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

C lco8c.9: 2: C _ (/) "' E L- J (/) c: ", Q) C Q) cffi co CCI(/)_ co C~ O_ Qj~ C Q) coS: cCOE Q) Q) 2-S:: J~ CClc: cc=: c e- J i5.,...; coC6o g:!:: 8 L- co co 0 OLLIII J ... J ct~~ I_ J)~ Page 26 Conclusion: The Ft. Walton Beach General Employees' Retirement Plan is reasonably well-funded. The Ft. Walton Beach plan compares favorably to general employee cost pension plans in 18 other small to medium size Florida cities in terms of current required contributions) and funded ratio. Past FundinQ Practices The Finance Director has noted that the funded ratio of the City retirement plan has declined in recent years, from 117% in 2001 to 87% in 2006. However, virtually all defined benefit plans incurred significant actuarial losses during this period, resulting rate of mainly from poor investment returns between 2001 and 2003. The actuarial return on City retirement fund investments since 2002 has averaged only 3. 5% per year. coupled with other non- investment actuarial losses, It is this investment performance, that have produced the decline in the funded ratio. The Finance Director has identified " two additional reasons" for the current condition of the City retirement fund: in of cash- flow and investment minimum City contributions years poor performance" and to other budget history of redirecting budgeted City pension contributions needs." However, a review of the historical documentation shows that the City has made the annual required contributions, as specified by the plan actuary and in accordance with fund applicable law, during every fiscal year. Under Florida law, the City is required to the retirement 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' s audited financial statements and annual actuarial valuations clearly reflect that the City has paid the full annual required contribution in during every fiscal year. In short, the City has done exactly what the law requires terms of funding the retirement plan. There are a few cities that have made pension contributions in excess of the annual required contribution amount during some fiscal years. These excess contributions can stabilize contributions in future But the vast majority of be used to offset or city years. cities do exactly what Ft. Walton beach has done, and exactly what the law requires: contribute the annual required contribution each fiscal year. The City of Ft. Walton Beach has provided, in its budget, a designated reserve fund for retirement contributions. Although this reserve fund is outside the retirement fund, it can serve the same purpose as making excess contributions to the retirement fund: stabilization of City retirement contributions from year to year. 5 Page 27 With respect to the Finance Director' s second point, that the City has " redirected budgeted pension contributions to other budget needs," it should be noted that: The City has historically budgeted an amount for retirement contributions for the next fiscal year based on an estimate from the actuary received 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 received several months after the fiscal year begins. In several fiscal years, the amount the City budgeted for retirement contributions exceeded the annual required contribution. In those years when the amount the City budgeted for retirement contributions exceeded the annual required contribution, funds were transferred to other areas of the budget in accordance with the City budget ordinance. Every budget ordinance adopted by the City Council contains the following ( or substantially similar) language: Appropriations may be transferred for the purpose of equalization when needed by a budget transfer with the approval of the Finance Director and/ or the City Manager as necessary. This action will not change the total dollar amount of the budget." The above language expressly authorizes budget transfers that are approved by the Finance Director or City Manager, as long as the total dollar amount of the budget is not changed. City Council approval is not required, unless there is a change to the total dollar amount of the budget. The authority to make budget transfers ( i.e., transfers between different budget lines), is commonly provided to city managers in city budget ordinances. The actuary has recommended that the City move to the " payment delay" model for future actuarial valuations, where the City' s annual required contribution would be determined well before the City budget is adopted. By adopting the " payment delay" model, the City would eliminate many of the issues that have been raised concerning differences between the amount budgeted for retirement contributions and the amount actually contributed. With " payment delay," the amount budgeted for retirement would be the same as the annual required contribution. Conclusions: 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. 6 Page 28 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 budget ordinances, and are a common practice in many Florida cities. Many defined benefit plans incurred significant actuarial losses during the past few 2003. The years, resulting mainly from poor investment return between 2001 and actuarial rate of return on City retirement fund investments between 2002 and 2006 averaged only 3. 5% per year. It is this investment performance, combined with other non- investment actuarial losses, that have produced the decline in the plan' s funded ratio. The actuary has recommended that the City move to the " payment delay" model for future actuarial valuations, where the City' s annual required contribution would be determined well before the City budget is adopted. By adopting the " payment delay" model, the City would eliminate many of the issues that have been raised concerning differences between the amount budgeted for retirement contributions and the amount actually contributed. With " payment delay," the amount budgeted for retirement would be the same as the annual required contribution. Emplovee Benefit Statements Like many employers, the City of Ft. Walton Beach provides annual statements to its employees reflecting each employee' s pay and benefits. There are two different statements sent to employees every year: ( 1) a " Statement of Retirement Plan Benefits" and ( 2) an " Earning and Benefit Statement." A brief description of each statement follows. Statement of Retirement Plan Benefits - this statement is prepared by the actuary, and shows each employee' s accrued pension benefit, vested percentage, vested monthly benefit and member contribution amount. Earning and Benefit Statement - this statement reflects the employee' s pay for the a variety of fringe year, including overtime and other pay, as well as the value of benefits, including health, dental and life insurance, City