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

on coping with the budgetary implications of Pension Funding Volatility which is included in the GE Pension Research file. As indicated in this presentation, volatility resulting from investment declines from 2000- 2002 and benefit increases during the late 1990' s have impacted many plans. The average funded level in 2004 was 88% and 7 out of 10 plans are at least 80% funded. The City average funding level in 2004 was 99. 09% and was 88% at September 30, 2006. The presentation further indicates that US large company stocks fell approximately 43% over the period from 2000- 2002. This is the largest sustained decline since the Great Depression. That according to the Public Fund Survey, the unfunded actuarial liabilities of public plans increased 2002 market by $ 300 billion between 2000 and 2004. Much of this is attributed to the 2000- declines. Negative investment returns decrease asset values and increase unfunded liabilities which are amortized by increasing contributions. Page 1 7 Ms. Lisa Absher, Finance Director City of Fort Walton Beach July 25, 2007 Page seven RECOMMENDATIONS MADE BY THE CITY FINANCE DIRECTOR (CONTINUED) Recommendation 4 ( Continued) Background and Past Practices ( Continued) As a result of this volatility due to the extreme market declines in the 2000- 2002 time periods, the GFOA and others are currently recommending that governments take measure to reduce the volatility in the ARC in order to create a more predictable operating budget and enhance the governments' ability to meet their funding obligations. Our responses to the recommendations are founded in those suggestions. Response to Recommendation 4 4a. A fixed contribution rate is a stabilization method and addressed in the GFOA presentation materials. The GFOA points out the advantage to this method is that it is straight forward and effective. However the GFOA points out disadvantages which are that the rate may be too high in good times, rate may not incorporate risk of extreme market declines ( possible resulting in a Net Pension Obligation) and that an asset/ liability study could help optimize the rate. Conceptually we do not recommend a fixed contribution rate based solely on percentage of active member payroll. We believe the use of funding corridors and asset smoothing can provide the City the protection against volatility with less risk than using a fixed contribution rate based on active member payroll. Using the funding corridor technique, the employer contributing rate remains constant while funded ratios remains within specified limits ( for example - 90% to 110%). If the funded ratio falls below corridor, the rate is increased to amortize unfunded liabilities over a certain period. If the funded ratio rises above the corridor, the rate decreases. This in conjunction with extending the smoothing period for assets can help reduce volatility with less risk than a fixed contribution rate based solely on percentage of active member payroll. 4b. We agree to the extent possible this can be achieved through the use of funding corridors and asset smoothing. 4c. The contributions are currently being directed as required by the Plan documents. Changing the timing of such contribution remittances may increase investment returns on such contributions but will also most likely decrease investment earnings in the City' s general and enterprise funds. Page 1 8 Ms. Lisa Absher, Finance Director City of Fort Walton Beach July 25, 2007 Page eight RECOMMENDATIONS MADE BY THE CITY FINANCE DIRECTOR (CONTINUED) Response to Recommendation 4 ( Continued) 4d. We agree that the Plan should take measures to reduce volatility. We believe an evaluation of the GFOA recommendations on volatility as an appropriate action to begin the process of minimizing volatility. 5e. We agree with this recommendation to the extent it can be done using funding corridors and asset smoothing vs. a fixed contribution rate. The Advisory Council should in conjunction with an experience study recommend any changes in actuarial assumptions as well as stabilization methods to the Board of Trustees. 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. Background and Past Practices City Council has approved the use of all external service providers used by the City with respect to the Plan. Response to Recommendation 5 When contacts expire or change is warranted, we recommend the City comply with statue and their purchasing ordinance. Recommendation 6 Continuing education for the Advisory Committee and or Board of Trustees should be made a priority. Background and Past Practices We agree competence of the Advisory Committee and Board of Directors is a part of the internal control structure of the Governance of the Plan and that certain training is offered to management and Council. Page 1 9 Ms. Lisa Absher, Finance Director City of Fort Walton Beach July 25, 2007 Page nine RECOMMENDATIONS MADE BY THE CITY FINANCE DIRECTOR (CONTINUED) Recommendation 6 ( Continued) Response to Recommendation 6 Due to the shift in financial health of many defined benefit plans and resulting new methods to reduce volatility, the training provided to these individuals may need to be increased or enhanced as is often necessary in a time of change. Specific Questions posed by Council not addressed on previous pages. 1. If theCity Council sets the amount in the original budget, how can this amount be changed without bringing it back to Council? 2. How can budget transfers and line items be done without city Council approval? The September 30, 2006, audit of the City of Fort Walton Beach, Florida, in Note 2A addresses the City' s policy with regard to budgetary control. The level of budgetary control that is the level at which expenditures cannot legally exceed appropriations) has been established by the City at the fund level. The City Manager and Finance Director are authorized to transfer budgeted amounts within departments of a fund and between departments of a fund; however, any revisions that alter the total expenditures of any fund must be approved by the City Council. During our audits we have noted, when the total expenditures of a fund have been changed, those changes have been made in a legally pennissible manner. Please let us know if you have any questions or would like to discuss any of the above items in more detail. Sincerely, O' SULLIVAN CREEL, LLP Certified Public Accountants & Consultants b. & Le~ Angela D. Balent Cc - Joyce Shanahan, City Manager Page 20  Attaclunent 3 Report froll -Tun Unn Le~ s, LongDlan a Walker Pension Attorney 7/ 30/ 07  REPORT ON CITY OF FORT WALTON BEACH GENERAL EMPLOYEES' RETIREMENT FUND July 30, 2007 James w. Linn Lewis, Longman & Walker, P. A. Post Office Box 10788 Tallahassee, FL 32302 850. 222. 5702 Page 21  CONTENTS Executive Summary... ...... ................. ........ ... .......... .... ................ ....... ........ ......1 ..... .......... ..... .. Current Status of the General Employees' Retirement 3 Fund......................................... 3 Comparison With Other City Pension Plans....................................................................... Retirement Plan Comparison 4 Chart.... ... ........ ...................... ...... ........... ...... ......... ...... ..... .. 5 Past Fu nd ing Practices............................................................................................................ Employee Benefit Statements ...... ...... .............. .... .............. ................ .... ........ ... 7......... ...... ...... 8 Comments on Finance Director' s Recommendations ..................................................... Retirement Plan Options .............. .... .... ..... ......... ....... ................... .................. 12 .... ............... ..... Page 22  Executive Summary Like many cities, the City of Fort Walton Beach provides a defined benefit pension plan for its general employees. Plan benefits are based on a formula that includes a member' s years of service, final average earnings and a benefit multiplier. Under state law, the City is required to fund the pension plan on a sound actuarial basis. This means that the City must annually contribute an amount, calculated by the plan actuary,that is sufficient to pay the " normal" cost of the plan ( Le., the value of plan benefits which is expected to accrue in the current fiscal year) plus a portion of the unfunded accrued actuarial liability. The amount that the City is required to contribute each year is the " annual required contribution" or ARC. The City has historically contributed the annual required contribution, as determined by the plan actuary, each year to the retirement fund. This is exactly what the law requires. The City has historically budgeted for retirement contributions based on an estimate developed prior to the beginning of the fiscal year. The actuarial valuation, which contains the actual annual required contribution for the current fiscal year, is typically not completed until several months after the fiscal year begins. In some years the amount budgeted for City retirement contributions exceeded the annual required contribution. In those years, the Finance Director and/ or City Manager transferred amounts that had been budgeted for retirement contributions to other areas of the budget. Such budget transfers were expressly authorized by City