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

Human Resource Director should be removed as voting members of the advisory committee. b) These members should be replaced with two non- employee members who can contribute expertise to the Plan c) Members should be appointed with staggered terms, and should consider term limits. RSM McGladrey Network An Independently Owned Member Page 1 2 Ms. Lisa Absher, Finance Director City of Fort Walton Beach July 25, 2007 Page two RECOMMENDATIONS MADE BY THE CITY FINANCE DIRECTOR (CONTINUED) Response to Recommendations 1 and 2 The role, composition and governance of Council, the Advisory Committee, and the Board of Trustees with respect the Plan and related recommendations are primarily operational and legal in nature. However, the Plan is required to function within the boundaries of the Plan document and it must adhere to certain statutory, federal tax law provisions and City ordinances. As such, the City' s general and pension legal council is best qualified to provide opinions with respect to past practices and the suggested changes for recommendations 1 and 2. From an internal control perspective the governance of the Plan is the part of the City' s control environment, which is the foundation for the entire internal control system in the organization. The control environment defines the character of the organization and affects the attitudes of all individuals towards governance and control. It consists of several elements including: integrity and ethical values, competence, a qualified board of directors and executive staff, a rational organizational structure, and proper assignment of authority and responsibility. We do suggest than any potential changes are evaluated in the light of the above elements. The Government Finance Officers Association ( GFOA) has endorsed a publication to address those Risks. The section on governance has points of focus for action management may want to review as a part evaluating the recommendations made. Recommendation 3 A second- opinion of the Actuarial infonnation should be obtained. a. A peer- review that includes and experience study and check of the computer contributions and liabilities should be perfonned b. A comparison of the General Employees Plan to other Plans should be perfonned c. Periodic independent critique (peer- review) should be perfonned every 5 years. d. The amortization period used to smooth overpayments or underpayments should be reviewed Page 1 3 Ms. Lisa Absher, Finance Director City of Fort Walton Beach July 25, 2007 Page three RECOMMENDATIONS MADE BY THE CITY FINANCE DIRECTOR (CONTINUED) Recommendation 3 ( Continued) Background and Past Practices The primary risk to a defined benefit pension plan is that the assets will not support the liabilities. The underlying purpose of any defined benefit pension plan is to pay current and future benefits to its members. As noted in the publication Public Pension Systems, Statements of Key Investment Risks and Common Practices to Address Those Risks, public pension plans commonly use three basic procedures at the highest level to address and manage the risk of assets not supporting liabilities. Actuarial review - Reviews periodically performed by an actuary mainly to evaluate the trends of the liability components of the system and their relationship to existing assets. There are two distinct types of assumptions used in an actuarial valuation: Demographic assumptions - estimating flows of people through the system and non- economic factors that affect benefits. Economic assumptions - estimating the impacts of economic factors on benefits and salaries and their present values. experience) studies - Studies generally performed periodically to identify Asset/liability ( changes in the relationships between the assets and liabilities of a pension fund. The actual experience in relation to current purpose of an experience study are to review actuarial assumptions and to develop any changes in the actuarial basis ( actuarial method and actuarial assumptions) as may be indicated by such review. Asset allocation models - Models generally constructed by the investment consultant and approved by the Board to achieve diversification amorrg asset classes in the most appropriate way to provide the best opportunity for producing sufficient returns to meet the expected liabilities. In many instances the asset allocation exercise may be part of the asset/liability study. With respect to past practices the City has: annually has an actuarial valuation prepared by a qualified actuary, has established periods for the amortization of unfunded actuarial accrued liabilities that conforms with the parameters by GASB, has collected and remitted actuarially required contributions on a timely basis as to achieve the Plans stated funding policy and is widely distributed prepares a CAFR which covers pension plan activity Page 1 4 Ms. Lisa Absher, Finance Director City of Fort Walton Beach July 25, 2007 Page four RECOMMENDATIONS MADE BY THE CITY FINANCE DIRECTOR (CONTINUED) Recommendation 3 ( Continued) Background and Past Practices ( Continued) All of which are recommended practices by the GFOA. The City also has approved asset allocation models. Participation in the Plan became mandatory for all full time general municipal employees in May of 1996. The GFOA' s recommendations also include a review of the plan' s actuarial valuations performed by an independent actuary at least once every ten years as well as an actuarial experience study performed once every five years. Response to Recommendation 3 3. aWe agree that an experience study would be beneficial for the plan and management should consider the GFOA recommended practice that includes such a study every five adopting years. Included in the parameters of the study would be possible modifications to asset allocation models as well as the review of the amortization periods. 3. b While there may be benefit to comparing the City' s plan to other plans it would be important to ensure the plans reviewed have the similar benefits, actuarial assumptions, and demographics; otherwise the information may not allow a consistent comparison. 3. c We also agree an independent actuarial peer review would be beneficial to the plan and is also a recommended However GFOA suggests a ten year time frame and the City practice. Finance Director has suggested a five year window. We would recommend an analysis of the costlbenefits of the peer review in order to determine what policy would serve the City best. 3. d We would recommend that amortization period to smooth overpayments or the underpayments be analyzed in conjunction with the asset/liability ( experience) study. The Government Accounting Standards Board ( GAS B) in Statement 25 indicates the maximum acceptableamortization period for the total unfunded actuarial liability is 30 years. Statement 25, paragraph 36 [, 1.) Page 1 5 Ms. Lisa Absher, Finance Director City of Fort Walton Beach July 25, 2007 Page five RECOMMENDATIONS MADE BY THE CITY FINANCE DIRECTOR (CONTINUED) Recommendation 4 City contributions should be fixed and promptly remitted. a. City contributions to the Plan should be set and remitted based on a percentage of active member payroll. b. The City contribution rate should be set on a long term basis. A stable contribution rate should be designed to fairly allocate ( accrue) pension costs across several years. c. City contributions should be directed to investment without haste; preferably on a bi- weekly basis. d. The Plan should take measures to reduce the volatility of City contributions. e. Changes in the city contribution rate should be recommended by the Advisory Committee and requires specific approval by the Board of Trustees. Background and Past Practices The City, in the last ten years has always funded the actuarially annual required contribution to the Plan, and if fact a small over funding, exists as of September 30, 2006. The policy of the City to fund in this manner is common practice among entities and consistent with the plan document. The City clearly discloses its policy with respect to its obligation under the Plan in its Comprehensive Annual Financial Report ( CAFR). Note 6C indicates.. . The contribution requirements of plan members and the City are established annually and amended by City ordinance. Plan members are required to contribute a set percentage of their annual covered salaries. The City is required to contribute at an actuarially determined rate. In our opinion, the recent trend affecting the unfunded actuarial accrued liability of the City' s plan is a function of market conditions that have impacted pension plans nationally. Page 1 6 Ms. Lisa Absher, Finance Director City of Fort Walton Beach July 25, 2007 Page six RECOMMENDATIONS MADE BY THE CITY FINANCE DIRECTOR (CONTINUED) Recommendation 4 ( Continued) Background and Past Practices ( Continued) The GFOA publication An Elected Officials Guide to Pensions and OPEB addresses in question 45 what are the key indicators of financial health for a defined benefit plan. Two different types of information are crucial in assessing the financial health of a defined benefit pension plan: Funding progress. One key indicator of financial health is funding progress, which can be defined as the degree to which assets set aside for benefits are adequate to cover an employer' s obligations. Employer contributions. Presuming that actuarial assumptions prove correct, the full funding of the annual required contribution, regardless of the actuarial cost allocation method suggested, should result in a sufficient accumulation of assets to make promised future benefit payments to employees. The City has, as noted above, has always provided for the full funding of the actuarially determined required contribution, which is an indicator of financial health. The funding progress of the Plan became less than 99% during the actuarial valuation performed for the period October 1, 2005, and City contributions have increased significantly over the past 4 year period, which however does indicate a shift in the financial health ofthe plan. However this shift is not unique to the City of Fort Walton Beach, Florida. The GFOA in May 2006, at its annual conference presented a presentation