration for not having been able to attend the Committee meeting because of a funeral. She talked about her concerns regarding the objectivity of the survey. She said she would have liked to discuss the issue further with the Committee.

General Manager Bostad explained that the last time a formal survey was completed by an outside consultant was about 23 years ago and since then they had done some in-house surveys. In an effort to improve the process, they had a formal classification and compensation survey done by Fox Lawson. He explained the methodology used by Fox Lawson, and how some adjustments were made after discussing the results of the survey with Section and Department Heads.

Operations Manager Rogers talked about the system utilized in the past where there were a few benchmark positions that were surveyed and then tied to other jobs within the organization. What Management tried to do this time was respect the employees' wishes and, after talking to Section and Department Heads, in almost every single case they raised the salary above what the survey said it should be based upon a review of objective criteria.

Board Secretary Farpón-Friedman requested to speak to express her disappointment on the survey, which resulted in her position being Y-rated. She noted the uniqueness of the Board Secretary position at Sweetwater Authority who is also the Controller for South Bay Irrigation District. As such, she has certain duties that have a higher level of responsibility than those of Board Secretaries at other agencies, and she did not think this was taken into account when surveying her position.

After a brief discussion, Director Pocklington amended his motion, and he was seconded by Director Welsh, that the Board approve the classification and compensation survey subject to reviewing the Board Secretary salary at the next Finance and Personnel Committee meeting. The motion carried.

C. Director Reynolds made a motion, seconded by Director Pocklington, that the Governing Board approve the request to forward the personnel requests for consideration at the Board Workshop on May 21, 2004. The motion carried.

6. ADOPTION OF RESOLUTION

Upon a motion made by Director Pocklington, seconded by Director Beauchamp, the following resolution:

RESOLUTION 04-08
RESOLUTION OF THE GOVERNING BOARD OF SWEETWATER AUTHORITY
SUPPORTING THE LOCAL TAXPAYER AND PUBLIC SAFETY PROTECTION ACT

was passed and adopted by the following vote to wit:

Ayes: Directors Beauchamp, Doud, Pocklington, Reynolds and Welsh
Noes: None
Absent: Alkire and Inzunza
Abstain: None

7. NEW BUSINESS

Request from Valley Center Municipal Water District to adopt a resolution supporting desalination: Director Welsh made a motion, seconded by Director Beauchamp, that the Board approve the adoption of a resolution Supporting the Development of Desalination and Encouraging the San Diego County Water Authority to Take Action Consistent with its Stated Support for Local Desalination Projects. The motion carried, with Director Pocklington abstaining.

8. APPROVAL OF DIRECTORS' ATTENDANCE AT MEETINGS AND FUTURE AGENDA ITEMS

A. Director Welsh made a motion, seconded by Director Pocklington, that the Governing Board approve per diem for Director Alkire's meeting with Counsel Cowett and General Manager Bostad on April 12, 2004. The motion carried.

B. California Special District Association, San Diego Chapter - Quarterly Dinner Meeting - Doubletree Club Hotel of San Diego, Thursday, May 20, 2004. Directors Beauchamp, Doud, Pocklington, Reynolds and Welsh will be attending this pre-approved event. No action was required by the Governing Board.

C. WESTCAS' Summer Legislative Conference - June 23-25, 2004 - Hyatt Regency Islandia Hotel, San Diego. Directors Beauchamp, Doud, Reynolds and Welsh will attend this event. Director Pocklington will attend only the Friday breakfast. No action was required by the Governing Board.

9. REPORT OF TREASURER - WANDA AVERY

Ms. Avery reported that the interest rate at the Local Agency Investment Fund is at 1.45 percent.

10. MANAGEMENT REPORT

A. Report of Operations Manager Rogers: Operations Manager Rogers reported that on Tuesday, May 4th, all member agencies received notification from the CWA that the Metropolitan Skinner Plant was running at 95 percent capacity, and all agencies that purchase water were asked to cut back on their usage. The pilot program at the Perdue Treatment Plant was running at the time, but we were not required to get off the treated water pipeline. Today we received notification of a leak in the treated water pipeline number 4 at the Del Dios turnoff, which is at Rancho Bernardo. They are in emergency status and have asked all treated water agencies to curtail treated water deliveries if at all possible. As of this moment we are taking water out of the reservoir. As a result of the years and dollars spent on reservoirs, treatment plants, and wells, Sweetwater Authority, will not be affected by this situation.

Operations Manager Rogers referred to an article in the San Diego Union regarding new Federal standards on arsenic. The article said that standards for arsenic, as of this moment, cannot even be measured. He asked Water Quality Superintendent Thomson to give a brief report regarding the arsenic situation as it applies to Sweetwater Authority and what the Federal and State guidelines are. Mr. Thomson gave a brief report about the situation with the levels of arsenic.

B. Report of General Manager Bostad: Mr. Bostad reported that Senate Bill 1272, the Ortiz bill, has been moved to appropriations and has been placed in a suspense file. He referred to a booklet put together by Communications Director Roberts and her staff about the Daughters and Sons Work Day. Communications staff is also working on a press release regarding the newly constructed well. He said that the Board Secretary would connect with staff and schedules to pull together a date so that we can actually do a ribbon cutting and then advise City Hall of their interest.

Manager Bostad also reported that there would be a weapons-of-mass destruction drill by the California State Training Institute program at the Reynolds Desalination Facility, and he has been assured that there will be no weapons at the facility. This is a large training effort that we are trying to coordinate at the request of the Department of Health Services. The Press has been advised about the drill.

He also referred to the interest from some Board members in doing a tour of the Recreation Facility prior to its opening. He suggested doing it in conjunction with a Board meeting. Staff will work on the arrangements. Manager Bostad also referred to the leadership tour on Friday, which will be attended by Maureen Stapleton, Mario Lopez from Congressman Filner's office and Luis Hernandez, Deputy Director of Planning for the City of Chula Vista. On May 25, we will be hosting the tour for the Helix Board. He asked if any Board members were interested in joining them, to please advise the Board Secretary.

11. DIRECTORS' COMMENTS

Director Reynolds said he wanted to report on the ACWA/JPIA election. On the first ballot, Ronald Vickery was selected as Vice President of ACWA/JPIA and Wes Bannister from Orange County for the Executive Committee. A second ballot was required for the Executive Committee, and Merle Alshire of Valley Center and Bill Knutson had a runoff. He was instructed by the Board to vote for Knutson, and Alshire won by 6 votes. He met Mr. Alshire, who is a very nice and qualified gentleman. He thought both were very qualified. He thinks that Mr. Alshire will do a great job on the Executive Committee.

Something interesting occurred at the Executive Committee meeting; Rainbow Municipal Water District was recommended for consideration to be dropped from the ACWA/JPIA insurance program. The reason being that their experience modification factor has increased quite a bit over the years. The board of the water district has changed and not lived up to commitments that they have made to install capital improvements. The new Board President and the General Manager gave a 45-minute presentation and stated their commitment to a minimum of four million dollars investment per year in infrastructure replacements over the next four years. This will be done through pay go on the four million dollars. They had a bond election for $40 million and lost. The ACWA/JPIA Board voted to give them a one-year reprieve on being dropped from the insurance.

Director Welsh referred to the Bring Your Daughters and Sons to Work Day brochure. She read something that one of the children wrote, "there were many jobs to be filled in Sweetwater Authority but the one who is in charge of the system is the Director of Distribution. There are 34 workers in the department and Mr. Olson is responsible for the distributive system. He is a leader and supporter of his department and manages to keep his employees on their work." She thought that was a sweet publication.

Director Pocklington thanked management and staff for the briefing on the retirement system. He does not understand it all, but has a better feel for it now. He feels that we do have a liability there that could be unlimited so we have to be concerned with what we do in the future. He said that we saw what happened to San Diego and the County of San Diego for not taking care of their retirement system. It has cost them billions of dollars and that is going to be taxpayers' money, and he is sure that is going to be an issue in future elections.

He said he had flown to Raleigh/Durham two weeks ago, and he had found it interesting talking to some of the people in government service in Raleigh/Durham and many small communities that depend on groundwater/well water. They have pollution problems from all the pig farms and the ground and water level is going down. They do not have any reservoirs like we have here. They will have to do something to take care of that. He thinks that North Carolina will have to look at some reservoirs in the future.

12. CLOSED SESSION

There was no need for one.

13. ADJOURNMENT

With no further business before the Board, Chair Doud adjourned the meeting at 7:54 p.m., to the hour of 3:30 p.m., on May 26, 2004.