Fort Walton Beach Council agenda — 08-22-2007 special agenda — reading text

" stable" normal cost rate does vary as the employee characteristics change, but the changes are not normally expected to be severe ( thus stable"). Virtually all defined benefit plans in the State of Florida use level percentage of payroll funding consistent with that described above, including the City' s General Employees Pension Plan. The reason why actual City requirements fluctuate is usually due to experience different than that assumed; the most likely reason is having actual investment returns being greater or less than that assumed. Thus, even though over the long term the expected investment rate is earned, contribution requirements will vary from year to year as those variances are recognized. There are ways the City can address the dampening of this volatility; the three usual in the City' s general fund, a stabilization fund ways are: pension reserve account account within the and making contributions in excess of those required pension plan, into the plan. Unfortunately, most stabilization methods usually require allocating or funding more than the requirement in order to build up reserves, thus further straining City budgets. Striving to obtain more stable contribution requirements is a reasonable objective; however, whether or not this technique is suitable for the City is beyond the scope of the project. With regard to item 4c, we do not understand item 4c as it appears to be dichotometric; however, we have no problem with whatever frequency of contributions the City may wish to adopt. Item 4d has been discussed as part of item 4b above. J:. .:~= :.=.==.=.: C~~~=~ 2tS Page 8 Ms. Lisa Absher August 2, 2007 Page 9 We do not understand item 4e. It is our understanding that under State rule, the actuary is the one with the responsibility of recommending the required contribution charged rate to the pension plan; the board of trustees of the plan has a responsibility to accept or to not accept) such report. In the event the trustees do not accept the report, they are charged with the responsibility of obtaining a report that they will accept ( either from that actuary or another actuary hired by the plan). If the City Council wishes to charge the Advisory Committee with recommending acceptance, we would have no objection to that procedure. Recommendation 5: The plan should retain professional experts who act in a fiduciary capacity. a. A competitive selection process should be used for all external service providers. b. Cost of services should be reviewed and specifically approved by the Board of Trustees. c. The Plan' s current directed brokerage program should be reviewed. With regard to general Recommendation 5, it is our understanding the City already retains " professional experts" to advise them with regard to operation of the plan. In addition, it is ourunderstanding that the only professional experts who act in a fiduciary capacity are those charged with the investment responsibilities of the plan. However, we defer to legal counsel with regard to who is acting as a fiduciary for the plan. With regard to the other elements of Recommendation 5, we believe they are outside the scope of our purview. Recommendation 6: Continuing education for the Advisory Committee should be made a priority. a. Travel to public retirement trustees seminars should be encouraged and paid for by the Plan. With regard to Recommendation 6, we believe this recommendation to be premature. To the extent that the Committee functions in a fiduciary capacity and is Advisory charged with carrying out the investment responsibilities of the plan, we believe that continuing education would be appropriate. Note that most public retirement trustee seminars are focused on the investment with administrative functions, process; to the extent the Advisory Committee deals only these seminars are of limited utility. Thus, it mayor may not be appropriate to give priority to these kinds of seminars depending upon what advisory structure the City Council believes is in its best interests. A;;; IijC~~~!~~ ts Page 9 Ms. Lisa Absher August 2, 2007 Page 10 Comments and Other Presentation Statements There were several other statements made during the presentation by the City Finance Director that we believe deserve comment. They are provided below: Most cities in Florida have abandoned their traditional what they call a defined benefit plan, for something like a 401( k) plan." ( presentation transcript page 2, paragraph 5) Our experience is the opposite- most cities in Florida have not abandoned their defined benefit plans. In fact, the strong union presence in a majority of plans has served to stonewall any efforts by cities to consider switching to a defined contribution type plan. We are currently contributing $ 1.6 million which is equivalent to about 10% of 2, your annual general fund operating budget." ( presentation transcript page paragraph 6) We do not understand this comment; the current City requirement for fiscal year 2006- 2007 is approximately $ 1.23 million; it is our understanding that the City intends to pay only the ARC. Our current required contributions for the current year are in, are 14. 95%. That's very high. The averages for these types of numbers should be 5% and probably anywhere between 5 and 8%, you see more likely 6% on average. In comparison to our peers are what you say a little bit more healthier plans, this is a very high figure." ( presentation transcript page 3, first paragraph) We do not agree with these statements. In our experience the City' s contribution requirements are less than many cities. In comparison to its peers, we believe the current City requirements to be much better than average. To state that the for average city pension plan contribution requirement averages 6% is not correct plans in the State of Florida. As soon asyou get below about 80% ( funded) you get in trouble with the Division of Retirement who is the governing body who has authority over making sure you' re taking the right fiduciary actions, so that you can see we' ve declined significantly in recent years." ( presentation transcript page 4, second paragraph under last Lisa entry) i~ A;: C~~~!~~ ts Page 1 0 Ms. Lisa Absher August 2, 2007 Page 11 We are unaware of any such measurement and believe there is no such " funding acceptability threshold." In general, for ongoing plans, 80% funding of projected liabilities ( liabilities for benefits already earned, plus present value of future liabilities of benefits expected to be earned in the future), 80% does not seem to be an appropriate benchmark for a plan in " trouble." This is because payments of pension benefits extend many years into the future. The only time a plan is in " trouble" is if it runs out of money" to pay pensions. To put it in perspective, current annual payments to retirees are about $ 1.6 million, and the actuarial present value of all current retiree future pension assets close payments is approximately $19 million. This is contrasted to current to $ 30 million ( all information as of October 1', 2006). So additional assets that would make the plan 100% funded are not needed until many years in the future. In fact, the actuarial basis behind development of the ARC is based on having the plan 100% funded by the time retirement payments are due. In terms of being able to meet its obligations, the plan is in " good shape." After you have had a chance to review this information, please let us know if you have any questions. Sincerely, t) 14, ila.. t h Michael J. Tierney Y~~~'~~ F.;;;;; ts Page 11  Attaclunent 2 Report frolD Angela Balent O' Sullivan Creel City' s Auditor 7/ 25/ 07 a1~ O' SULLIVANCREEL LLP i'Cert(fied Public Accountants & Consu/; ants 45 Beal Parkway, N. E.' Fort Walton Beach, FL 32548' ( 850) 244- 5121 July 25, 2007 Ms. Lisa Absher, Finance Director City of Fort Walton Beach 107 Miracle Strip Parkway SW P. O. Box 4009 Fort Walton Beach, Florida 32549 City Council has requested our comments with respect to opinions on the past practices of the City' s general employee pension plan ( Plan), and opinions on the recommendations to the General Employees Plan made by the Finance Director/ Plan Administrator. Council has also asked for any other suggestions we might have concerning the plan and individual council members have also submitted specific questions. We will embody our comments topics using the format of the six on the first two recommendations made by you at the City Council meeting held June 12, 2007. The individual questions asked by Council, if not addressed in our responses, will follow the recommendations. RECOMMENDATIONS MADE BY THE CITY FINANCE DIRECTOR Recommendation 1 The roles of the city Council as the Board of Trustees vs. the General Employee Pension Plan Advisory Committee should be re- evaluated. a) There should be increased clarification of responsibilities between City Council as the Board of Trustees and the Advisory Committee. b) There should be a clear differention between when City Council is taking action as the Board of Trustees or as City Council c) City Council should appoint the members of the Advisory Committee. d) City Council should consider increasing the independence of the Advisory Committee. Recommendation 2 The Advisory Committee membership should be changed. a) The Finance Director and