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6.1 B Page 14 California Public Employees Retirement System (CaIPERS) CaIPERS incurred portfolio losses of 5.1% and 24% in FY 2007/08 and FY 2008/09 respectively. The combined effects of these losses, in conjunction with the expected annual returns of 7.75% not being met, has been to significantly reduce the funded status of the retirement system. As a result the CaIPERS governing board has approved change that includes the use of a temporary smoothing method to phase-in the impact of these losses over a three year period. Another looming issue with CaIPERS is whether or not the CaIPERS Board will lower the assumed investment rate of return (currently at 7.75%). CaIPERS has been reviewing this assumption in light of the current economic projections to determine if this is still a reasonable rate of return upon which to base retirement contributions. If this rate is lowered (a more likely scenario than it being increased) then the City's contribution to CaIPERS is expected to increase. State of California Part of the State's adopted FY 2009/10 budget included shifting $2.05 billion from Redevelopment Agencies in California to the State in FY 2009/10 and FY 2010/11. Redwood City's Redevelopment Agency lost about $3.56 million in FY 2009/10 and is expected to lose $733,000 in FY 2010/11. The California Redevelopment Association filed a legal challenge to this shift but the trial court found in the State's favor. On November 2, 2010 California voters overwhelmingly approved Proposition 22, an amendment to the State Constitution, which is intended to prohibit the State of California from redirecting local taxes and various fuel taxes from local governments. As is often the situation in California, voter approved initiatives are challenged in court so it may be some time before it will be known if proposition 22 is challenged, and if so, if its validity is upheld. Should this initiative be upheld and become law one significant threat to municipal revenues will have been eliminated. Downtown Parking Operations With the opening of the downtown cinema/retail complex in 2006 along with the 590 space underground parking garage that is owned and operated by the City, the parking enterprise fund that was formerly financially self- sufficient now requires an annual subsidy from the City. In FY 2010/11 the City expects to transfer $750,000 from the general fund to the parking fund to support the parking fund's operations. The length of time that this subsidy continues and the extent to which it continues are a function of how quickly paid parking activity in the downtown area increases and whether such increased demand will justify increased parking fees. It is expected that some level of general fund financial support to the parking fund will be required for the indefinite future. Sales Taxes Sales tax is critical general fund revenue as it accounts for about 18% of total general fund revenues. As a result of the pullback in consumer and business purchases, locally generated sales tax in FY 2009/10 was down $0.5 million or 3.4% compared to FY 2008/09. The majority of this decline is attributable to lower business-to-business (software sales, chemical products, electronic equipment, heavy industry, and leasing) sales. The City continues to rely heavily on sales tax generated by businesses engaged in selling software. A threat to this revenue stream is the progressive migration of businesses delivering software to their customers electronically (via lnternet download or over dedicated phone lines) which then, under regulations adopted by the State of California Board of Equalization, provides that such products are no longer subject to sales tax. Costco, a major big box retailer and one of the City's larger sales tax generators, replaced their former 121,400 square foot store with a 160,000 square foot store and added a gas station with 12 fueling stations. Construction began spring 2009 and was completed by the end of October 2009. This welcome expansion is expected to generate additional sales tax revenue for the City. iii