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HomeMy WebLinkAbout01/27/2017 Council Limited Meeting, Mayor's Long Term Financial Planning Committee Workshop MINUTES OF A LIMITED MEETING OF THE KAUAI COUNTY COUNCIL January 27, 2017 Pursuant to Hawaii Revised Statutes (HRS) Section 92-3.1(b), Members of the Kaua`i County Council attended a Limited Meeting as guests of Mayor Bernard P. Carvalho, Jr.'s Long-Term Financial Planning Committee at Council Chambers, 4396 Rice Street, Suite 201, Lihu'e, Kauai on Friday, January 27, 2017 at 8:08 a.m. The following Members were noted as present: Honorable Arthur Brun Honorable Mason K. Chock Honorable Arryl Kaneshiro Honorable Derek S.K. Kawakami Honorable JoAnn A. Yukimura Honorable Mel Rapozo Others present: Bernard P. Carvalho, Jr., Mayor Wallace G. Rezentes, Jr., Managing Director Ken M. Shimonishi, Director of Finance Ernest W. Barreira, Assistant Chief Procurement Officer/ Budget Chief Steven A. Hunt, Real Property Tax Manager Keith Suga, CIP Program Manager Elizabeth Fu, GFOA Project Consultant Mayor Carvalho: Good morning, Councilmembers. Thank you so much for the opportunity to come before you. This session is just to talk story. Our team has been working diligently with the Government Finance Officers Association (GFOA) people and of course representatives. I mean what I think what I have heard so far is all about hopefully we can come together with a solid understanding of what to look forward to in the future regarding our budget and finances and being responsible on how we manage our county government, assets, that we have all of it tied in. I do not know all the specifics, but all I know that the process has come so far. There is a lot of process pieces in place. Hopefully we can get the healthy dialogue today. We are not going to make final decisions of course, but to inform you where we have come and how far we have come and I think we are on the right track in looking at how we are arranging our budget process and look forward to a healthy discussion today. I know that our folks have been working very hard to inform us every step of the way. Today is the day to share the information and hopefully we can come to some understanding and maybe disagreements and agreements, but at the end of the day, it is just the beginning of this bigger picture. With our team, we will be explaining every step of the way. Mahalo for the opportunity and we look forward to some healthy outcomes for today. Mr. Chair. LIMITED MEETING 2 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Council Chair Rapozo: Thank you and thank you folks for doing this. As long as I have been on the Council, I do not remember having a formal long-term financial meeting and that really sounds bad for the municipal government, municipal entity that we did not have one. Thank you folks for doing this and of course to you, Mayor and the staff, and Elizabeth from GFOA. There is no offence or disrespect to anybody in the room, but I do not think we could have done a long-term financial plan without the help from GFOA, so thank you for being here as well. Yesterday, Councilmember Kaneshiro and I met with Ken and Ernie and got kind of the snapshot and I have to say that we are in a much better position today then we were several years ago. I appreciate what Ken folks, all your team has done as far as turning the colored lines the other way and you folks all know what I am talking about. Now, like you said, we just have to concentrate on being disciplined reducing our risk and we talked yesterday about the rising personal cost with the collective bargaining agreements. That can really cripple some of the Counties in Hawaii and we are one of those Counties so we have to be real careful and then of course the (TAT) cap is not helping and just the overall shrinking of the revenue streams coming into the County. I think we just have to stay the course. I am excited. I am looking forward to learning today and hopefully we can come up with some policies that will solidify and keep this train moving in the right direction. Thank you. Mayor Carvalho: Can we change to canoe instead of train. Council Chair Rapozo: Only because Brian Baptiste... Mayor Carvalho: Oh yes. Okay, we will stick to the train. Council Chair Rapozo: "I think I can, I think I can," the little train that could, but because you here, we will talk about the canoe. And I also want to thank the Councilmembers that made the effort to be here eight o'clock in the morning. I know Councilmember Chock has a funeral so he is excused, but you know I think I just want to mahalo the Councilmembers for being here today because I know everybody is busy. Everybody has priorities so thank you. I honestly did not want to be here alone. They out number me here like that so thank you. Mr. Shimonishi: Thank you, Chair and Councilmembers, for participating in our workshop. I just want to do a very, very brief overview of the project itself before we actually get in to the agenda and further discussions so that you know how we got started and all of that. I have a quick presentation. This long- term financial plan was the number one priority that was agreed to by the Council and the Administration at the Special Council Meeting and Goal Setting Workshop held on February 6, 2015. I know there was a list of various priorities and it was ranked and this was the number one priority that came up with consensus between both, again, the Administration and Council. This is also included as part of the Mayor's Budget Presentation for last year's list of goals to work with GFOA consultants to develop a three (3) to five (5) year financial plan based on fixed cost, anticipated expenses, capital needs, revenue generating, and opportunities and so on. So the project launched September of 2015. The long-term financial plan group members include our former Managing Director Nadine K. Nakamura and current Managing Director Wallace G. Rezentes Jr., Assistant Chief Procurement LIMITED MEETING 3 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Office/Budget Chief and Budget Chief Ernest W. Barreira, former Director of Finance and Real Property Tax Manager, Steve A. Hunt, Councilmember and Budget and Finance Chair Arryl Kaneshiro, our Human Resource Director Janine M.Z. Rapozo, Capital Improvements Projects (CIP) Manager, Keith Suga, Budget Analyst Christine Wong and myself, working in conjunction with our Project Consultant from GFOA Elizabeth Fu, Manager of Research and Consulting. The long-term financial plan team held twenty-two (22) meetings. We have drafted seven (7) financial policies. The basis for long-term financial planning. The seven (7) policies listed are Structural balanced Budget, General Fund Reserve (Reserve), and the Risk Analysis, which is primary GFOA with our input on that. The long-term financial plan, CIP asset management, our debt management, investment, and user fees. Today, we will be discussing the top three (3) policies and the analysis and hopefully at a later date, we will come forward with the rest of the policies. So the initial project completion was set for August last year and I do not think we can say completion because you know as you understand long-term financial planning is an ongoing process evolving as it goes, but we were hoping to try to wrap up the policies last year. We were looking to extend it to February/March of this year depending on policy adoption and final review. So I think the main thing I wanted to drive home was that, while it is clear the Administration and Council identify long- term financial planning as a priority, the question remains, is there a political will to faithfully execute these policies? I think when times get tough and we are faced with very difficult situations, are we going to sustain these policies or are we going to try to go back to what we previously practiced? I think that remains a challenge that we need to keep that in mind moving forward. With that, that is the very brief overview that I talked about and I would like to turn over the rest of the agenda to Mr. Barreira for his discussion. Mr. Barreira: Thank you Ken and thank you Councilmembers. This is just some real overview information since we are required to tape the proceedings, so the Long-Term Financial Planning Workshop is actually coordinated by the Executive Branch and while we are physically here at the Council Chambers, the Workshop is not an official Council activity, but rather the Council has been invited to attend and participate in order to have this open and public dialogue about the initiative overall, which was identified two (2) budget cycles ago as the single most important issue for all of us respectively in our respective branches of government. The participation of the Council is essential because all of these proposed policies will ultimately be subject to your approval and your review through the formal submission process to the Council. As a matter of housekeeping, while this workshop is not an official activity of the Council we have been informed that the proceedings will be recorded, but not televised. Any member of the public who is present today and there are none, we would have invited them to submit a statement or make a verbal statement. If they should come in later, we will decide if whether that is going to be allowed, but at this point, no one is here so we can dispose of that. Our purpose today is to review draft policies that have been done as Ken pointed out and of course the expert guidance and consultation assistance from Elizabeth Fu will be very critical to us today as she helps us to understand where we were and were we have come, and the type of guidance and assistance that has been given us. Today, we will focus on the three (3) policies outlined by Ken. This will be the General Fund LIMITED MEETING 4 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Reserve Policy, the Structurally Balanced Policy, and our Long-Term Financial Plan Policy. In addition, we will inform you before the close of the day of other draft policies which are currently under review and development. Our workshop discussions are a very critical component of the Long-Term Financial Planning initiative because it will provide the committee with valuable input and information from all of you that will be used to make needed adjustments or modifications. And in closing our workshop today it is our intent to be able to clearly define our next steps as we continue with the advancement of this critical initiative. Moving through our agenda, we would to move to the public comments period, but that is not going to be necessary. We will actually move into the policy starting with the General Reserve Policy. Talking first about Best Practices and Risk-Based Reserve Analysis which will be our consultant Elizabeth Fu. We have kept this pretty open in terms of structure. We have every section that we will be reviewing, in addition to preliminary information, the actual policies, because there is no other way to avoid that painful process except going through it and then we will invite the discussion questions before we move on to the next section. Thank you. Ms. Fu: Good morning members of the Council and the project team. Thank you for having me back on Kaua`i to discuss with you the process of the Long-Term Financial Plan and also the General Fund Reserve recommendations. So broadly speaking GFOA has a best practice that recommends sixteen percent (16%) of General Fund revenues or expenditures be dedicated as contingency of General Fund Reserves. With that said sixteen percent (16%) is just the threshold that we recommend, the minimum threshold. Counties and Cities and various government may adopt more or less depending on their structure. If you are a smaller government, we probably want to look a little larger because your tax base is a little bit different, you do not have as much financial flexibility and then more specifically in terms of the County you would face very specific risk, so we address that throughout the General Fund Reserve recommendation. Before I go too far let us talk about our roles. My role is really to be an objective third party in recommending the Reserves. I know that some of the numbers may not be palatable to everyone and that is perfectly fine. It is a discussion amongst the County as to how much you want to Reserve. I am just providing a recommendation on the range. Based on the information available, and based on the information, it is a little bit of an influx including what State of Hawai`i Employees' Retirement System (ERS) plans to do in terms of employer contribution rates and the changes to the discount rate. For the county, the role is to kind of review the data, review the recommendations that I made, look over the risk factors, then ultimately discuss and adopt a strategy in terms of reserves and also other things besides setting aside funds. So whether it is insurance, whether it is looking at the policies and the practices that the county has, and determining an appropriate reserve target based on all these different factors. And I want to say I kind of want to make this a discussion point. I rather not just talk to you, but feel free to come at me with questions as well. So broadly speaking, GFOA's framework looks at five (5) different areas. First, we identify risk. We talk with members of the project team, members of Council, and throughout the analysis, we also uncovered different types of risks that the County may face. From there we assess the risk. So we looked at past historic references, LIMITED MEETING 5 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL we look at analog where possible to kind of gauge the range of impact if the risks were actually come to fruition. And then we identify risk mitigation approaches. Throughout the presentation you will hear me talk a little bit about policies and other strategies besides just holding funds. Then, we assess expected risk reduction. So part of this is we do not know the risk that we face. We do not know when the next economic downturn is going to happen, we do not know when the next hurricane or natural disaster is going to happen so we cannot assess the expected risk reduction from there. From there we select and implement mitigation methods so we make recommendations on what the county can do in terms of reserve maybe as policies, maybe as a practice, maybe it is a little bit of everything. As I stated these are recommendations based on current conditions. As Ken mentioned at the beginning of the presentation that this is a process, things change. Your risk factors change. If you are in better economic condition then ERS may not be a factor in your reserve strategy. Maybe after an economic...maybe after a natural disaster, you may want to rethink about if you want to reserve more based on different historic references. So this is an ongoing process and hopefully the General Fund Reserve analysis is reviewed every year. The policy is reviewed every year to make sure that it is aligned with your current conditions. So these were the primary risk factors and secondary risk factors the County has identified and again this is in conversation with county staff and Councilmembers as well. Broadly speaking, these categories are what government's base in terms of risk factors in their general fund. Questions? Councilmember Yukimura: Just one is to the general framework of what we are doing. Will these long-term financial plan policies be adopted by Finance? They are not adopted by the County Council? Ms. Fu: That is incorrect. It is adopted by Council. Your role here is...I make a third party recommendation, and Finance has a different idea. Ultimately, you as Councilmembers adopt what the final reserve recommendation or reserve target is. Councilmember Yukimura: And they will be in this form what you have identified? So the first (4) four pages, is that the form we would approve, or is there a resolution? Mr. Barreira: It will be submitted formally to the Council and at the time we submit it, it will be either in the form of a resolution request or ordinance that has yet to be determined. Councilmember Yukimura: Okay. I think that is good enough for now. Thank you. Ms. Fu: Sure. Councilmember Chock: I apologize for being late as well this morning. I had to pay my respects to my Uncle. So you said that annually we should be looking at reevaluating this. Is there a specific timeframe that we decided that we have to make some decisions on it annually or just in the fiscal year? I am just curious as to when that is going to be? LIMITED MEETING 6 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Ms. Fu: So in terms of when you would review the policies. It should be done in conjunction with the budget process. Some policies, I will have to say, you do not have to necessarily review annually because they do not change so much or they are not so volatile...so it is like your investment policies. Those are more about internal controls, right? General Fund Reserve, you may want to look at annually whether you make changes annually. You may not want to make changes annually, but you want to review it at the forefront before the budget process so you anticipate what will happen in the next couple years to kind of set the sight for what the current budget should look like. Councilmember Chock: Okay. Thank you. Council Chair Rapozo: You did a pretty through analysis of the risk factors and you come to some conclusions. I think heard earlier in your opening comments that GFOA recommended a reserve balance of...what I believe you said sixteen percent (16%) or fifteen percent (15%). Ms. Fu: Sixteen percent (16%) yes. Council Chair Rapozo: Sixteen percent (16%). After reviewing our risk factors, that is where you came up with the much higher... Ms. Fu: Correct. Sixteen percent (16%) is the standard threshold that we recommend. However, that does not consider a government's risk. We worked with governments where sometimes they want to reserve up to fifty percent (50%) of their general fund revenues and expenditures because of the various... Council Chair Rapozo: So were you going to go through the risks... Ms. Fu: Yes, absolutely. Yes. It is a really long PowerPoint presentation for a reason. Councilmember Yukimura: That is why we have all day for it. Ms. Fu: I anticipated questions so... Councilmember Kaneshiro: But we do not need to take all day. Councilmember Yukimura: I am glad the Budget & Finance Committee Chair is saying that. Council Chair Rapozo: Well we blocked off the room till eight o'clock tonight so... Ms. Fu: Okay, so I will be spending my Friday night with you so let us do this. There are different factors of Things that drive risk, so definitely your commitment, assignments, other external entities that may have a LIMITED MEETING 7 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL place, for example, like a (inaudible) on some of your funds. Your budget practices also your affect your target levels. For example, right now the County budgets in a very lean fashion. You do not really budget for vacancies, so you do not have as much flexibility as some governments would have this kind of cushion. Your size of government is quite small, again as a smaller government you do not have a great of as the tax base or the diversity of a tax base as a larger government does. Borrowing capacity is something we need to consider. You do have some capacity to issue debt, but you also have some capital assets set in the landfill and those things that would draw on your debt. From an outsider perspectives, our rating agencies do look at your fund balance to see how healthy the government is. Then there is political support and this is where everyone in this room comes in. Is there an appetite, as Ken asked? Is there a political will to execute on these policies and maintain this level of reserve? So we discussed this last time when I presented to Council, but just a broad overview of what we do in terms of analyzing risk, so we accept that we all are subject to some type of uncertainty, whether it is economic downturn of a natural disaster. We assess the potential impact using analog examples and historic references and then we augment, so if we have fewer references, we apply a higher multiplier of 2.0. If we have more historical data we use a lower multiplier, typically 1.5. This Triple A framework is really from forecasting experts Spyros Makridakis and this is kind of what he framed in the book Dance with Chance. You will hear me talk about Triple A and this is what I am referencing. So this is our recommend action just as a high level over view and then we will talk about each of the different risk factors. About twenty-seven (27%) to forty-one percent (41%) is what we are recommending at this time. Again there are some things that are in fluctuations such as the ERS liabilities. Also my colleagues at GFOA and I are finding our approaches to storms and natural disasters, so that may change as well depending on our different approach, but right now we are recommending twenty-seven (27%) to forty- one percent (41%). I anticipate even with the changes to our approach with storms and related floods this will not change very much. ERS liabilities may change somewhat, but again I do not think it would be any great difference between twenty- seven (27%) and forty-one percent (41%). Let us kind of walk through each of these areas, beginning with the Revenue Volatility. Here we focus on several things such as TAT Revenues, Property Taxes, and other General Fund Revenues. So let us begin with Real Property Taxes. What is driving a lot of the real property tax changes are volatilities the annual valuation because the County has a process of reviewing or assessing property annually. It does fluctuate year-over-year and we looked from 1985-2015 to see what the changes have been to volatility in the annual valuation process. So the two (2) largest we found was a thirteen percent (13%) annual decline FY 1994 and that was due to Hurricane Iniki and eleven percent (11%) decline in 2011 due to the housing downturn. Yes. Councilmember Yukimura: So the second reason which is annual decline, you labeled it as housing downturn, but is it not really a delayed response to the big crash in 2008? LIMITED MEETING 8 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Ms. Fu: I am sorry. Go ahead. Did you want to say something? Mr. Hunt: Yes, there is a delay because many of the properties that were in escrow at the time 2007 and into 2008 still continued to close and those were used as comparable for future years assessments and until we started assessing the slew of properties that were now in distress that were closing, there is a delay in terms of getting that information into the assessment so there is a lag between the actual identification of when the market turned and the actual data to support the market turn and the revaluation because it is done only annually. There are no mid-year adjustments. Councilmember Yukimura: What I am saying is I think the housing downturn is a kind of a limited identification of the cause because I think it was the 2008 crash that the tourism slowed down tremendously and then the economic levels slowed down and then the income that was available to people to pay their mortgages and it all...it was this cycle, but so it was actually this very substantial economic downturn that caused this housing downturn, is just what I want to say. Ms. Fu: Yes, so I agree that we would probably call it the "great recession" in that instance. Steve is very right that 2010-2011 is when most governments felt the aftershocks of the housing downturn, the great recession, and the accumulation of all the impacts, so I would agree with you that here the housing downturn maybe a little bit more limited, but we could probably say it was the great recession. Councilmember Yukimura: Thanks and thank you for the term. Ms. Fu: So this graph indicates how the valuation has changed over time and these are the years that we have looked. As I said earlier when we see the decline in FY 1994 and then also in FY 2011. What is important here is there is two (2) different things that play. The County's history has shown that there is two (2) different ways in which valuation have been affected and they are not necessarily dependent on one another. For example, you could be in the midst of addressing a hurricane and responding to disaster recovery efforts and then you would face the impacts of a recession again. Same thing, you could be in the middle of a recession and then all of a sudden you face a hurricane. Those are very two (2) distinct scenarios. So because of that when we look at revenue volatility for real property taxes, we say that these two (2) scenarios are very much things that the County could be at risk for. It may be prudent for the County to reserve for both scenarios and that does mean a higher reserve and again this is why we are having a discussion on what the County's risk appetite is. If you really want to be more conservative and save more than you would save for both scenarios. So we are going to look at these two (2) scenarios in the next couple slides. Councilmember Yukimura: Can you go back to the other slide. You know that big spike up, that is Maui right? LIMITED MEETING 9 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Mr. Hunt: Kauai. • Council Chair Rapozo: The orange... Councilmember Yukimura: So, yes, is that not an Iniki reaction too? That all the tourist went to Maui instead of Kauai. Mr. Hunt: I think it was also the time when the Gulf War was occurring. In 1993 I think a lot of travel and ceased and Maui was a little more dependent on that travel industry not having as many timeshares to fill in the void from typical hotel-type travel. It is difficult for me to speak for Maui, but that seems to be the drop before immediately before 1993, I suspect is probably associated with the Gulf War too. Councilmember Yukimura: Which just proves your point about volatility of our tax base. Council Chair Rapozo: How would that affect the hotel organization? How would that ... Mr. Hunt: It depends on the number of visitors. Hotels are also looked at in terms of...especially if they are selling and they are based on economic factors, you know, revenue. If you are losing a large number of visitors because they are not traveling because of the Gulf War that occurred and we did see quite a bit of decrease in tourism because of that. Council Chair Rapozo: And that would affect the real property tax valuation? Mr. Hunt: It would. On a short-term basis, yes, because we do assessments annually. Councilmember Yukimura: Because hotel occupancy factors into assessment, right? Mr. Hunt: It does. We look at what they call "revenue per available room" and occupancy is one of the factors in that. Councilmember Yukimura: Thank you. Ms. Fu: The first scenario we look at is if the County experiences another natural disaster where its tax base is impaired so you have fewer properties because a hurricane destroyed them. Here we look at the reference case FY 1994 and look at the thirteen percent (13%) annual decline in valuation. In the lower range, we would recommend a thirteen percent (13%) annual decline as experience. But there is also an upper range where we do not know what the next hurricane would do. It could be it could have a lower effect then Iniki or it could have a much higher effect then Iniki. So we apply a one point five (1.5) multiplier to the thirteen percent (13%) annual decline. So the nineteen point...This results in the LIMITED MEETING 10 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL nineteen point five percent (19.5) annual decline in valuation for tax rate and I just added the chart on the calculation on the impact of what a thirteen percent (13%) annual decline would have for the County and what a nineteen point five percent (19.5%) annual decline valuation would have for the County. So we are looking at a reserve in the range of fourteen point six million (14.6) to nearly twenty-two million (22,000,000). The other scenario I mentioned earlier regards to the great recession. So if the County were to experience the impact of a recession again then we look at the FY 2012 figure on what actually happened with annual decline in real property tax revenues. We look at what a seven point one (7.1%) percent annual decline would do and that would impact the County's real property taxes by seven point six million (7,600,000). On the higher end, we again apply a multiplier of one point five (1.5) and this results in about eleven point four million (7.4) dollars. The reason we look at lower range is because they trend down are that the County's properties are not as hit going to the bubble state of high in prices as it was in two thousand and eight 2008 era so still as you see in the graph the condos still have not recovered the medium prices are still below the low per prerecession levels. Councilmember Yukimura: You said, "now we do not have to worry about the bubble." Is that because of our cap on assessments? Ms. Fu: In saying that this will be the lower range so we are looking at it as what the County position is today. Councilmember Yukimura: Okay. Ms. Fu: So the other thing we looked at is TAT revenue volatility and unfortunately, there is really no volatility in TAT revenues. You know what the state has done in terms of the County's share is so we do not really have to recommend additional reserve in terms of TAT revenue volatility. It will be one hundred and three million dollars for FY 2017, and ninety-three million (93,000,000) thereafter. So nothing will change unless something changes with the state and how they distribute to Counties. The other thing we need to recognize is the other general fund revenue volatility real property taxes and TAT represent a significant amount of the general fund revenues, but then there is still about eleven million dollars ($11,000,000) out there that is still within the general fund that we need to account for as well. So here we exclude real property taxes, TAT, and revenues that are no longer realized so like your investment revenues which are not as high anymore. And revenues that are no longer directed to the general fund that have moved on the civic programs and areas. So when we look at it from an annual perspective FY 2010 was when we saw the most significant annual decline of fifteen point seven percent (15.7%). This is largely due to nonbusiness licenses and fees and so we take the approach of applying the one point five (1.5) multiplier to the fifteen point seven percent (15.7%) so this is about a twenty-four percent (24%) decline in other general fund revenues and reserve about two point eight million dollars ($2,800,000). Questions? LIMITED MEETING 11 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL So that largely covers the drawdown of each area of the revenue volatility piece. And then we will move on the extreme events and natural disasters. So when we talk about extreme events and natural disasters, unlike when we talked about revenue volatility, here we are talking more about the expenditures side and what the county would need to immediately respond and have a clean-up efforts made available. So when we looked at the historic examples, we saw two (2) different types of extreme events. We saw some for less severe more frequent events such as severe storms and flooding. And then obviously there is the impact of a hurricane like Iniki. That is more sever. So we looked at information from FEMA to gather additional reference point as to what the County may experience and FEMA's data base has information back from 1999 to present day and we pull the information for other Hawaiian events and what other Counties have experienced. We want to make note that we looked at it from this perspective of the impact to the General Fund since the focus of our analysis is General Fund. Some of the total cost includes component units, like the Department of Water, which would respond separately or have a separate fund to respond to. Another thing I want to be mindful of is the numbers here maybe higher than what the County may need because we are pulling references from FEMA declared disasters so just as a caveat because of data limitations, so just kind of keep that in mind as well. So as you can see what is highlighted in yellow is what Kaua`i County had experienced. What is important to and what is kind of unique is the 2006, 2007, and 2008 events. Because the Country has experience consecutive events, there is a scenario in which you can experience something similar. You would draw on your reserves, but then you may not have enough to address the following less severe storm or flood the following year so you keep on drawing but you may not recover, may not have replenished the reserves in time to address the next event. So this is what we use as a reference point 2006 to 2008 consecutive flood experiences. In order to capture what the amount would look like for the County in present day, we first adjusted the figures to current prices keep two thousand and sixteen dollars ($2,016) and then also adjusted for your current population size. We do not know exactly how much a storm would cost the County. No one would really know because they are dependent on a lot of geographical factors, geological factors, and also to prepare a strategy that may be in place. So we use population density as the best measure. So if we combine all three (3) events together, the County would need about one point eight million dollars ($1,800,000). But again, we have to adjust for uncertainty because we do not have a lot of data points so we apply a multiplier of one point five (1.5) and this would be a reserve about two point seven million ($2,700,000). Councilmember Yukimura: Explain again how population density is a factor. Ms. Fu: In terms of you may have more people, more residents that would... Councilmember Yukimura: Per square area. LIMITED MEETING 12 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Ms. Fu: Yes so the damages maybe different because maybe you will have greater infrastructure in place now because your population has grown and the infrastructure is what you are trying to account for. Councilmember Yukimura: So I mean like say so if a place like Honolulu were hit which has a much higher density, one would expect that the damages would be greater? Ms. Fu: Exactly. So we considered that and factored that in. Councilmember Yukimura: Okay. Councilmember Chock: Can you tell me what are the pros and cons of having a healthy reserve? How does it play out in a natural disaster for receiving funds from FEMA? Do they take into consideration that we have a good balance reserve and so we do not need the funds to respond. I just want to get clear about what that truly means for us. Do you understand the question? Mr. Shimonishi: Right, you are saying that since we have this money set aside, that FEMA could potentially reduce any aid coming to the island and our thought was that it would not be affected because there is no impact on that. Councilmember Chock: Traditionally, I was wondering how that is affected and so... Council Chair Rapozo: I think once the disaster is declared a disaster by FEMA then it is all reimbursable anyway so we would have to front the money and they send the reimbursement. I think as long as we have that designation from I guess the government or President then they...I guess certain parameters which qualifies these damages for federal funds so I do not believe that it would be an issue. It is kind of scary though. Who knows? Now it is all new up there in Washington D.C.? As I understand it, it would not have an effect on the Reserve. Councilmember Kaneshiro: That is the purpose of having that reserve moneys for. When there is a hurricane, we will have this money available to start doing stuff immediately, and then when FEMA moneys come in, it will help replenish the reserve again. Councilmember Yukimura: Well, you also have Reserve Funds because the Feds may not have it. Ms. Fu: That is also very true. It may not be a FEMA declared disaster and you may need the funds. Councilmember Yukimura: And even if it is, certain kinds of damages are not qualified. You are just in extreme dire straits financially. Councilmember Chock: I am not advocating for that. LIMITED MEETING 13 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: No, it is a good question. Councilmember Chock: Sometimes when you look rich you get keys. Councilmember Yukimura: That is true. Mr. Hunt: Councilmember Yukimura just covered that, but it is in fact not all of the expenditures will be reimbursable so the reserve is also to cover the un-reimbursable portions. Ms. Fu: So looking at the impact of something more large scale. A hurricane or tsunami are something of a low probability event, but it has very dire consequences. So here we would not recommend just reserves alone. For example Hurricane Iniki cost the County one hundred and seventy-nine million dollars ($170,000,000). I do not think the County would want to reserve one hundred and seventy-nine million dollars ($179,000,000) that is just not prudent. Councilmember Yukimura: We would use it on our roads first. Ms. Fu: That is a lot of money that could be used for other purposes. So we think of about different strategies so you can use debt so like inter-fund borrowing are going out to an outside creditors in terms of a loan in place and also insurance to cover deeds for every extreme. There still practical reality of having some funds available in order to as you all mentioned respond immediately until FEMA can reimburse the County. So here we have limited historic references from FEMA. There is definitely Hurricane Iniki and the cost to the County and then there are two (2) tropical storms that happened in Hawai`i County, but other than that nothing. No more Hawaiian Counties were captured in FEMA's data bases. So we looked at other places and we focused on Florida because of the geographical coast that a hurricane would impact a coastal community. However there is definitely limitations because Florida is very different from Hawaii and the hurricane patterns are very different, but these are still reference examples that we want to draw on in addition to the three. Same as before we focus on the General Fund cost and not anything related to Department of Water or anything of the sort and again we normalize for the cost per capita taking in account that place of greater density may incur higher cost than in places of lower density. Then we apply the density per capita to our total estimated damages per capita. For each historic references to what the County's current population density is, one thing to point out is we do not apply Triple A here because we are using a mathematical perspective or mathematical approach that should kind of be more precise than just using Triple A. So this is what we came with. We came with a distribution, this is what the County would need to cover a non-reimbursable components of a natural disaster or a storm and the varying levels of reserve that may be needed. So on the left-hand side is probably where you would want to reserve because you are getting essentially more benefit by every dollar saved in reserves. LIMITED MEETING 14 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL On the middle side you might want to do debt because you could potentially repay in the short-term future. Then, in the right-hand side on the far end you may want to do insurance because that would be events like Iniki and more severe hurricanes. We cannot say exactly where on the spectrum the County would want to reside and it is differently up to people in this room to kind of decide and talk about. Where we provide guidance is on the low range we would recommend about three point seven million dollars ($3,700,000) and this is because up until this point you get eight percent (8%) incremental gain in confidence for every million dollars you save in reserve. And then when you hit the nine point seven million dollar ($9,700,000) mark, you gain about four percent (4%) confidence so about a reduction in half and clearly as you move towards your right it becomes you get less you gain less in competence for every million dollars you save in reserve. So that is why we recommend the strategies of reserve, debt, and insurance. In terms of debt having a contingent capitol arrangement so seeing what providers are out there to kind of establish what a contingent loan will look like and also consider inter-fund borrowing if other funds are healthy enough for which the General Fund can borrow. Then there is a new type of insurance. A newer type of insurance tool called parametric insurance. It would primarily be a supplement to your traditional insurance and it gives government a bit more flexibility to use the funds to address whatever needs that clean-up cost without the restrictions of say like FEMA and other insurance. One of the challenges with this type of insurance tool is you buy an insurance policy for a category five hurricane or a category three hurricane, rather, and the County were to experience a category two hurricane, you would not get insurance reimbursement or any funds paid off because you were insured for a category three and not a category two. Councilmember Yukimura: It is kind of like a high deductible. Ms. Fu: Questions or concerns in regards to this portion? Okay. So we also would consider in terms of natural disaster the potential perhaps the County reserving too much. So as I mention earlier the less severe storms we recommend a reserve about two point seven million dollars ($2,700,000) based on three (3) storms occurring in consecutive years. There is a potential that the County does experience three (3) consecutive storms, but when those consecutive storms be a more severe storms as described in the previous scenario. So here we would recommend that it is plausible that the County can reserve to cover the baseline for more severe storms in the three point seven million dollar $(3,700,000) range. That would also cover if the County were to also experience less severe storms. Questions or concerns? Alright, let us move on the capital repairs and replacement. Before I go too far into the analysis I want to make sure that we are focused on what the intent of the general fund reserve is and what the purpose of the analysis is focused on. So capital funds should be used to address more infrastructure and only the General Fund should be drawn if something unexpectedly fails. So I wanted to make that clear and up front that moneys held in other funds such as highway fund, should be used first LIMITED MEETING 15 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL to address and maintain assets, but only in the most dire and unexpected scenarios is the General Fund used. Councilmember Yukimura: So by that you mean we should use the user fee funds first? Ms. Fu: Not the user fee funds. Councilmember Yukimura: Like the highway fund. Ms. Fu: Exactly the highway fund, the CIP fund. Councilmember Yukimura: I think of the highway fund as the user fee fund, but I guess I am just not getting your distinction, excuse me, sorry. Ms. Fu: So whatever fund is funding your capital assets, those are the first line of defense for your capital assets. Councilmember Yukimura: As compared to? Ms. Fu: You would not want to draw on your General Fund because those funds: your highway fund, and your user fee funds are used to maintain your capital assets. Councilmember Yukimura: Okay so you use the fund which is specifically identified for that particular asset, right? Ms. Fu: Correct. Councilmember Yukimura: And then you go to the general fund if you... Ms. Fu: If something unexpectedly fails. Councilmember Yukimura: Right, right, so the general fund sort of in case of emergency. Ms. Fu: Exactly, for capital assets. Councilmember Yukimura: For capital assets. Okay. Ms. Fu: So there are few assets for concern for the County. The broader assets are the landfill. Here the County has identify strategies to address the landfill and that is to use the Department of Health Clean Water State Revolving Funds and also Bond Funds. So you have a strategy in place so we would not recommend any additional general fund reserve, but we do return to this...because debt does have an impact on the County's overall general reserve strategy. LIMITED MEETING 16 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: So the Clean Waters State Revolving Funds and the Bond Funds are adequate for covering the what is it the...the sixty-one million dollars ($61,000,000) or something for the landfill? I mean, I do not think we have ever been presented by the administration with a real plan for how we are going to finance the landfill and I mean to me it is the whole solid waste capita which includes the Materials Recovery Facility (MRF) and the other side too of what I mean unless our whole solid waste strategy is going to be the landfill, which I believe is not a good strategy. Mr. Shimonishi: Right, just looking at right now I think what we see in terms of the need to finance the lateral expansion that we have identified with the revolving funds, the ability to finance that again though that would impact our debt service obviously. I think the larger picture of the new landfill that is obviously is something that has to be worked into our five year plus projections and how do we actually come up to finance that whether it be partially bond or partially the state revolving fund so that in fact is the concern. Councilmember Yukimura: So what you are saying Ken is this revolving fund is going to the old landfill. Mr. Shimonishi: For the immediate lateral expansion, yes, we have gotten approval. I am not saying that that is not going to be available on the new landfill. We are saying that to identify what is now because that is actually a State loan program. Councilmember Yukimura: Yes, I mean, good that you have identified that because otherwise I do not know where that money is going to come from, but you are basically saying...so the sixty-one million dollars ($61,000,000) is for the new landfill, right? Somebody tell me... Council Chair Rapozo: Sixty-one and a half according to this. Councilmember Yukimura: So the sixty-one million dollars ($61,000,000), we do not have a financing plan yet? Mr. Shimonishi: Again, I think no we do not, but I think that is something obviously would have to work into financial projections. What is the debt service of sixty-one million dollars ($61,000,000) in five (5) years, six (6) years? What does it take to generate the recurring revenues to support that? I think that is the whole process of why we are doing this plan. Councilmember Yukimura: See we are putting capital into a dying technology when we should be putting it into the technology of the future that is going to take us out of this rut, not rut, it is a huge cavern or whatever that is. I mean you know. We should be accelerating the new technology so we can extend the life of the landfill by accelerating our diversion to it. Mr. Barreira: And Councilmember Yukimura, that is why we are allowing discussion about this in regards to financing future debt and I know LIMITED MEETING 17 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL those discussions will come up in budget so I think right now we are just trying to outline all these situations that are impacting upon the development of this plan. Councilmember Yukimura: Yes, but to me this is a key example of what Elizabeth is helping us to analyze. There is this huge upcoming financial storm sort of. It is not an Iniki, but it is a landfill storm and we do not know how we are going to meet it. Right? I mean because we have this huge future need and it is a replacement of sorts. It is a replacement if you take the mentality that we are...that solid waste is about the old technology. But that is the dynamic that if we are transforming our system to something else we are spending so much money on the old stuff, we do not have money for the new stuff, and we keep going down this dead end road. Council Chair Rapozo: I think as Elizabeth said early on that this a snapshot as of today and the Administration's plan is to finance sixty-one and a half million either through bonds or revolving funds and I think what Councilmember Yukimura brings up this information is going to be very important as we discuss the future options. When you talk about, "it is important that the County consider this obligation when discussing general fund reserves as debt associated with the landfill will affect the County's reserve strategies. So that I think is a discussion that we will have when we talk about the financing options of the landfill. Right now as of this moment this analysis that is the direction that has been explained to you Elizabeth. So I think it is important for us to consider that too when we move forward because I am not sure...I have to assume that it is going to impact our reserve strategy because it is going to increase debt service. Ms. Fu: Exactly. Council Chair Rapozo: And how much, that I do not know, but that is for the discussion as we discuss where we go from here. Ms. Fu: And this is a lower scale capital project. If any government is not issuing debt, good for them, but most governments do, because if we are talking about sixty-one million dollars ($61,000,000) unless you have this in your back pocket and you have been saving up for years and a few governments do because it is so expensive that they do have to supplement funds internally with going out to the bond market because of such...we are talking the landfill's useful life, Keith, I need your help here. Is that seventy-five (75) years, thirty-five (35)? The landfill's capital useful life? Councilmember Yukimura: The new one or the old one? Mr. Suga: It is depending upon the cell capacity, but roughly you can say each cell is seventy-five (75) years. Ms. Fu: Right, so seventy-five (75) years. We are financing seventy-five (75) years into the future. Think about how much money that we would need in order to create a new landfill so that future years can use it too. LIMITED MEETING 18 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Council Chair Rapozo: And there is also other costs associated with the landfill that is beyond the construction and design and planning that we have to take into account as well so anyway. Sobering, sobering. Councilmember Chock: Can I get clarification on the last slide. So you know we got an aging bridge and we know that it needs maintenance maybe it needs to be changed and then it fails and falls into the ocean or river and it becomes an emergency now. Is that grounds for using the reserve? We know for years it has gotten money that it needs too. It is on the CIP list but I am just trying to clarify where the line defines when we should be able to move on it. Ms. Fu: And that is in line as a condition of an asset that is really in dire condition. So let us kind of move through the next discussion and we can highlight some of the things that you just asked. So in terms of roads, this is based on the payment condition index that was conducted several years ago on how your roads are. So nothing is in the failed condition, nothing is in the serious condition, there are miles of roads that are in the very poor condition and majority is in the fair condition area. As I mentioned before, the General Fund Reserve is really meant for assets that are dire condition that are expected ultimately to fail and you would have a buffer in case that should happen. Because none of these roads, no miles of roads are reported in the latter two (2) categories, we are not making a recommendation for General Funds Reserves. This does bring across different recommendations and this goes back into the practices and the policies that the County adopts. We recommend developing an asset management plan that focus on the preservation of roads. The graph on the left is from the Federal Highway Administration (FHA), about preservation and where you are kind of getting more money out of preservation than not maintaining your roads and having to replace it. So, here we also recommend that the County look to establish a sinking fund in this highway fund and the sinking fund is essentially like a savings account. You know some of your roads will need more, in terms, of repair and maintenance in the coming years, so you set money aside so that in year five (5) when those treatments need to be applied you have funds readily available. Also we recommend that the County adopt a maintenance strategy to maintain a useful life of the road, so to maintain the roads to its thirty (30) years of useful life and the County has three hundred (300) miles of road. The County would want to maintain approximately ten (10) miles annually. This is all based on total replacement cost; right now we just used a proxy figure of deferred maintenance cost to recommend approximately four million, two hundred, thousand dollars ($4,200,000) annually just to maintain roads. Councilmember Yukimura: Four million, two hundred, thousand dollars ($4,200,000) annually based on...I mean the recommendation we got was 10 million... oh ok from public works to take away the backlog of repair. Ms. Fu: That is just the backlog; I am talking about annual maintenance. LIMITED MEETING 19 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: So that is once we get to back to parity so to speak or... than it would be four million two hundred thousand dollars ($4,200,000) and yes after thirteen (30) years their spreadsheet showed it dropping the ten (10) or the fifteen (15) or whatever it was. It was dropping to a six (6)-eight (8) or something in that ballpark. We are saddling our citizens with huge debt. The other Councilmembers need to be here. Ms. Fu: The next area of concern is bridges. So this is a report on the twenty-five 25 federally-aided bridges the County has. The condition assessment says none are in anywhere in the critical or immediate failure condition, but most are in the fair category. However, the county does have non-federally funded bridges or non-federally aided bridges and these are about a hundred of those. Unfortunately, condition assessments are not readily available for these bridges and the County is making effort to get better information. Unfortunately, without that idea of what is actually in a failure condition or a critical condition, we cannot recommend a reserve for bridges. Similar to with roads again we need to develop an asset maintenance strategy, establish a sinking fund, and adopt maintenance strategies to maintain bridges to their useful life. Council Chair Rapozo: So absent the sinking fund, I guess you would go back to the reserve. I mean you have to have one or the other right? Something has to pay for this stuff. Ms. Fu: Exactly. A sinking fund is more about what yo7ur knowns are... Council Chair Rapozo: It is like a savings account that is dedicated. Ms. Fu: Exactly. So the Department of Public Works knows that there is a major repair that needs to happen in two (2) years or three (3) years so you start setting money aside within the CIP fund that is funding the bridges and once that two (2) or three (3) year mark has come up, your budget process takes the money from the sinking fund to actually go and make the repairs needed. Council Chair Rapozo: And we have over one hundred (100) bridges that are non- federally funded...that many? Councilmember Kawakami: Correct. Councilmember Yukimura: So if you say four point two (4.2) for roads and four point six (4.6) for bridges that is a total of eight point eight (8.8). Ms. Fu: Yes, so that is just maintenance strategy, annual maintenance strategy. Councilmember Yukimura: Right, so arguably the user fee should cover that, right? Oh, but the sinking fund is another strategy? LIMITED MEETING 20 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Ms. Fu: So I want to make clear that the sinking fund is more about what known repairs need to happen, so larger known repairs that need to happen. Sinking fund would be geared towards that, but I am talking more about the annual maintenance strategy that will need to happen. So for roads, it would be more like the paving and the treatment...for bridges, I am not a public works expert on what actually needs to be done in the annual maintenance process for a bridge but... Councilmember Yukimura: So I think I need to get this distinction better. You are saying that the annual maintenance does not come from the sinking fund? Ms. Fu: Annual maintenance is a budgetary process, you would budget that amount. Councilmember Yukimura: That is the eight point eight (8.8) million you are talking about, right? Ms. Fu: Yes. Councilmember Yukimura: So, if we do not take it from the highway fund which is basically a user fund and correct me if I am wrong, than it would come from the general fund. So a really good financial strategy would be to make our highway fund cover the annual maintenance. Ms. Fu: For roads, yes. Councilmember Yukimura: Yes okay. And the sinking fund goes to what? Ms. Fu: The sinking funds are within your funds for where the asset is being funded through. Councilmember Yukimura: Within the highway fund. Ms. Fu: So within the highway fund, within your general fund cap CIP fund. Council Chair Rapozo: It is like a lay-a-way. Councilmember Yukimura: Right. Council Chair Rapozo: You put money away until you have enough than you can pick up the item that you bought. Ms. Fu: Correct. So if you know you need to do the culvert repair or replacement in year five (5), you are setting aside money so in five (5) years you have that money. Councilmember Yukimura: That is like our landfill closure fund. LIMITED MEETING 21 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Ms. Fu: Exactly. Councilmember Yukimura: Because when we built the landfill twenty- three (23) years ago or whatever, we were obligated and I do not know who made us do that but, god bless them. The feds right...so they require us to put aside every year monies that we will need at time of closure. So that is what we should do with every asset, you are saying? Ms. Fu: Major asset, yes. Councilmember Yukimura: Every major asset. Ms. Fu: Yes. Councilmember Yukimura: Okay, thank you. Ms. Fu: Moving on to the secondary risk factors, these were areas of risk that have a smaller implication to the County's General Fund Reserve. So let us talk about growth really quickly. You are a growing community which is great and based on the Kaua`i Transportation Data Book your resident population de facto population are expected to grow about one percent (1%) annually and point eight percent (.8%) annually through 2035. It is a very natural rate of growth so there is no general fund reserve recommended because as more residents come in, you should hopefully expect to see more revenues come in to kind of balance the need for services and also ability to pay for those services. Councilmember Yukimura: But development for new growth is an upfront cost that is the whole thing with the water reserve charge I believe. If the people who are developing and who need the development do not pay for that upfront cost than the current residents will be paying for it. Ms. Fu: Right, you are absolutely right in that instance a reserve would be recommended, but there is no indication that there is a large scale development that all of a sudden going to inject five hundred (500) new residents the County. Councilmember Yukimura: But that is in fact our general plan update so it is what is called impact fees and all of that we need to develop better. The Facilities Reserve Charge in the Water Department is an effort on the part of the Water Department, who is responsible for the development of the water system for new growth, to pay for that system in an accountable way, but there is all of this political pressure to lower that and that means that current residents will pay for that, rate payers. I am just pointing this out; I do not think this is something that this particular focus needs to address. I mean you are saying... I mean a general fund reserve is not recommended, but someone still needs to pay for the cost so maybe that is where the impact fee is that we have not addressed. We did the study, but it has been on the shelf for about eight (8) years. That is probably what we need to address too, rapidly growing communities that is what happens. LIMITED MEETING 22 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Ms. Fu: If you are expecting rapid development than yes in fact fee are a way to fund that lag between when upfront cost is needed and when residents start to contribute to the overall counties funds or revenues. That is one way for sure, but right now there is nothing that indicates all of a sudden there is a major development that is going to add a great number of residents to the county. Councilmember Yukimura: Okay, thank you. Mr. Barreira: In terms of time, we want to get through this analysis because there are two (2) policies that we want to attend to before the lunch break. Councilmember Yukimura: Okay, let us just stick to the subject. Ms. Fu: So in terms of legal exposure, the County budgets eight hundred thousand dollars ($800,000) annually for general liability and auto claims. You also have a self-insurance reserve about nine hundred twenty-seven thousand dollars ($927,000). Here we really do not recommend anything additional beyond what you currently practice because of your historical experiences and that some of which have ranged under the threshold. You only have had two (2) settlements in the history of the county that exceeded seven hundred fifty thousand dollars ($750,000) but still were under the one million dollar mark. As long as you maintain your current practices, we do not recommend anything additional. In terms of liquidity, in talking to the County finance and treasurer...oh I am sorry about the typo on the slide. There is nothing that indicates that the County has a difficulty in paying its bills, so there is no need for a working capital reserve. Councilmember Yukimura: Good job you folks. Ms. Fu: The other issue that we also need to address is the dependency of other funds. The general fund is transferring to other areas and these are also operating subsidies so there is a debt service fund that it makes transfers to and also the solid waste and the golf enterprise fund which are primarily fee driven and operative subsidies. While we do not recommend a general fund reserve and here is kind of the rationale for a debt payment, it is just part of the budgetary process, you need the money and you need to find it somehow. However, there is a strategy that the County could adopt with an asset management plan to ensure that appropriate monies are set aside for future needs so that the debt payments could be...there is a systematic approach to do that payment. In terms of the solid waste and golf enterprise funds, this is where the user fee comes in. These are fee driven enterprise funds and enterprise funds are essentially the business component unit of the business activities of the government so when you need to assess how these fees are we recommend that the County really adopt a user fee policy to determine what the actual cost are to provide these services and whether what the County is charging is appropriate with the cost of providing these services. Fees should be conducted annually, not annually, but periodically because the demands for services do change and also the cost of providing services do change. Yes... LIMITED MEETING 23 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: What determines whether something is an enterprise fund? Ms. Fu: If it is a user fee or fee driven. Councilmember Yukimura: If it is fee driven, the services fee driven? Ms. Fu: Yes, it is like a business process. Councilmember Yukimura: So we have sewers and water also, water is a separate budget, but do we not sometimes do general fund moneys to sewers? Mr. Shimonishi: That is correct. When there appears to be a deficit in the budgetary process that the general fund has transferred moneys to support sewer. Councilmember Yukimura: But we do not have such a regular subsidy for sewers as we have with solid waste and golf, is that it? Mr. Shimonishi: It has been sporadic, correct. Councilmember Yukimura: Yes so sewers have been more or less self- sufficient. Mr. Shimonishi: I think you need to look in totality when it is self-sufficient, meaning with all the capital needs going forward and with all of that. I think that would be questionable, but in general on the operating basis, it is not regular consistent transfer of money from general fund to sewer like obviously solid waste and golf currently and the debt service. Councilmember Yukimura: But we probably should include them on the list, in terms of the last recommendation, periodic updating of fees. I am concerned about asset management of the sewers because we have aging infrastructure and that was supposed to be—is that on our agenda? Scott is not here, but at some point—Scott are you there? When do we have sewer maintenance on the agenda? SCOTT K. SATO, Deputy County Clerk: Next week. Councilmember Yukimura: Okay. Thank you. We could experience a catastrophic asset failure in sewers. Our sewage treatment plants could dysfunction, we could have spillage—do we not still have outfall in the ocean in several places? I think we probably just should include sewers as an enterprise fund, or highlight it, or include it in the highlighting, or something. Mr. Shimonishi: Yes, correct. They are defined as such. Again, I think we are just looking at our reserve and the risks that GFOA has analyzed. I think they are all good points and sewers are an enterprise fund. Again, I think in looking at this, we are just trying to identify what are risks are right now and how do we... LIMITED MEETING 24 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: That is what I am saying, there might be some risks in sewers. Mr. Shimonishi: Yes. Mr. Barreira: Those comments will be documented by Christine because part of the interaction here today again, will impact our policy development. We will finalize the policy before formal submission to the Council. Councilmember Yukimura: Okay. Mr. Barreira: As we get into the policies and those areas arise, we will make appropriate indications. Councilmember Yukimura: Okay, thank you. Ms. Fu: I want to add that the user fee is not just for the enterprise fund. It is all fees within the County. Councilmember Yukimura: Okay, that is good. Ms. Fu: As I mentioned when we talked about our landfills, we also have to consider debt. This is what the County's Moody's credit is right now, Aa2. This is how it compares to other similar sized jurisdictions across the Country. I want to mindful that I am looking at Kaua`i County's 2015 figures, but the ones of the other jurisdictions are for 2013. That is just because that is the most recent data available. You can see how the County compares. You are doing a lot better than your peers in the AA category. You would want to kind of use these figures as a benchmark to hold. The top figure is your direct debt as a percentage of your full value, as your full value being your taxable properties, and then overall debt burden to your full value. Here is how you folks compare to other counties in Hawai`i in terms of overall debt per capita, you are at the low range. Some things for you to be mindful of as you need to look to debt as a financing option as well. Councilmember Yukimura: Yes, we are in the low range until we put in the landfill. Ms. Fu: There is also overall debt burden as a percentage of full value compared to other counties. Again, you are still on the relatively low end of the range. Then, the last one is the measure of debt service payments as a percentage of expenditures. Again, you folks still fare well. There are just some things to be mindful of as we are thinking about reserve strategies, your financial future, and where debt has a role. The other form of concern that we need to look at is ERS. The proposed contribution rate changes figures are unofficial. My understanding is that ERS is LIMITED MEETING 25 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL still kind of having discussions on what it will ultimately be. These figures, the rate increase from seventeen to twenty-five and a half percent (17-25.5%) for general employees and twenty-five to forty-one and a half percent (25-41.5%) for special categories, was given to us in December. There are still discussions being made and ultimately, the State Legislature has not adopted the final rate changes. They are still being discussed, but there could be a need for the County right now to reserve for a small buffer until it can adjust its budgetary process. I was discussing in the beginning where we need to look at the conditions of the County periodically in order to determine our reserve level, this would be an area of such. This would be a one- time use of a reserve because we are looking at this expected changes and using the reserves as a buffer in case revenues are short or just as a one-time fix until the County can amend its processes. The proposed rate changes would have an impact of about eight million four hundred thousand dollars ($8,400,000) in contributions. Typically speaking, most pension funds do not adopt a drastic increase, but they phase it in, so they do a gradual approach. For example, (inaudible) recently did something similar. They are doing a phase three (3) year approach. No one is really inclined to shock all local governments and all entities in dramatically increasing the contribution rate in that one (1) year. That is why we look at what other pension plans have done, and typically at the higher end, they do about twenty to twenty-five percent (20-25%) increase in annual contributions as an upper range. Because we do not really have a good sample set, we applied a higher multiplier and said that the highest rate change could be about forty to forty-five percent (40-45%) annually. That gives us a reserve of about five million nine hundred thousand dollars ($5,900,000) to seven million four hundred thousand dollars ($7,400,000). Councilmember Yukimura: Is this for current employees? Mr. Barreira: Current, yes. Councilmember Yukimura: So it does not do anything to address the backlog? We do not have any backlog, but the pension fund does in the State. Council Chair Rapozo: Unfunded liability. Councilmember Yukimura: Yes. Mr. Shimonishi: This is too in fact, catch up on the funding of the pension plan so that it is within a less than thirty (30) year timeframe. I think based on the more recent actuary data that they have, it is going out to sixty-six (66) years in order to actually fund the plan. Councilmember Yukimura: So it is affecting the unfunded liability? Mr. Shimonishi: Yes. It is to catch up as well as to pay for the current employees going forward. LIMITED MEETING 26 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: Okay, that is what the Governor talked about in his state of the state. Thank you. Ms. Fu: Then in terms of Other Post-Employment Benefits (OPEB), per the State, the counties are required to meet their full annual required contributions starting in Fiscal Year 2019. If it does not do so, then it is going to come out of your share of TAT. Council Chair Rapozo: Hooray. I mean, then screw them. Let them take it out of the TAT. Councilmember Yukimura: No, but we are doing things well, right? They do not have to. Ms. Fu: Because this recourse is in place, you do not need a general fund reserve; however, it does place a greater emphasis if you folks experience a revenue volatility related to economic downturn, a natural disaster, or anything of the sort. Councilmember Yukimura: I remember two (2) budgets ago where we did not pay the full amount, but we corrected it pretty quickly. Ms. Fu: Let us kind of summarize everything arriving at a reserve level. Again, here are the figures that we are currently recommending that the County adopt in terms of General Fund reserve levels. I walked through each one of these with all. Let us kind of talk about how twenty-seven percent (27%) and forty-one percent (41%) compares. Looking at other Hawaii counties, you can see where you folks are. When we are talking about unrestricted, we are talking about unrestricted fund balance in terms of that there are no constraints placed on it. So, there is no bond covenant here and there are no moneys that are committed to special projects, et cetera. These are moneys that you could actually utilize as necessary. The available for risk mitigation captures categories in which it is the unassigned fund balance, and also specific dedications that a government may have imposed. For example, you have assigned nine hundred twenty-seven thousand dollars ($927,000) to self-insurance. So that would be a category that is captured here. Then, the final column is dedicated to risk mitigation is the amount in which you have set aside specifically for these areas of self-insurance, budget stabilization, emergency needs, natural disasters, et cetera. This is how you all compare to other Hawaii counties. I will say that Maui County, even though it has ten percent (10%) right now for risk mitigation, its policy strives for twenty percent (20%). So, those are just things to keep in mind, that there is merit in having set aside funds. In all Hawaii counties, they have specific dedicated funds for risk mitigation in terms of natural disaster areas and economic downturn areas. Things to keep in mind as the County is having discussions on what it wants to reserve or the final target amount, we have to be mindful that there are some risk interdependencies. It is interdependent in the sense that if one occurs, the other will likely occur as well. If there is another economic downturn, then you would probably expect that your pensions payment in ERS will go up too because investment returns LIMITED MEETING 27 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL are not there, and you will see a lower discount rate as we are kind of experiencing now. It is the same thing with natural disasters and revenue volatility. If you have a natural disaster, then all of a sudden, you may see less permanent revenue coming in or other user fee categories coming in. The only real area we kind of see as independent is legal exposure. You cannot really say when someone is going to sue the County and the County has to settle. So that is a risk on itself. When risks are interdependent, we want to reserve for both just to make sure that we capture if one happens, the other happens, and we have funds to address both. The other thing to consider is the risk of the probability of it occurring. If it likely to occur such as an economic recession, it is wise to hold the full amount. With low probability occurring, then you could hold a lesser amount. A good example of that is a very severe natural disaster as we discussed, in that there are other strategies that the County could adopt aside from reserves for those types of risks. The last thing we want to consider is the County's ability to reduce its budget in the event of a downturn. Could reductions be made in expenditures, are there funds from vacancies that could be used, is there a contingency that the County has built up? This is what the current County Reserve Fund Resolution states, twenty to twenty-five percent (20-25%) of actual operating expenditures, plus encumbrances, plus General Fund transfers to other funds. Per the Resolution, this means about twenty-six million eight hundred thousand dollars ($26,800,000) to thirty-three million five hundred thousand dollars ($33,500,000) as of Fiscal Year 2015. In Fiscal Year 2015, you are meeting that reserve resolution. You are at thirty-two million six hundred thousand dollars ($32,600,000), so it is a matter of what is our recommendation compared to this resolution statement. Where we kind of want the County to move forward in making adjustments to its reserve resolution is to adjust the reserve basis to exclude encumbrances and transfers. This is because these are not moneys that are actually available and encumbrances can change dramatically over the year, so it may not be reflective of your current position. We also suggest that the County review its reserve categories and adjust if needed. Right now, a large portion of your reserve policy is captured in the kind of "catch-all" unassigned category. That is not very helpful in terms of knowing when you can use the funds, when you should use the funds, and what the funds are actually dedicated for. So, we recommend assigning categories such as natural disaster, economic downturn, et cetera, in order to make it clear to all parties that these funds are utilized for this purpose. It is the same thing with assigning risk mitigation categories within the fund balance, which is what I just talked about. Finally, state how the County will replenish the reserve, if drawn. If you ever utilize your funds, you need to put it back in just so that if you face that risk again, you have funds available. We are mindful that it does take time to replenish. You cannot replenish automatically the following fiscal year. What is the plan to address it in the next couple of years or the next three (3) years, depending on how much this County draws. With that said, that is the conclusion of my presentation. I am happy to answer any questions about the analysis or the reserve recommendations. LIMITED MEETING 28 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Council Chair Rapozo: I guess the question is, and I am sure you saw the draft that has been presented today, how close are we to the recommendations that you have stated? Ms. Fu: I think it was thirty percent (30%), right? Mr. Shimonishi: Yes. Ms. Fu: Thirty percent (30%) is definitely within the twenty-seven to forty-one percent (27-41%) range. Council Chair Rapozo: That is probably a good start because to go to forty-one percent (41%) would be... Mr. Barreira: Council Chair Rapozo, in the presentation that we did yesterday of the analysis, I think we outlined that we were just short as of where we stand today, post-CAFR if we are looking at the thirty percent (30%) figure. Council Chair Rapozo: But I was looking at the other categories. Have you had a chance to review the categories; disaster response, self-insurance, and revenue volatility? Mr. Barreira: All of that was factored in, in coming up with that assessment, and that is the Committee's work. Of course we will get it over to you today. Council Chair Rapozo: I am just trying to figure out such as assigned risk mitigation categories, is that something that we are going to do? Ms. Fu: You have definite say in it, but the finance team and the project team has provided a starting base. Councilmember Yukimura: How does...go ahead. Mr. Shimonishi: I actually have a worksheet, if you want to go over it now or do you want to take a ten (10) minute break. Council Chair Rapozo: We can take a break. Mr. Shimonishi: We will lay out the categories and what we are recommending, each of the category percentages, why we are not recommending this category, or why we went higher on this category to show how we came up with the thirty percent (30%), what does that actually make up in terms of a dollar amount, and where we are with our most recent fund balance according to the CAFR. We can walk through that and then walk through the policy, the triggers, and how we replenish or use, et cetera. LIMITED MEETING 29 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Council Chair Rapozo: Yes. I just want Elizabeth to chime is to see if is in line with what GFOA is recommending. That is all. If there is a conflict, I would like to hear some justification as to why we are not following the recommendation. That is all. Mr. Barreira: In the general reserve fund policy, in fact, Ken can do it now, but in that discussion, one of the components of that agenda item was to go over that analysis. Council Chair Rapozo: Okay. Mr. Barreira: And we can do it after the break. Council Chair Rapozo, I was going to say we can take a caption break if you folks want. Council Chair Rapozo: Okay. Mr. Barreira: Okay,ten (10) minute break. Thank you. Mr. Shimonishi: I will go over how we calculated our recommended percentage and which areas we addressed. You heard Elizabeth speak a bit earlier about all of the different categories regarding revenue volatility, extreme events, expenditure volatility, and the pension liabilities. Here, you can see what GFOA's low range recommendation is, which is at twenty-seven percent (27%), versus the high range of forty-one percent (41%), and where we are recommending a range of thirty percent (30%). The first thing that we wanted to make sure we covered was the impairment of the County's Real Property Tax base, relating to any kind of disaster or what have you. We went with fully reserving the high range for that amount at sixteen and a half percent (16.5%) or revenues. So, these are all based on revenues. We also identified the need to reserve our other revenue sources. Again, it is just slightly less at two percent (2%), but what we did not calculate into our reserve was the need for an economic downturn. The rationale for that was if we are already reserving for the impairment, do we really need to reserve for the economic downturn as well? In that respect, the team felt that we could cover the impairment and if there was a downturn, we could also use that to cover that scenario as well. Next is extreme events. You heard Elizabeth talk about the sliding scale and the confidence level of being able to cover the immediate direct expenses of a natural disaster. GFOA's low range is at two point eight percent (2.8%) with the high range of eighty-five percent (85%) probability to cover that at seven point three percent (7.3%). We actually went up on that to ten percent (10%). This brings us into the ninety-five percentile (95%) confidence that we would be able to cover the direct events of a natural disaster. So we are higher in that regard. The next area that we covered was our self-insurance and lawsuits. Again here, we decided to go higher on our self-insurance coverage in terms of our reserve. What we did not include is the ERS liabilities. Our thought process on that being the fact that it is likely to be phased in, I do not think the State or any other County could absorb that immediate increase. We have seen a bill put forth that phases in the increase in the ERS contributions, so in that respect, we would be committed to LIMITED MEETING 30 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL covering that through the normal budgetary process as we have covered our OPEB requirements. So we would recover our ERS commitments as well. That is how we came up with the thirty percent (30%). If you look to the columns on the right that says, "2016," based on. the Comprehensive Annual Financial Report, forty-three million three hundred nineteen dollars ($43,319,000). So applying what the low GFOA would be, what the high range would be, between thirty-seven thousand dollars ($37,000,000) and fifty-seven million.dollars ($57,000,000), the far column on the right is what we have modified the reserve at thirty percent (30%) to be. It is roughly forty-two million dollars ($42,000,000) or a little over forty-two million dollars ($42,000,000). Our current Fund Balance as of the last CAFR—sorry, I do not have the descriptions there, but it is basically saying that in our disaster related area, we have three million nine hundred thousand dollars ($3,900,000), we have one million five hundred thousand dollars ($1,500,000) in our self-insurance, and thirty-six million five hundred thousand dollars ($36,500,000) in our Unassigned Fund Balance, which is a combined total of just shy of forty-two million dollars ($42,000,000). The difference between the forty-two million dollars ($42,000,000) we currently have and the projected reserve we proposed in the policy, is short about one hundred thousand dollars ($100,000). Keep in mind that in this year's budget, we also came forth with a few money bills for the Fire Department for the Self-Contained Breathing Apparatuses (SCBAs) and Automated External Defibrillators (AEDs), and we did a little bit of Office of Economic Development (OED) grants. So that makes that shortage a little more, maybe closer to one million dollars ($1,000,000). Right now, that is what we are looking at in terms of where we are today. So we are very close to what we are proposing and I think it is quite a bit more than what is currently on as far as the resolutions that are on the books. Again, are any comments or questions about how we arrived at this or any of the percentages, et cetera? Council Chair Rapozo: The first question is, are we really comfortable with not having any reserves? I heard what you are saying, you think we can cover it in our General Fund budget. But for the pension, GFOA is recommending a pretty significant amount. I am kind of concerned about the last two (2) because as I read the risk analysis, why would we increase the legal reserve fund that much? It is significant, in fact, it is more than twice of what the recommendation is. As I read the analysis, and she went pretty far back with our history of claims and settlements, I guess I just question why would we go—are we anticipating something big coming up? Mr. Shimonishi: I do not think we are anticipating something big. I think one of the...and I could have explained this a little better, but one of the benefits to increasing the self-insurance in this reserve technically could be reducing the amount we budget in the Operating Budget on that line item. It was a combination of nine hundred thousand dollars ($900,000) plus eight hundred thousand dollars ($800,000) in the Operating Budget. This would give us the potential to cut down on that amount as well, and we are being a bit more conservative in increasing the self-insurance fund. LIMITED MEETING 31 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Council Chair Rapozo: Are you folks suggesting that we are going to lower the General Fund allocation from eight hundred thousand dollars ($800,000)? Mr. Shimonishi: That would be my suggestion in terms of the General Fund Operating Budget, that we would carve some of that down. Council Chair Rapozo: Only to put them in the reserve? Mr. Shimonishi: Yes. Council Chair Rapozo: I think the reserve is for unanticipated. I think the eight hundred thousand dollars ($800,000) is a safe number. It is like the shell game, you are just taking it from here and putting them here to make us get a higher reserve, but in actuality, I think there is more certainty that we are going to run into problems with ERS than claims. I do not know. Maybe I am just seeing it wrong. I am just trying to figure it out. Mr. Rezentes: I think the rationale on the ERS and Employer-Union Health Benefits Trust Fund (EUTF) for that matter, is historically, the County has taken the policy—not only the Administration, but the Council over the years has followed the policy that we are going to be fully funding that requirement whatever the requirement is on an annual basis. If we intend to divert from that annual policy, if you will, of fully funding the retirement and EUTF, then I can see more of the rationale as to why you would want to have it there. But I think from the Administration's perspective and I believe the Council's perspective by how the County Council has approved the budgets, we are intending to continue to fully fund that requirement on an annual basis. Council Chair Rapozo: But we are relying on, or not relying, we are basically mandated by what the Legislature decides to do with that fund, with our obligation, right? We have to wait to see what they do this session. I think that is where I am concerned, that if we budget one hundred percent (100%) of what we think we are going to owe and then the formula changes or the liability changes and we end up with more, where would we get that money from? Maybe I am reading it wrong, Elizabeth. I do not know. I am just reading her analysis, and it is saying, "subject to legislative action, that number could change," and that is why we would want something in the reserve in a case that would occur. Councilmember Yukimura: She needs a seat. Council Chair Rapozo: We just do not know what is going to happen, and this is not a reserve policy for this fiscal year or next fiscal year. This is one that we revisit every year, but it is a long-term reserve policy. Ms. Fu: This like, I mentioned earlier and for ERS, is really a one-time reserve based on your current condition with the expectation that ERS' contribution rate is going to change. Council Chair Rapozo: It will go up? LIMITED MEETING 32 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Ms. Fu: Exactly. Council Chair Rapozo: Assuming that it will go up? Ms. Fu: Given all of the information we have as of today, we do not know what the State Legislators will openly decide on. The Reserve is really a cushion for the County for this one-time increase that we know we are expecting. This is a practice that we may not need to continue because in year 2, you already know what the adjustments will be. You will have your budgetary processes in place. What I am recommending and what GFOA is recommending is really should the County need this buffer and wants this buffer, then that is the number that we would recommend. Overall in terms of the General Fund Reserve policy and the reserve target especially, it is really the County's decision on its risk appetite. If you want to be safe, reserve these amounts. Council Chair Rapozo: Yes. Ms. Fu: If you think the moneys could be better used for services for your residents, then do not reserve this amount. Again, this is a discussion and this is why we are here. Council Chair Rapozo: Okay. Mr. Hunt: Just to add to that too, in our discussion amongst the long-term financial planning team, we are given adequate notification, the actuarial report does come out. We are given it. It is not like we are giving a retroactive bill saying, "You need to pay this from an ongoing fiscal." It is normally a projected fiscal. So because the ERS change is going to be a recurring expense, typically the reserves are for non-recurring expenses, the one-time hits. Again, we think that we are given adequate notification. In fact, we know what those numbers are. What we do not know is whether we should be phasing in a smaller portion or budget the full amount. If we are looking at the first year, if we do not get adequate notification from the Legislature in terms of where they are headed with this, then maybe the reserve is an okay thing to do for the first year. But if we know what the full amount is and we are prepared to budget that, then there is no need for the reserve in this category. Council Chair Rapozo: And I guess that is my question. Are we prepared to budget for that number, whatever it may be? Do we even know that number right now? Mr. Shimonishi: Well, we know the estimates that were provided. Again, we know that there is a bill proposing to phase in those amounts... Council Chair Rapozo: Right. Mr. Shimonishi: ...in increments. I have not seen anything that says it would be all at once starting July 1st of 2017. LIMITED MEETING 33 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Council Chair Rapozo: Okay. Thank you. Councilmember Yukimura: In the categories that you have delineated, are there transfers between—we are not saying that we shall, how are we enforcing the category? Is it a hard and fast rule that we spend only on this category or subcategory that it is designated for or can we draw form it for another category? Mr. Shimonishi: This is just trying to determine... Councilmember Yukimura: The total figure? Mr. Shimonishi: ...the total reserve. Yes, we identified categories, but obviously if we had some kind of natural disaster that required us to use forty million dollars ($40,000,000) or whatever then... Councilmember Yukimura: Okay. Mr. Shimonishi: ...we would access that money. Councilmember Yukimura: Okay. Mr. Shimonishi: And obviously everything has to be done. Councilmember Yukimura: Is the purpose of the categories mainly for coming to this overall figure? Ms. Fu: The categories should be used to help determine the reserve, but also to state specifically why we are using reserves. So, you were using reserves for these categories identified so that it holds the County accountable in not using reserves for one-time budgetary lapses (inaudible), such as you are just trying to use it to balance the budget or you are using it for ongoing expenses when in reality, you are not in an economic recession or you are not faced with a hurricane or a natural disaster. Councilmember Yukimura: Yes. We want it there for the actual purpose of the reserve and the reserve is actually a budgetary discipline, right, that basically keeps us from spending it for other things. So it is something like a household saving for college, you put that aside as soon as you get your paycheck and then you budget for the rest of your monthly needs from that balance, right? Is that what we are basically doing? Okay. Council Chair Rapozo: But as I read the use of reserves, Elizabeth, it says, "Reserves shall not normally be applied to recurring annual operating expenditures. The reserves may however, be used to allow time for the County to restructure its operations in a deliberate manner, but such use will only take place in the context of an adopted long-term plan to reach a sustainable structure." I actually do not even know what that is saying. The next sentence is where I question, "Further, the categories shall not limit the County from moving available funds from LIMITED MEETING 34 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL one category to another in the event of unforeseen conditions." I do not understand where the discipline or the accountability is at. Ms. Fu: In terms of the former, if you are drawing on funds or whenever you draw on funds and it is approved by everyone, there is a mechanism or a plan adopted to how you are going to replenish the reserves. That is what the first statement is saying. The second statement is saying, like Ken gave an example, if the County experiences a natural disaster that costs forty-four million dollars ($44,000,000), then you can draw from the entire General Fund Reserve. You are not restricted to the categorization of the eighteen and a half percent (18.5%) if you need all available funds to address a natural disaster. Council Chair Rapozo: Okay. Mr. Barreira: Are there any further questions on the analysis? If not, we can go through the... Council Chair Rapozo: Move to approve. Councilmember Brun: No. Mr. Barreira: For Councilmember Brun and Councilmember Kawakami, whatever commentary, concerns, or comments that are made, our Budget Analyst, Christine, will document it. We will take it back to the Committee as we meet again to find the answers. Councilmember Kawakami: Thank you. Council Chair Rapozo: This is actually being recorded as well. Mr. Barreira: Yes. Council Chair Rapozo: And videotaped. Mr. Barreira: If there are no other questions and of course (inaudible) can come back, but Ken will (inaudible). Mr. Shimonishi: That was the analysis on how we categorized it and the percentages that we came up with. I know Council Chair Rapozo read through some of the policy already, so I am wondering if there is a need to go through the policy further or are we done. Council Chair Rapozo: I was just going through the policy looking at the numbers. Mr. Shimonishi: Okay. Council Chair Rapozo: You can go ahead and... LIMITED MEETING 35 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: Done with what? Mr. Shimonishi: On the policy, page 1 of 3, we talk about the introduction, we just went over the amounts held in reserve and the percentages that we came up with. I wanted to point out the bullet points below that in terms of revenue volatility, the use of that is tied to the real property taxes and other tax revenues. There is a trigger that it has to be more than three percent (3%) of a decline in order for us to access that reserve. Again, it just tries to keep us from dipping into that just because the revenues dipped a little or so on. Three percent (3%) may not sound like much, but if you take three percent (3%) of one hundred twenty thousand dollars ($120,000), it adds up to a pretty sizable number, you compound that with potential expenditure increases that we cannot control, and that is why we kept that at a relatively low percentage amount. The next bullet point just talks about natural disasters and the abilities related to that. I mentioned expenditure volatility on damage claims, liabilities, settlements, and so on, which we have seen. The next paragraph talks about if we are not meeting the reserve that we need to come up or the Director of Finance needs to come up with the five (5) year time horizon to how we get back to that. Section III establishes the priority in terms of if we are below in our reserve amount, what we want to fund first in the reserve. We have the disaster response as being the first thing that we want to fund, followed by the self-insurance provision, revenue volatility, and then any unfunded mandates or legal claims with the self-insurance component. We talked about the use of reserves. Section B in that paragraph, authority. The Mayor may initiate by a majority vote of the Council, so that would be an ordinance. Section C talks about the replenishment. At the end of each year, we would do this analysis of the reserves again to show where we are. Finally, if there is any excess over and above what we stated what the reserves are for, that items A, B, C, and D would be the priority of how to use the excess in reserve. First would be towards and capital improvement programs, second would be for any road/bridge repairs or reconstruction, third to offset any long-term debt or debt service payments, and then D would be the final. Mr. Barreira: Are there any concerns on the subject of the policy that the Council would like to take back to the Committee, on the thirty percent (30%)? Mr. Shimonishi: I guess general overall, thirty percent (30%) there may be too high or too low, or should we strive for better? Council Chair Rapozo: Based on our fiscal position right now and the numbers you showed us yesterday, I think thirty percent (30%) is probably a realistic number. Obviously, I would like to get to forty-one percent (41%), but I think for right now, and we can always build on that hopefully. I would ask that the legal—that one I would suggest if you would bring that up. LIMITED MEETING 36 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Mr. Shimonishi: Okay. Council Chair Rapozo: Again, if we are only going to take the money out of the General Fund to put it in the reserve, I guess I do not see the value of that. If we are just doing that to hit the thirty percent (30%) mark, then again, is that practical? Mr. Shimonishi: I think that would also help reduce the operating budget once we have that in there, but point well-taken. Council Chair Rapozo: It is like if I put money in a savings, but I only have to take it out, I may as well leave in my checking account so that I do not need to put that extra effort to go take the money out if I know I am going to use it. That is why I think it is really hard with that category because you never know. We could get hit next month with a ten million dollar ($10,000,000) lawsuit or we could go several months without any claim. So that is a difficult one. Mr. Shimonishi: Okay. Councilmember Chock: Is it the Committee's recommendation that we stay here at thirty percent (30%) for the next few years or is there a more long-term plan to increase it over time, and if so, when? Mr. Shimonishi: Again, I think we need to look at the risk analysis, does the risk analysis change dramatically and do the percentages move, to try to determine that. When we say that we are going to hold forty-two million dollars ($42,000,000) of the County's money, that is something else we need to consider. How does that play with the public? Could or should we be using that for something else? It is just a judgement call. Councilmember Kaneshiro: It is what we are comfortable with. This provides a target. If anybody asked us prior how much money should the County have in reserve prior to this, I do not think we would even have an answer. As far as where we should be, it would be great to get to forty percent (40%), but again, we know we have roads, were know we have all of these others things that needs money now, so what do we do? Do we try to reach the forty percent (40%) or do we spend it now and maybe save us costs in the long-run? Those are the considerations that we have to make. It is definitely a good start to have a target. Council Chair Rapozo: I know. I was not suggesting forty percent (40%). I think if would have asked me before today, I would have said twenty percent (20%) would be a good number. But in reading the risk analysis and understanding how this thing works, I think that is probably a good target. Whether we reach it or not this budget, we do not know, but we will see. Councilmember Kaneshiro: Of course we want to have a good and healthy reserve, but we all know we have pending liabilities and we do have needs right this second for roads and things like that. So the consideration is do we keep a reserve we are happy with and then use any additional moneys on things that are pressing? LIMITED MEETING 37 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL If all of our roads were perfect, then we would probably shoot for forty-two percent (42%) or a higher percentage in reserves, but we know that we have things that are pending now that needs money. Mr. Barreira: Something that came up yesterday that Council Chair Rapozo brought up is that the public does not understand the budget. The biggest challenge for all of these policies is not necessarily the dialogue we are having now, it is to have our people that we serve to understand why we need this and what the dynamics that come into play are. This formal submission and the associated hearings that will be held here at the Council is going to be very critical. Mr. Shimonishi: I just want to...sorry. Councilmember Yukimura: I think what you say is correct, Ernie, things pivot on the understanding of the public. But what we say around this table either helps the public understanding or detracts from it. When we have people saying, and you can look at the federal level, right? There are people saying, "Oh, you can do this," and you really cannot, but public officials are saying you can. "You can spend it here and you can do this and still have a balanced budget," then the public gets confused. It really helps when we are speaking with a united and informed voice around this table. I think it is very helpful to have this so we can support public understanding. I think the documentation or the thought process that went into developing this policy is very valuable. This thing is being videotaped so it will be archived and available to the public if they want to go back and see what was said today and understand the presentation, right? Is that correct? Is Scott there yet? Mr. Barreira: I suspect that when we take this formally to you, it is going to... Councilmember Yukimura: We are going to have a similar discussion? Mr. Barreira: Yes. Councilmember Yukimura: Yes. Councilmember Kaneshiro: This will eventually end up as a Council agenda item eventually, but people will be able to see it. Council Chair Rapozo: The video is going to be available if anybody wants to get it. It is a limited meeting, but that is why we have to videotape it. If somebody wants it—I do not know what the quality is because we are only using one (1) camera and my microphone is not on. But if anybody wants it, they definitely can get it. Councilmember Yukimura: I think these papers needs to be available to the public too, for those who really want to dig in and understand because the more people understand, the better. A few months ago, the headlines were, "Oh, the State has a one billion dollar ($1,000,000,000) surplus," right? Everybody goes, "What? "they are not doing this," "they are not doing that," and "we should go and ask them LIMITED MEETING 38 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL for money." That just creates such a misunderstanding. Look at the actual condition of the State. Anyway, I really appreciate this work, Elizabeth. Thank you very much. To Ken and the team, thank you for initiating this whole process because we first have to understand and absorb it, but then we have to help make it available so the public understands too. Mr. Shimonishi: Right. Not to make things more confusing, but Elizabeth mentioned a relatively new insurance product, parametric insurance. We have reached out to an insurance broker and he has given us a tentative look at something that could be offered to Kauai. I have a meeting with him scheduled for February 3rd. Just to give you a basic understanding of that, again, to have the insurance policy where we would get a payout if a Category 3 or higher hurricane was to come within a fifty (50) mile radius of Kaua`i, regardless if it hits the island or not. That is my understanding of the policy. Right now, the numbers for a five million dollar ($5,000,000) policy would be roughly two hundred twenty-five thousand dollars ($225,000) in premiums per year. It is money, so that is something that we need to obviously look at. Council Chair Rapozo: How much non-reimbursable—because this only covers non-reimbursable, right? Mr. Shimonishi: No, we would get paid out regardless. Council Chair Rapozo: What do you mean by regardless? Mr. Shimonishi: As long as a hurricane met the Category 3 or higher intensity, which is one hundred eleven miles per hour (111 MPH) or more, and came within this radius around Kaua`i, we would receive a payout of that money. I hate to say... Council Chair Rapozo: So it is not like the insurance that Elizabeth talked about? Mr. Shimonishi: No, that is the insurance. Council Chair Rapozo: Okay. Elizabeth, I thought you said it was for non-reimbursable—in other words, after the Federal Emergency Management Agency (FEMA) reimbursed the County for whatever damages... Ms. Fu: That was the reserve level, which was the graph that I was showing. The parametric insurance is if the County were to experience a more severe storm, you would probably want a different mechanism like debt or a parametric insurance to cover the cost related to that. One (1) of the advantages of the parametric insurance is that your payout is immediate and you can spend it as-needed. You do not need to wait for FEMA to say whether you can spend it on this category or not this category. You have the money, you can spend it to meet whatever needs that need addressed. LIMITED MEETING 39 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Council Chair Rapozo: At two hundred twenty-five thousand dollars ($225,000) a year? Mr. Shimonishi: Correct. I think if you divided that into the payout, it would be twenty-three (23) years of coverage for the premium. Councilmember Yukimura: Wow. Mr. Shimonishi: Right. Again, it is something that we are looking at, just to let you folks know. Mr. Barreira: Of course for Category 3 storm, if they it comes within fifty (50) miles of the island, it is going to beat us up pretty good, but we would have the insurance. Councilmember Yukimura: And we have had a storm. Councilmember Kaneshiro: Again, there are risks to it, but you are looking at five million dollars ($5,000,000). Is a storm going to hit us within the next twenty-two (22) years and is it worth it to be paying money now to get the money later? Council Chair Rapozo: But you have to have five million dollars ($5,000,000) in damage. Mr. Shimonishi: No, it is just a payout. Council Chair Rapozo: Are you telling me that if a Category 3 hurricane passes Kauai and there is no damage, we are going to get five million dollars ($5,000,000)? Mr. Shimonishi: Correct. Council Chair Rapozo: That is gambling. Mr. Shimonishi: Yes. I actually have an E-mail. We can look at it. Council Chair Rapozo: I would love to see that. That is gambling. You are putting your money on the double zeros on the Roulette wheel and we hope you hit the double zeros at two hundred twenty-five dollars ($225,000) a spin. Councilmember Yukimura: But what are the chances in twenty-three (23) years... Mr. Shimonishi: And that is right. Councilmember Yukimura: ...in a global warming world? LIMITED MEETING 40 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Ms. Fu: Let me add that it is based on a designation. So FEMA would have to say, "It is a Category 3 hurricane," and that would trigger it. Councilmember Yukimura: Of course. Ms. Fu: You are not automatically getting a windfall. There is a trigger and that is the FEMA designation or the National Hurricane Center's designation that it was a Category 3 storm and the wind speeds were this. Council Chair Rapozo: Right, and it passed within fifty (50) miles of Kaua`i... Ms. Fu: Correct. Council Chair Rapozo: ...there was no damage; and we would get five million dollars ($5,000,000)? Ms. Fu: Correct. Councilmember Yukimura: And the premium is two hundred fifty thousand dollars ($250,000) plus... Council Chair Rapozo: We have to read the fine print on that one. Mr. Shimonishi: The premium looks to be about two hundred twenty-five thousand dollars ($225,000) a year... Councilmember Yukimura: A year? Mr. Shimonishi: ...for a three (3) year period. Councilmember Yukimura: Oh. Mr. Shimonishi: Just to refine it, a Category 3 hurricane would payout fifty percent (50%) of the policy value, so it would pay two million five hundred thousand dollars ($2,500,000). If it was a Category 4 hurricane or higher, it would pay one hundred percent (100%). Council Chair Rapozo: Okay, so now it is changing, Ken. Mr. Shimonishi: No. Still, with a Category 3 hurricane, it is two million five hundred thousand dollars ($2,500,000) it is about eleven (11) plus years of premium in that. If it there was a Category 4 or higher hurricane, it is five million dollars ($5,000,000). Council Chair Rapozo: Right, and how long has it been since we had a Category 3 hurricane? Mr. Shimonishi: Well... LIMITED MEETING 41 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Mr. Barreira: 1992. Council Chair Rapozo: What? Mr. Barreira: 1992. Council Chair Rapozo: Okay, can you count the years? Councilmember Yukimura: Twenty-five (25) years. Council Chair Rapozo: Do you think that is a good investment? Mr. Shimonishi: Well no, and this is where we have to... Council Chair Rapozo: I understand. I appreciate you looking into it. Mr. Shimonishi: ...what our thoughts are in the next ten (10) or five (5) years? Council Chair Rapozo: Yes. Councilmember Yukimura: I am sorry, Ken, do you pay this premium for three (3) years or continuously for twenty (20) years? Mr. Shimonishi: You could do it for one (1) year or a term of three (3) years. Obviously there is a discount if you do three (3) years. Council Chair Rapozo: Is that the annual premium? Mr. Shimonishi: Yes. Council Chair Rapozo: You might get a discount if you buy three (3) years at once, but it is not like where some life insurance policies where you pay and then you do not need to pay, and then you get the coverage. Mr. Shimonishi: No. Council Chair Rapozo: You pay two hundred twenty-five thousand dollars ($225,000) a year if you want this coverage, right? Mr. Shimonishi: Right. Council Chair Rapozo: Wow. Mr. Shimonishi: It is just something to consider that could help. LIMITED MEETING 42 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Council Chair Rapozo: What company is it? I want to work for that company and sell that kind of policy. Do you know what the commission must be like for a two hundred twenty-five thousand dollars ($225,000), seriously? It sounds really good, but when you do the numbers, seriously. Mr. Rezentes: It is good and bad. Council Chair Rapozo: Holy moly. Councilmember Yukimura: That is why they are looking at it carefully. Mr. Shimonishi: Gambling. Anyway, I just wanted to bring that up. Council Chair Rapozo: Okay. Mr. Shimonishi: We are meeting with the broker and that would be one (1) way to augment the reserves as opposed to holding hard dollars. Mr. Rezentes: Ken, you mentioned that in three (3) years there is no occurrence, there is something in the policy that brings back money or something. What did you say? Mr. Shimonishi: No. From what I read, and I do not want to get into details, but if we were to experience an event say in the second year, they would require the premiums be paid for the third year upfront. Council Chair Rapozo: So we could not cancel? Mr. Shimonishi: I guess. Council Chair Rapozo: Oh my gosh. What company is this? Mr. Shimonishi: I have to go look at my E-mail. Council Chair Rapozo: I am just curious. I want to read up on this thing. I am really honestly amazed because there has to be a catch. Mr. Barreira: In terms of the Council's general commentary about parametric insurance with regard to what we should do back in Committee, is there commentary? It sounds like you want us to look at it closer. Council Chair Rapozo: Absolutely. Mr. Barreira: Okay. Council Chair Rapozo: I think we need to know a little bit more about the fine print. LIMITED MEETING 43 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Mr. Barreira: Okay. Council Chair Rapozo: If that was on the floor today, I would not support that. Mr. Barreira: Okay. Council Chair Rapozo: I do not know about the rest of the Council, but I do not think it is a really good investment knowing that. Mr. Barreira: Notwithstanding the corresponding savings on the frontend, okay. Council Chair Rapozo: But I do not know enough about it. Mr. Barreira: Are there any other questions on the General Fund Reserve policy? We are going to be moving to the structurally balanced budget policy. Ken is going to open with a presentation with some historic figures regarding recurring revenue expenditures and then Elizabeth will talk about some best practice guidance, which we support, our policy development. In terms of order after that, Steve will speak to the issue of asset management, which impacts heavily upon this policy, and then we will go over the review draft of the policy as we did earlier. Mr. Shimonishi: Just generally looking at where our recurring revenues are. Again, we are just talking about our General Fund. We have our Real Property Taxes, which are the largest component of our revenues, followed by the State Transient Accommodations Tax (TAT). We have public service company taxes and then various other miscellaneous or business licenses and so on. Our recurring expenditures of course are our employee cost related benefits; other operating items such as our services, consulting, grants-in-aid, utilities, and insurance. This is a slide that shows the Operating Budget Ordinances that we passed since Fiscal Year 2010. I am going to take a little while to go through this slide. It is a little busy, but it speaks to passing balanced budgets as opposed to structurally balanced budgets. If you look at Section 19.03 of the Kauai County Charter under Financial Procedures, it states that "The proposed and adopted annual budget ordinance shall be a balanced budget, the total expenditures and appropriations shall not exceed the estimated revenues and other resources." It is basically saying that we have to pass a balanced budget. If you look at Fiscal Year 2010, the first blue bar for all of the years represents the revenues that we budgeted. The green bar next to it represents the expenditures or the appropriations that were budgeted, and the light colored section above that represents the transfers out of the General Fund budget. What you see in this upper left corner, that little peach colored block, is how much of the Fund Balance that we used to balance the budget. Basically, our revenues and our resources are equal to our expenditures, both columns are the same, so this is a balanced budget. As we go forward to Fiscal Year 2011, you can see the same components and how much more of our Fund Balance we have used to balance the budget. In Fiscal Year 2012, we see that the revenues were actually budgeted less than the expenditures, or I guess the other way around, the expenditures were LIMITED MEETING 44 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL budgeted more than the revenues. We still had our transfers out and we, in fact, used a greater portion of the Fund Balance to balance the budget. Similarly, in Fiscal Year 2013, it was the same type of arrangement. In Fiscal Year 2014, we get back into budgeting at least our revenues exceeding our expenditures, but still utilizing Fund Balance. In Fiscal Year 2015, as I see it, we made an improvement in terms of our revenues covering our expenditures and transfers out, as well as using less of the Fund Balance. In Fiscal Year 2016, we virtually did not use any Fund Balance. Lastly, Fiscal Year 2017 is at zero (0). When you look at the actual results of those years, you can see the impact of not having a structurally balanced budget, which caused the deficits to occur in Fiscal Year 2011, 2012, 2013, and 2014 where we have this rather rapid decline in our Fund Balance. Now that we have moved towards a more structurally balanced budget, we are rebuilding our Fund Balance, so to speak. I think that is the point I would make about the policy that we are looking at in terms of a structurally balanced budget and not just the balanced budget which met the Charter requirements. In terms of our structurally balanced budget policy—oh sorry. Ms. Fu: I just wanted to make clear the distinction between a balanced budget versus a structurally balanced budget. This is a GFOA best practice guidance, that governments adopt a structurally balanced budget. A balanced budget as you know, is revenues equal expenditures. That is what many governments are required to have. What a structurally balanced budget does it looks at reoccurring revenues. For example, your Real Property Taxes and TAT. Those are reoccurring revenues that you consistently received, not your one-time revenues from the Feds nor your windfall revenues from whatever program. It also looks at your reoccurring expenditures. Your reoccurring expenditures are certainly your salaries, benefits, materials, services, and asset maintenance costs. Those are your reoccurring expenses. It is not like your one-time payout for a settlement from a lawsuit. It keeps those two (2) figures and it looks at how they match up, if they align, are they balanced? We also recognize that sometimes it is impossible for governments to be structurally balanced because of the issues addressed in the General Fund Reserve strategy. You may experience a natural disaster, there may be reasons for drawing upon reserves, or you may experience another recession in which you need to draw on reserves. We understand that, but outside of those circumstances, a government should try to strive to achieve a structurally balanced budget. Councilmember Yukimura: Basically, you are ignoring the one-time either disaster or windfall in looking at a structurally balanced budget in order to be prepared when the one-time disaster hits? Ms. Fu: Ideally, a structurally balanced budget is in order to get a government thinking about how it is spending its resources. We are not constantly drawing on funds to spend for wants than needs. A structurally balanced budget looks at your reoccurring revenues and your reoccurring expenses as-is, not the windfalls as you just noted. In terms of expenditures related to natural disasters, that is just a given or at least a one-time events... LIMITED MEETING 45 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: Those are the risks. Ms. Fu: These are the risks that you face and that is why a structurally balanced budget also looks at your reserves because that does come into play. You need money in order to address a situation where frankly, there is no other outlet. Councilmember Yukimura: And it disciplines you not to put recurring expenditures on one-time revenues, right? Ms. Fu: Correct. Councilmember Yukimura: Okay. Council Chair Rapozo: Have we done the exercise with our budget to see how structurally balanced the County is? Mr. Shimonishi: I think just by the fact that we have gotten away from using our Fund Balance to balance the budget is a big improvement. It is huge. Councilmember Yukimura: Yes. Council Chair Rapozo: But in that, we are counting a lot of the nonrecurring. Have we done the exercise taking all of the recurring revenue and all of the recurring expenditures to see where we are at? Mr. Shimonishi: Right. I think that is something that we need to take harder look at as we prepare our budgets going forward. An example of what might not be a recurring revenue is a temporary increase in the Transient Accommodations Tax. Councilmember Yukimura: Correct. Mr. Shimonishi: If we knew that it was only going to be increased for one (1) or two (2) years and then decrease, technically, we should not have used those revenues to balance our budget. That is basically kind of what the policy is saying. Councilmember Yukimura: Yes. Mr. Shimonishi: Also on the expense side, if we were seeing one-time type of expenses, then could we have used the Fund Balance to balance that? That is the discussion that we need to have, right? Council Chair Rapozo: Or even a scenario where we have a federally funded program where maybe they fund the salary and we fund the benefits or something like that, or there is a match. We cannot count the federal money as revenue, but we can count the benefits or the other expenses as a recurring expense. LIMITED MEETING 46 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Would that be right? Let us say there is a match and we fund fifty percent (50%) of a position. Mr. Rezentes: Or I think things like the Staffing for Adequate Fire and Emergency Response (SAFER) grant. We are going to have this money coming in... Council Chair Rapozo: He said for the SAFER grant, they are going to pay three (3) years and we have to pick up after. Mr. Rezentes: Right. Councilmember Yukimura: Correct. Mr. Shimonishi: In that case, we would obviously need to identify recurring revenues to pick that up. Council Chair Rapozo: Wow. Councilmember Yukimura: That is what makes sense. In one sense, we are addressing the—I do not know if I am using the right word, but the reliability of the income stream or the revenue stream. TAT depends on how robust tourism is, and that is why using TAT moneys to offset expenditures in our budget related to the de facto tourism on our island makes sense because when tourists do not come and the TAT goes down, the expenditures related to tourists will presumably also lessen, right? The number of rescues, the people on the roads, and all of that starts to go down. The revenues go down too, but if you are depending on tourism revenues to pay for your golf course, do I dare say, or some costs that continue even when tourism is down, then you are more in a vulnerable position... Mr. Shimonishi: Yes... Councilmember Yukimura: ...whereas the General Excise Tax (GET) is less likely to go up and down with tourism. I am sorry. Go ahead. Mr. Shimonishi: Unfortunately, I do not think we have that problem with the TAT being that it is capped. Councilmember Yukimura: Correct, but we were advocating that the cap be removed so we could use those moneys for General Fund purposes. Mr. Shimonishi: Right. Councilmember Yukimura: I am not sure that it is that stable of an economic arrangement. Mr. Shimonishi: And that is why if it was in fact on some type of percentage, we would consider that potentially reserving for the volatility. LIMITED MEETING 47 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Mr. Barreira: Just one (1) more comment about the GET and looking at the way we have tried to formulate it in trying to get support from the Legislature, if we are assuming that there are twenty-five thousand (25,000) people on the island every day and they buy goods and services, it would have an impact... Councilmember Yukimura: It will. Mr. Barreira: ...not the majority impact, but it would have some impact on our revenues. Councilmember Yukimura: That is correct. That is good point, but it probably will not have as much impact on the GET as it will have on the TAT. Mr. Barreira: Oh, yes. If we can move on, but before we go onto the actual draft review, I would like Steve to speak to the issue of asset management, which is a very significant component of this particular policy. Mr. Hunt: Unfortunately, I drew the short straw on this one. I asked too many questions. Speaking to a structurally balanced budget, one (1) of the components if you are asking if we are there, we are only there when we have addressed our asset management as well. We talked briefing a little bit about sinking funds, about maintenance funds for roads and bridges, but that is really kind of the tip. We also need to be talking about facilities, parks, aging Information Technology (IT) infrastructure, and regular replacement schedules for equipment and vehicles. It is really a much broader issue. Again, the asset management plan is something that we will undoubtedly have an effect on the debt management policy as well as the structurally balanced budget. At this point, we do not have that plan to bring before you. It is something that we are still working on because again, we are looking at the departments involved and who is collecting the data, assembling the data, who is going to be managing it, identifying it as well as trying to eventually put a price tag and a timeline to some of these depreciable assets that are a little bit longer-lived. Currently, there are individual departments such as the Department of Public Works Roads and Parks Divisions that have identified or are in the process of identifying comprehensive inventory lists of assets along with their associated level of deferred maintenance. Some assets require repair and maintenance (R&M) while others simply depreciate fully and eventually are replaced, thus, we need to segregate out what is an operational R&M type of expense that would be budgeted annually from those that would be more capital in nature. Again, these potentially could either be a sinking fund to identify when that capital would be infused back into the budget at the time they depreciate. In the private sector, sinking funds or capital reserve accounts are typically established for set asides needed to repair or replace long-lived assets. If properly budgeted, the cost of the repair or replacement is fully budget by the time the asset or some component of the asset has outlived their useful life. Taking this concept to the government sector, there would need to be a General Fund CIP Fund for items that would heed to be replaced in the future as well a General Fund account for anticipated R&M expenditures that will occur in future operating budgets. Current practice has been to identify a couple of significant projects that are likely to be addressed within that fiscal year as well as to provide some moneys to address emergency repair or maintenance that occurs. LIMITED MEETING 48 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Going back to one of Ken's graphs, if you consider the General Fund, roughly eighty-five percent (85%) of the General Fund revenues are used for employee salary, wages, related benefits, factoring in our reserve for self-insurance, utilities, and other costs. There is really not a lot of funds left after that to address some of these deferred maintenance issues or to do set asides for sinking funds, so that is something we just have to be aware of. Also, I think when we start looking into individual projects, especially in facilities, some of the triggers that would trigger additional added expenses such as the Americans with Disabilities Act (ADA) compliance.We have had a comprehensive facilities analysis with ADA to which ones are not compliant. As we go forward, there are certain triggers and some of it is just routine R&M that would trigger having to come in compliance with it. So it is an added expense. It is not just reroofing. It is not just replacing a door if you have to widen it to be ADA compliant. We just have to be mindful that a lot of these deferred maintenance items will come with not only the price tag to repair, but also to improve to make them federally compliant. What that means for this long-term financial planning group, our next steps are continuing to identify the condition of the County's assets, estimate when the R&M or capital will be needed, determine the amount of funding required, and then to develop a long-term budget strategy on how we will absorb these costs as part of our asset management plan. I am sure there will be questions. Council Chair Rapozo: Really quickly, in this after every one of the polices, it says that GFOA provided an example policy per user fees and asset management, are we privy to that? Mr. Barreira: Do you mean the sample? Council Chair Rapozo: Yes. Mr. Barreira: It is all public record. It comes from other jurisdictions. Council Chair Rapozo: Whatever was provided, can we get it? I am just curious to see what the example looks like. Ms. Fu: Yes, the project team has it so we are happy to forward that along, and it also serves as a basis of the policies that... Council Chair Rapozo: We have been talking about user fees sporadically throughout the years, and I just have never seen a policy for it, as well as the asset management and inter-fund borrowing. Mr. Barreira: We will work with Christine to transmit the drafts over. Council Chair Rapozo: Thank you. LIMITED MEETING 49 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Chock: For the asset management assessment in structurally balanced budgets, when do we anticipate getting to the point where we review something? Council Chair Rapozo: Can we do it by Tuesday? Mr. Shimonishi: That is a tough question. Clearly, it is a function that we do not have a good handle on, and how do we get the resources to now make a comprehensive analysis of all of the County facilities, how we do keep that up and running so that it is not just a one-time thing and then five (5) years later nobody did anything or nobody reviewed it? It is something that is difficult. I think we have been struggling with that as a team to address and we know that it will take resources to actually get there. Once we get there, what is that number and how do we address it? Is it a one hundred million dollar ($100,000,000) number again or what is it? How can we get our finances around it to address it? It is keeping us from moving forward completely, but we identified that as a risk area. Councilmember Yukimura: It feels like we are the farthest along with roads. Why develop a policy if we cannot fund it, right, although a user fee policy could help us fund it. I am grateful for the Roads Division, Keith, and those who have been involved in identifying the assets, assessing their conditions, and building the capacity to use all of the technology that is needed to develop this well-assessed inventory. We have actually been going through those steps over the last five (5) years in roads and it seems like that is kind of the process that we have to do with each Division; Sewers, Parks, and so on. They kind of pioneered the pathway, although the technologies will vary, like we had the MicroPAVER program. I do not know what it will be for Parks and I know they said that they are going for a program, but I have not seen anything yet. You are developing the policy, but you have to do it in conjunction with the departments, do you not, or can you do it as an overall financial policy and then do a directive to them? Mr. Shimonishi: I think we see Parks obviously moving in that direction, and whatever they come up will be helpful overall. Councilmember Yukimura: Not if they do not get the right program. Mr. Shimonishi: Unfortunately, it is spending some money ahead of time to at least try to get a handle on what they have in their area, so I think it is a little mistimed, you are correct. But again, we just see this as something as how do we get our hands around it aside for what it is for a real database analysis of what our actual costs are to maintain these facilities year after year? Councilmember Yukimura: It seems to me that you need to really work hand-in-hand with the departments or divisions to make sure that they are actually setting it up right. Council Chair Rapozo: Well, we are told every year that it is being setup. LIMITED MEETING 50 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: I know. Council Chair Rapozo: I think Councilmember Yukimura, you have been promised that for probably ten (10) years now, that I can remember. It is just never done. I think that is where the Administration has to get on it. Where is it? We try. All we can do is ask. Councilmember Yukimura: Look at where we are with Solid Waste infrastructure, the transfer stations and all. We are at crisis mode. What I am concluding is that you really need high level leadership in each department to do this because without that, it is garbage in and garbage out. Kudos to the Roads Division in the Department of Public Works. Mr. Barreira: We are going to move to the actual review of the draft policy, and thus open it up for questions before our lunch break at 12:00 p.m., after which time, we will have one (1) policy remaining. Mr. Shimonishi: The policy is relatively short, two (2) pages. I think adherence to it may be a little more difficult, but we will see. We have the introduction of the balanced budget and so on. In our definitions, we have defined the recurring revenues. It is obviously revenues that can be reasonably expected to continue year to year with some degree of predictability, mainly real property taxes. We also defined what non-recurring revenue is, which we spoke about earlier. It is temporary types of grants. I mentioned about the temporary increase in TAT that could have potentially been classified as a non-recurring component of revenue and therefore, not to be used in balancing our operating budget. We also have the definition of recurring expenditures as well as our non-recurring expenditures. The portion there related to the reserve and how we could use this once we met the reserve or non-recurring. We have also listed our structurally balanced budget goal. Earlier, I showed how we transitioned from the historical practices of using our Fund Balance to balance the budget to now really trying to avoid that practice. As we know, it is not a best practice, although it was common. I think it is probably common amongst other government agencies. Finally in Section IV, we talk about the structurally balanced budget directives in listing some of those out there; employee compensation, operating and maintenance costs, and so on. Mr. Barreira: Steve's presentation hits directly on operating and maintenance costs of capital assets that we are not only grasping a handle on exactly how substantial the scope is, but having intelligent projections so that we can budget accordingly. Councilmember Yukimura: Thank you, Ken. On that last point, this is where sinking funds would come in, right? Mr. Barreira: Yes. LIMITED MEETING 51 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: Okay. To your point about recurring revenues, I do not see any reference in here about the importance of fees. It would seem to me that fees such as gas and fuel taxes and things are really important for the ongoing operations of the County. Those are ongoing expenses, so they need to be supported by ongoing fees. Mr. Barreira: That touches on recurring revenues, and there will be a separate policy that we will submit later that further elaborates on user fees, which is a very big component of where we need to go in terms of financial sustainability. Is your comment that you would like that subject matter specifically outlined in this policy? Councilmember Yukimura: Well, if you could somehow point out what a key factor that is in the health of our recurring revenues or something like that. That would be useful, otherwise it falls on real property taxpayers, right? I keep going back to this fact that the large commercial trucks that cause the majority of damage to our roads fight the vehicle weight tax, but that is a way of really capturing the recurring expenses from the cause of the recurring expenses, whereas otherwise the general taxpayer—either we are going to use excise taxes or real property taxes. There is not the direct correlation to the use. In some cases, where the user is a low income family, we do want to use the generalized revenues, the GET, and the real property taxes to help them. But should we do that for commercial entities that are causing the most damage and putting their cost of doing business in a regressive tax on poor families and elderly who are paying the excise taxes and in some cases, the real property taxes. To me, that is a real policy issue. Mr. Barreira: We will make a note to include that to clarify the user fee issue. Councilmember Yukimura: Is that it? Mr. Shimonishi: Are there any other questions? Mr. Barreira: Yes, that would cover the second policy, structurally balanced budget. We had planned to take up the long-term financial plan policy, which is a very short policy, after lunch. Would you like to continue now and see where we (inaudible)? I think we wanted Wally as the Managing Director, to speak to his priority issues. We kind of touched on that already. So, Wally, I am not sure if there is anything else you would like to say. Mr. Rezentes: I think we kind of touched on it at least twice in this discussion. I just kind of wanted to say that taking everything as a whole so far today, we know it is a priority. We know that this is the right way that we need to head in. The policies that we ultimately are going to present to the Council to hopefully adopt is not going to be easy. It is not going to be easy to sustain over long periods of time. I can speak to some experience with a bad cycle in the County's history after Hurricane Iniki where there where a number of years post-Hurricane Iniki where our real property tax revenues dropped and obviously took a while to LIMITED MEETING 52 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL come back. We were fortunate to get some grant-in-aid at the time from the Legislature to bridge some of that gap, and obviously money from the Federal government as well. Because of the way TAT is structured, we are a small part of TAT, but because it hit only Kaua`i, we were fortunate in that respect. On the other side of the equation, the expenditure side, we all know we have collective bargaining issues that we do not always have control over. At that time, I think it was 1995 or 1996, where we were in collective bargaining negotiations when our real property tax revenues were at its lowest and we were reeling. Although we put up a case to the arbitration panel that we could not afford increases for the Fire Department at the time, at the end of the day, it did not matter. I think the arbitrator said in writing that although the County of Kauai put up a justifiable case because we are just one (1) component of a total, we had to find ways to fund the increase in real property taxes. I think as we go forward and we look at both the expenditure and the revenue side of the equation, there is good reason to look at not only the expense side, but all of our revenue opportunities and options to fund recurring and non-recurring items. Once we get the componentry of the asset management in play, I think it will be even more evident of the importance of trying to find the revenue solutions that can cover or handle an adequate well-done asset management program. I am sorry for diverting, but just listening to all of our discussions so far, I just wanted to mention that and kind of divert away from that statement of"highest priority defined by the Mayor and Council." That is my two cents. Mr. Barreira: Are there any questions for Wally? Councilmember Yukimura: Not so much a question, but thank you because it triggered in my mind that we have been talking about recurring revenues, but the biggest recurring expense is the personnel costs. I know there is a move afoot, but we need to pay attention to the efforts to make the collective bargaining process more rationale or be able to take into account the things that we have to look at as we try to create a budget for the island. I think we have been trying to do that by having a Council representative, as the body that approves based on finances, in the collective bargaining process. I am just remembering that we want to ask that reserves not be considered in the collective bargaining process as an expendable or available source of money because that is what they often look at. I think when the Police got their four percent (4%) over four (4) years compounded just recently, if I remember the arbitration decision, it was like, "Well, they have all of this money." That defeats the purpose of the reserve and you want to have the system recognize the satiability of the reserve. Mr. Barreira: That is why right now without the reserve, it is an Unassigned Fund Balance, and it is much easier for the people as you are noting... Councilmember Yukimura: The arbitration panel. Mr. Barreira: ...to look at that and say that it is slush... Councilmember Yukimura: Correct. LIMITED MEETING 53 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Mr. Barreira: ...as opposed to a reserve that is clearly defined by law and established very specifically what the components of that reserve are. While we could not tell them not to look at it, I think we would have a stronger basis. Councilmember Yukimura: Well, I think we could. That should be a ground rule for arbitration decision-making, that the reserves are off bounds because otherwise every time we try to create a reserve, it is gone because it is going to be allocated to collective bargaining. Mr. Rezentes: I think if it is set aside by ordinance, then you have a greater... Councilmember Yukimura: Change to argue? Mr. Rezentes: ...chance to argue that point, yes. Council Chair Rapozo: So we would be prohibited from spending it if it were by ordinance. Mr. Rezentes: Right. Council Chair Rapozo: I do not care what the arbitrator said. Councilmember Yukimura: Okay. Council Chair Rapozo: If it said it is prohibited. You would have to go find it somewhere else. Councilmember Yukimura: Well, then that is... Council Chair Rapozo: That is the problem with arbitration. Councilmember Yukimura: Well, then that is a really compelling reason to establish a reserve by ordinance or whatever because... Mr. Barreira: Do you have a second? Councilmember Yukimura: What? Council Chair Rapozo: He asked if you had a second. I made the motion earlier already. Mr. Rezentes: The reality is the stress test is when you go through a downward economic cycle and you are still going to want to maintain these policies that thorough. That is where everyone, the Executive and Legislative branches, are going to be tested to try to maintain the policy however it is going to be approved, by ordinance or whatever, have it stay there without amending. LIMITED MEETING 54 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: Well, I think the test is continuous... Mr. Rezentes: Yes. Councilmember Yukimura: ...because every budget, we have people coming here saying, "We want money for this" whether it is a department, or a public member, or those who get moneys from the Office of Economic Development. To the extent that we do not do a rigorous review of their request and we do not require impact financing, such as they show us what their impacts are, they carry through it, and we are convinced that they actually have the capability to get those results. If we do not do that kind of budgeting, we cannot do it in really hard times. We should be able to do it in good times. But the reserve, by putting some money aside, is forcing us to do that otherwise we would be giving out those reserve moneys and thinking "oh, it is fine. You can have some and you can have some." When we do not have enough money to meet all of the requests, that is when we start saying it—well, it should force us to be more rigorous. I do not see anybody else listening. Oh, Councilmember Brun and Councilmember Kawakami are. Mr. Barreira: Are there any other questions or comments? Council Chair Rapozo: I hear a lot of the discussion about revenue opportunities and we have to be really careful. The solution to all of this with asset management is not just money. You can throw all the money you want, but if we do not have the qualified and competent people to manage it, it is not going to work. I get nervous when I hear, "We have to take advantage of revenue opportunities," because we are going to set the thing at thirty percent (30%) and we are going to raise revenues to get to the thirty percent (30%), and toss more money at some problems-I do not think the problem right now is just money. We need to recognize that, but we have to find the source of the problem and then work on a solution, not just keep tossing money at it. Anyway, that was just my closing comment before lunch. Councilmember Chock: The other thing for me is when I look at the structurally balanced budget directives, how do we actually translate this into each department so that it is part of their understanding and culture? Are there administrative rules that helps support that we are all understanding the decision that we are making are cohesive? Mr. Barreira: I guess we would have to say that as the Budget Team, that would be our responsibility. First of all, if we have an ordinance, it becomes clearer in that it becomes a law of the County. Then of course through our work on the Budget Team, making those communications and understandings clear. We spend a great deal of time with our departments as well as with the Council during the budget session and even prior to the budget session to help get some of those realities in place. Councilmember Kawakami: No disrespect, but I question the strategy of having a reserve as a way of negotiators not looking at that pool of money. I think in the long run, all it does is shift who is going to get pressured because we can make the ordinance for thirty percent (30%) and then when times are tough and they are LIMITED MEETING 55 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL negotiating, they are just going to lobby us to lower the percentage rate. I can tell you just from experience that we had a Rainy Day Fund at the State Legislature and a Hurricane Fund that nobody was supposed to look at, but we scooped it to balance the budget. Do you know what I mean? They are still going to look at the money, so we should not kid ourselves that we are going to put this on the side and nobody is going to look at it. Everybody is going to look at it, even the Council is going to look at it. Councilmember Yukimura: Well by that framework, we are going to be moving toward Detroit. Council Chair Rapozo: Moving to where? Councilmember Yukimura: We are going to be moving towards Detroit because look at the State, its unfunded liabilities? Look at our road repair, if we just allow it to continue, that is where we are headed because we cannot just ignore it. We can, but then we give it to the next generation, and that is irresponsible. So we have to do it and we have to help the public understand. I think the problem is that we are not doing that enough because look at the reality and the choice, and look at the suffering that came out of Detroit. It was terrible. Mr. Barreira: What Ken and Wally hit on earlier in the discussion and we have heard it from some of you as well, we opened this saying talking about political will on both sides of the aisle. There will absolutely be substantial pressure from special interests. It is a matter of how strongly we are going to commit to the financial stability issues of the County. When I meet with all of you, I have always said the same thing, "It is easy when you do not have to face the electorate." When you are just the money person and you face policy and realities, it is much easier to speak. But what we are trying to pursue is a better way to approach government responsibility in terms of managing its finances. Councilmember Yukimura: I want to point out that when we had the excise tax discussion in an election year, there was more testimony for the excise tax than against it. Sometimes if we really listen carefully and if we help educate, the public will stand in the right place or support the right thing. Mr. Barreira: Are there any other comments or concerns so that we can write it down? If not, I would like to ask Elizabeth to talk a little bit about the evolution of the process in terms of long-term financial planning, which is why we procured her. Ms. Fu: I mentioned a lot about best practices that GFOA has and I will make sure that all of you get a copy of the best practices that we are discussing. One (1) of the best practices is that governments adopt a long-term financial plan. Keep in mind that there are key elements to the plans, so it is a timed horizon; how far in the future we look at. Typically, we say five (5) to ten (10) years. There is also a scope. What funds should we include? Should we just include the General Fund or should we include all funds to get a more macro picture of the County. Then, there is also the frequency of the practices of evaluating key elements LIMITED MEETING 56 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL of the long-term financial plan. Some things you will do every year as part of the budget process, which is the forecasting of revenues and expenditures. Some things may not need to be updated as frequently, depending on the changes in the circumstances and the demographics of the County. In terms of the content of the long-term financial plan, there is the financial environment analysis, which is what your financial position is and how things are looking for the County's'financial health. We forecast the revenues and expenditures, we look at the debt position, and the affordability. What is the debt service looking like as a portion of expenditures? Then, once we identify how we are looking long-term, we look to see if there is a structural balance. If not, what are strategies to meet balance or mitigate the imbalance? If you folks at balanced, then what can we do to sustain that? The process also requires monitoring, so you could be quarterly monitoring or yearly monitoring to make sure that all things are aligned. Other things to consider are key health indicators such as different metrics that will identify how the County is trending, how much fund balance the County is drawing on for various reasons, how the County's fees are coming in, how the County's revenues are coming in, et cetera. Most importantly is the visibility of the long-term financial plan. It is a document that is across the County. It is not just within the Office of the County Clerk, Council Services Division, it is not just within the Administration, nor is it just within a department. It is across all County agencies. Your citizens also does have a role to play in helping describe what the desire is in terms of service levels. The County Council has a decision to make in terms of what the service level ultimately should be, and then the Department of Finance and the Administration has to work to kind of meet collaboratively with all across the County to make sure that the service level could be funded adequately. I want to make a very important point, that long-term financial planning is a process. I stated to you all many times that it is not going to happen overnight and it should not happen overnight. It is an evolutionary process that changes through time. As you are embarking on this journey, I would caution in wanting to set expectations. Do not expect a pretty document. If you are looking for a pretty document, then that kind of scares me because this finance team and the Administration is putting more time to a document than actually looking at the process and the different components. If you see all of these different components spread out through the budget process and through discussions, then you do have a long-term financial plan. Do not think of it as a planning document. Think of it as a process. Councilmember Yukimura: Will we get the written notes or things that you folks have been reading from? Mr. Barreira: As we talked about earlier with Council Chair Rapozo, we have the draft policies that has helped to govern our work in the Committee. Christine is going to compile that and make sure to get it to the Council. Councilmember Yukimura: Okay. So what Steve...yes. Mr. Barreira: Whatever we have done, we will share. LIMITED MEETING 57 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: Okay great. Thank you. Mr. Barreira: In terms of the government financial plans, the next reasonable question would be when do we plan to roll this out and make it effective? We just wanted Ken, in his capacity as the Director of Finance, to talk about the vision as far as what the next steps are in terms of a long-term financial plan. Mr. Shimonishi: Thank you, Ernie. Obviously, this is new to the County, to myself, and to many of us here. It is a challenge and I think initially when we started on this, we were thinking along the lines that"okay great. How can we just put these numbers together and give us a forecast, and then we are done?" I always had great expectations that we could execute all of these policies pretty quickly and just go for it, but that is obviously not the case. I would say that I have been humbled by the process. We are still trying to target the implementation of a five (5) year rough outlook starting with Fiscal Year 2019. That is still our goal. We recognize that there are still challenges ahead and we will do our best to try to make do with what we have. Hopefully we will not be too far out of range. At least we will have something that gives us an outlook rather than nothing that gives us no outlook, which is the way I would put it. The long-term financial plan policy is pretty straight forward. We are identifying this as such and we will do the long-term financial plan. Mr. Barreira: In terms of where we are on the agenda given that one (1) page long-term finance plan policy, you have already read that and that is the easiest task of the day. We could conclude this morning or maybe going a few minutes after 12:00 p.m. depending on the amount of questions. What is the preference of the Council? Councilmember Yukimura: Are you talking about concluding and then coming back to finish? Mr. Barreira: No. The long-term financial plan is a one (1) page document that is a relatively easy review, which Ken will do next. Mr. Shimonishi: I did that. Mr. Barreira: Excuse me? It is already done? Mr. Shimonishi: I did it. Mr. Barreira: He is pretty much done. Next, Wally will come up and tell you where we are in terms of policies currently under review, which will come to the Council at some point, as well as next steps and future action items which are very truncated closing remarks. Councilmember Yukimura: Okay. I have a question for Ken. Are you saying that you are intending to produce a five (5) year plan that starts Fiscal Year 2019? Is that what you just said? LIMITED MEETING 58 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Mr. Shimonishi: That is correct. Councilmember Yukimura: Are you assuming that the long-term financial plan policies, General Fund Reserve, and structurally balanced budget, will be passed by the Council sometime this year, or do you not want to make assumptions? You want to hope that they would be passed this year to give guidance to the whole long-term financial plan, right? Mr. Shimonishi: Yes, that would be ideal. Obviously everything is going to come up before the Council for adoption in some form... Councilmember Yukimura: Right. Mr. Shimonishi: ...but I would just say that regardless, we need to try to work towards this and get something on our radar. Councilmember Yukimura: The adoption of this though, is an important step in what you projected as developing the five (5) year plan. Mr. Shimonishi: Sure. Councilmember Yukimura: Yes, okay. Then, there are other policies to come, right? Do you have a timetable for that right now? Mr. Shimonishi: Not quite. Councilmember Yukimura: The ones that are at the end of the report, page 55 and 56. Mr. Shimonishi: No, we do not have a timetable. But I think relative to our investment policy/user fee policy, I think we are close to final as we can be. So that could be shortly, but again, we talked about the asset management side of the equation which to be honest, is kind of where we are struggling. Councilmember Yukimura: Okay. Thank you. Mr. Barreira: Ken, can you go into the policies currently under review since Wally stepped out? Do you have the agenda? There were subcategories of where the critical issues are as we pursue those policies. Mr. Shimonishi: Right. We already talked about the capital asset management policy under review, and all of the challenges we faced with that. We also have a debt management policy which is actually tied into that as well, but would set some parameters on how we would incur debt or borrow money, why, what the matrixes are that we would use to measure ourselves against, and hopefully more importantly, not exceed. You saw that one of the things was the debt per capita. We wanted to establish a maximum on that. Does that actually fly with what we see coming up in our needs? We need to revisit that. Councilmember Yukimura, you mentioned the user fee policy as well. Again, that is another area. One (1) of the LIMITED MEETING 59 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL goals of that policy is are we trying to recover our costs, are we just trying to do some reasonable assessments, and again, what are the potential risks in charging fees where historically, there have been none? I think a good example is use and I have brought up—let me look around for the Administration, the use of our stadiums. Vidinha Stadiums is a pretty sizable facility. We can control it. Are we prepared to charge fees for youth soccer, Kauai Interscholastic Federation (KIF), or whatever? All of those things needs to be taken into account when we look at a user fee policy and adopt it. Again very quickly, those are the policies that we are looking at and are coming forward before the Council at a future date. Councilmember Brun: The parks, I know I heard two (2) years ago that we were going to charge fees because we reserve them for softball. Are we looking to do that? What is the hold up? Councilmember Yukimura: I never heard that, not in our County. Councilmember Brun: When I went to the Department of Parks & Recreation, they said they were going to try implement... Council Chair Rapozo: You heard that from the Department of Parks & Recreation? Councilmember Brun: Yes. Council Chair Rapozo: Okay. Mr. Barreira: The short response to that is that everything for which we maintain and manage the operation and for which we are not charging any services are on the table because it is significant. Of course our biggest customer is the State in terms of the stadiums that we provide. That is our infrastructure, manpower, overtime, and utilities. It is everything. Council Chair Rapozo: I know 3(B) says current efforts underway, what would the current efforts be right now? Are you folks actively looking at some potential user fees? Mr. Barreira: That as well as looking at the current fees that are on the books, better understanding the legal authority whether it be statutory or by Charter or by County ordinance, and then of course trying to get a correlation between what that actual expenses are pertaining to the services being provided so that we can determine what is a fair fee to establish. Council Chair Rapozo: But are we actively looking at that or are we just talking about it right now? Is someone actually doing that research or is it just something that you are discussing in the Committee? Mr. Shimonishi: In our policy meetings, we have asked the Department of Parks & Recreation to give us a list of all of the activities that are occurring in the facilities... LIMITED MEETING 60 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Council Chair Rapozo: When did you want to get this done by? Mr. Shimonishi: ...and the fees that we could have charged. Council Chair Rapozo: We wanted to get it by Fiscal Year 2019? Maybe you should ask somebody else. I am not joking. We talk about this. I know Councilmember Brun said he heard about it two (2) years ago, not on the Council obviously. He is a user. That threat has been made for a long time. It has never come to the Council as a recommendation. We either have to do it or we do not. I cannot see how the high school cannot pay for at least the electricity. At some point, especially with the State, because they do not cut us any slack. I think somebody has to actively do that. I know this has been discussed for many years and we have yet to see any kind of fee schedule. I am not talking about going after the people camping on the beach and whacking them. I am talking about the big users that generate revenue off of our—I know we are digressing, but this is how serious it is. You have businesses that have formed and I know this because a lady called me up yesterday. She got her business of inflatables and they are taking the inflatables to a County park using the County water, charging fifteen dollars ($15) or twenty dollars ($20) a head and letting the kids play in the water, and we collect nothing. Councilmember Yukimura: Yes, that is a for-profit business. Council Chair Rapozo: For-profit. Those are the kinds of things. When you start looking at targets and where we are going to go, that is where we go. Councilmember Yukimura: Yes. Council Chair Rapozo: Not the camping. We are going from two dollars ($2) to three dollars ($3) a night. No. How much does a football game cost in electricity? Do we even know that? You folks are the wrong people to ask, but do we even know? Did somebody do an analysis that for every hour the lights are on, how much does it cost the County? How much does it cost the County to have a worker there to clean the toilets and put toilet paper? We do not even know that. How can you even start to charge? Do you just pick a number? Anyway, I like the user fee discussion, but I want to go beyond the discussion and assign somebody to do the research and the analysis. It should not take more than two (2) weeks to get a report back regarding the stadium, the baseball parks, and the parks that these people are letting the businesses use to generate revenue. Two (2) weeks is plenty time. Councilmember Yukimura: The Department of Parks & Recreation should be doing this. Council Chair Rapozo: Exactly. Mr. Barreira: Council Chair Rapozo, actually as part of this entire process, the Mayor has made those assignments and that information should be provided to him shortly. LIMITED MEETING 61 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Council Chair Rapozo: Okay. Councilmember Kawakami: I have a question. Before we even reinvent the wheel, do we know if the other Counties are implementing user fees? Councilmember Brun: Yes. Councilmember Kawakami: They are? Councilmember Brun: A tournament on O`ahu for the weekend costs one thousand two hundred dollars ($1,200) for the lights, and that is way more than what we were discussing on charging. We go up to O`ahu for the tournament and it costs the people one thousand two hundred ($1,200) to one thousand three hundred dollars ($1,300) for the whole weekend. Councilmember Yukimura: Is that the Department of Education? Councilmember Brun: No, it is just a private person doing his tournament. Council Chair Rapozo: But how much money does that person make at the end of the tournament, Councilmember Brun? Councilmember Brun: The entrance fee is three hundred seventy-five dollars ($375) or three hundred twenty-five dollars ($325) with sixteen (16) teams. Council Chair Rapozo: Right, that is my point. Councilmember Brun: There is money to be made. I umpire a lot, so there are a lot of tournaments coming up. These people are making and we are not charging them anything. We have County people there lining fields doing all of these things. Thank you, pat on the back, but we are eating all of that cost. As a user, I would pay the fee. It is just we want to practice and we want to do a tournament because very single tournament makes money. Look at the Waimea Town, that tournament alone makes at least thirteen thousand dollars ($13,000). Councilmember Yukimura: Oh my goodness. Councilmember Brun: For the tournament fees, food booth, and everything. There is a lot of money to be made. Councilmember Kawakami: But is this money for-profit or does it go back to a nonprofit? Councilmember Brun: It is just individuals. Some are individuals, some are for-profit, and some are nonprofit. LIMITED MEETING 62 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: Well, that is where a policy would carve out these distinctions. We would decide whether we would just put a fee on for-profits or for nonprofits. You could have two (2) different rates based on the category, but I think Council Chair Rapozo is asking for that kind of analysis because there is money that is justifiable to get. We have to make that kind of discernment about which is the best policy. May I also say that if we just make the Wailua Golf Course break even, we will have one million two hundred thousand dollars ($1,200,000) in the General Fund to spend for other things such as... Council Chair Rapozo: Even if we make the bus. Councilmember Brun: Yes, I just told them. How about we make the bus feasible? Council Chair Rapozo: I am just kidding. Councilmember Brun: And the recycling program. Councilmember Yukimura: If you want to go into that, alright, let us start. Council Chair Rapozo: I am not saying to charge these park users to generate revenue streams for the County, I am just saying let us not lose money while someone else is making money. That is all I am saying. Councilmember Yukimura: Well, that is the same argument for commercial truckers, excuse me. Ms. Fu: May I add that GFOA does have a best practice in regards to user fees. A lot of governments are looking to fees because they are capped out with taxes and they are looking for new revenue streams. It definitely is something that a lot of governments are looking for more guidance on. In terms of user fees, it is absolutely essential to first understand what your statutory authority is and then understand the total cost of service. You cannot make a judgement call as to whether you want to subsidize something or not, or even make money off of something until you know the cost basis. Council Chair Rapozo: That is why I asked the question. Ms. Fu: Then from there, it is a matter of discussion with Council on what the priority is. Who are we actually asking to pay full cost or more than full cost? Who are we subsidizing? You can certainly make the argument with public health, maybe you want to subsidize the cost of a vaccination because it is important to the County's overall viability. For a resident to pay five dollars ($5) when the real cost is ten dollars ($10), you lose that five dollars ($5), but that is fine for you. These are the important conversations that you have. The County is making an effort to kind of understand what the charges are, and that is the essential first step. LIMITED MEETING 63 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: Are you done? Ms. Fu: Yes. Councilmember Yukimura: Do you have any resources or guidelines for setting user fees or for setting a good policy regarding user fees generally and for parks? Ms. Fu: In terms of policy, the policy template is guiding a lot of the best practices of elements to include in a user fee policy. I have given samples to members of the project team as well. Councilmember Yukimura: Okay. Ms. Fu: But there is no set standard in terms of what or how much you want to charge because the ultimate question is, what is the County's priority in terms of either making money, breaking even, or subsidizing. It varies by program and it varies by what you think are priorities for your organization. Councilmember Yukimura: Yes, but even what you just said in terms of asking those question such as who are the subsidizing, who we want to subsidize in the public interest, and those kinds of things. I do not think we have had very many of these discussions whenever we have had fee increases or fee adjustments in front of us. Maybe what you just said is enough. Thank you for breaking it down like that because I just have not seen our discussion really address those questions. Ms. Fu: I will... Council Chair Rapozo: If you rent the Kaua`i War Memorial Convention Hall, you pay. The cost to operate the Kauai War Memorial Convention Hall for a three (3) hour period is a lot less than using the Vidinha Stadium, and yet, when you use the Kaua`i War Memorial Convention Hall, you are paying almost four hundred dollars ($400). Councilmember Yukimura: Yes. Council Chair Rapozo: So we are doing it already with certain facilities. Councilmember Yukimura: Well, we are doing it with the bus too. Council Chair Rapozo: Yes. Councilmember Yukimura: We are subsidizing, but it takes cars off of the road, it stops greenhouse gases, it makes our elderly independent, and the biggest use is from the west side. Those are the kinds of things that we have to think about. Councilmember Brun: I love the Kauai Bus, Councilmember Yukimura. Do not worry. LIMITED MEETING 64 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: Great. Mr. Barreira: The final policy, of course, is on its way of investment. That one is going to be relatively simple because it is reflective of what we are actually doing, so that will be on its way. In terms of future action items, all of what we have discussed today will be incorporated into our comments that Christine has been documenting and we will take it back as we continue our Committee meetings, we will talk about all of that. Council Chair Rapozo, your concerns about user fees, much of which is underway, and I know the skepticism is understood. But we do have several pieces of that work that has been done and it is a matter of getting it into a policy discussion to determine what we want to do, especially when we are trying to make an assessment on actual costs to the County for rendering all of these services. The Mayor is not here to make closing remarks, but on his behalf, and Wally if you want to jump in here, that is fine. We want to thank the Council again. It is unique that we have found a single issue that we have both committed to and agreed to. It is a really critical one in terms of the County's financial sustainability. I thank each Councilmember and especially the leadership from Council Chair Rapozo for allowing us to move in this direction. The next step is you will see us is coming before you with formal submissions after modifications are made, at which point we will be seeking either a resolution or an ordinance for your consideration, and then of course giving you an updated timeline in terms of the remaining policies that have yet to come. We are moving aggressively into budget, which means that the time that is available to us is limited. So any opportunity for the Committee to gather will probably be shortly after the March submission of the budget. After that, the window closes again because of budget hearings here as well as starting next week, active budget hearings with the departments over on the other side of the aisle. If there are any other comments that you would like to make that you want us to include in our follow-up responsibilities, please do so now. If not, we are concluded for the day. Councilmember Yukimura: Ernie, I just want to thank you and the team for very extraordinary work. Twenty-two (22) meetings, and we look at the results. They really show such substantial work and I know there is still a lot more to do. But I feel like we are really setting the County on a good foundation for budgeting in the future. I just want to really thank you for the great work. Mr. Barreira: And the involvement of the Budget & Finance Committee, Chair Kaneshiro has been extremely valuable not only in terms of the (inaudible) but (inaudible). Councilmember Yukimura: Thank you, Councilmember Kaneshiro. Council Chair Rapozo: How long do we have you for, Elizabeth? Are you with us forever and ever? Do we pay you? Do we pay GFOA? I know we talked about this the last time. LIMITED MEETING 65 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Councilmember Yukimura: A pittance compared to what they are producing. Council Chair Rapozo: Yes, I know it was very—I think your airfare was more than what we pay. Ms. Fu: I love working with you folks and I would love to see everything through. I hope that you will... Council Chair Rapozo: Is it our decision? Mr. Barreira: Yes. Council Chair Rapozo: Like Councilmember Yukimura said, I learned a hell of a lot today. The morning session was extremely valuable in going through your analysis. We just see things differently after your explanation. I just hope that we can follow through and move forward. I appreciate you. I just want to say that the Mayor was coming back, but they are taking his dad from the hospital and sending him home today. He was going to try to make it back before lunch, but anyway, that is why he is not back. I wanted to make that clarification. Mr. Barreira: To answer your question, Council Chair Rapozo, we definitely have a professional service with GFOA, or was it exempt. I cannot remember. Councilmember Yukimura: Forty thousand dollars ($40,000). Council Chair Rapozo: I think that one was probably exempt. Mr. Barreira: But because the specialty is with GFOA, and of course, GFOA was kind enough to break it out into phases. The current phase we are in now, there are other potential phases which we can continue to encumber the services of GFOA to help us as we move along, and those decisions will be made as we continue through the process. Council Chair Rapozo: I think we would need that at this point. We can take them out of the reserve. Mr. Shimonishi: A recurring expense. Council Chair Rapozo: I just appreciate the work from all of you folks, and of course to Councilmember Kaneshiro. I know it is not easy. We want to do whatever we can to help move this things along. Thank you very much. Mr. Barreira: Being no other comments, we are done with the workshop. Thank you very much. Councilmember Yukimura: Thank you. LIMITED MEETING 66 JANUARY 27, 2017 OF THE KAUAI COUNTY COUNCIL Council Chair Rapozo: Thank you. There being no further business, the Limited Meeting of the Kaua`i County Council adjourned at 12:09 p.m. :mn