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

adjustments, the costs can be shared with employees. Currently employee contributions are fixed and the City bears all the investment risk. Linking retirement benefits to the Plan' s financial position/ condition - under this approach benefits would be linked to the Plan' s investment performance. Creation of reserve funds also helps to lessen the effects of volatile market conditions on employer contribution rates. To that end, in 2002, the City began designating a portion of its fund balance for Retirement. As of September 30, 2002, $ 600, 000 was set aside for the purposes of off- setting increasing costs of employer contributions. The difficulty with such funds is that when assets are plentiful, it is easy to fund the reserves, but when assets become more limited the demand for these special reserves increases. As of September 30, 2006, the City had $ 276, 000 set aside in Retirement Reserves and an estimated $ 262, 518 budgeted for use during the 2007- 08 budget year. Professional Experts: The Plan currently retains professional experts who act in a fiduciary capacity, and include: investment managers, investment advisor, custodial services/ benefits manager, actuary and pension attorney. These experts have been approved by City Council as indicated below. Investment Advisor/ Merrill Lynch - City Council initially approved an agreement with Merrill Lynch on July 25, 1989. A new agreement with Merrill Lynch was approved by Council on November 26, 2002 and was signed on April 1, 2003. Actuary/Actuarial Concepts - The City entered into agreement with Actuarial Concepts on July 25, 1989 to provide actuarial valuation for the Pension Plan. The City has maintained its relationship with this firm since that time. Custodial Services - Benefits Manager / Salem Trust Company - Approved by City Council on March 13, 2001. This represented a change from existing provider SunTrust. costs of the plan. The City Council shall, in the preparation ofthe annual budget for the City, place in such budget anappropriation of sufficient sum to meet it' s agreed upon share of these costs. The Finance Director shall pay such amounts into the retirement fund each year as soon after the beginning of the fiscal year as feasible, based upon the availability of funds from City operations, but no less frequently than quarterly. Page 3 of4 Page 44  Investment Managers - Davis Hamilton and Jackson and Sanford C. Bernstein ( now Alliance Bernstein) - Approved by Council on March 13, 2001 ( which represented a change from SunTrust) to provide greater diversification of the Plan' s investments as recommended by the Investment Advisor. Attorney - Lewis Longman and Walker - The pension attorney has been engaged by the City since approximately June 17, 1997, although in lieu of a contract, the City contracts with the firm on an hourly basis. ContinuinQ Education: The City has always encouraged continuing education for its employees. Prior Finance Staff has attended annual Public Retirement Trustee Seminars. They are and should continue to be encouraged to attend such continuing education programs and training. Thank you. Page 4 of 4 Page 45  Attaclunent 6 Staff Report frolD Usa Absher Finance Director For 6/ 1Z/ o7 Meeting  CITY OF FORT WALTON BEACH MEMORANDUM DATE: A- ugU8t 16, 2007 RGPe. IU"\b/ II/ O"': f TO: Honorable Mayor and City Council Members FROM: Lisa Absher, Finance Director SUBJECT: Report on " Financial Condition of the GE Pension Fund" In light of your directive at our most recent meeting, to provide City Council with direct communication regarding my concerns, I am providing the following memorandum. Since my employment with the City on 11/01/06, I have been working to accomplish a reconciliation and explanation for the current funding situation and financial condition of the General Employees' ( GE) Pension Plan. As requested at the City Council meeting on 5/ 29/ 07, I am providing a summary of my conclusions, findings to- date, and recommended improvements. Financial Condition of the GE Pension Plan The Plan currently has 235 current employee members and funds 110 retirees. Police and Fire employees have their own Plans. Funding for the GE Plan comes from: 1.) mandatory employee contributions at 5% of wages, 2.) City ( employer) contributions, and 3.) investment earnings. The Plan' s financial condition has been generally sound, however the Plan' s Funded Ratio has declined to 87%, and the Plan is currently experiencing higher-than- usual requirements for contributions. In order to meet current estimated liabilities, the City is contributing 14. 9% of wages, plus the employees' 5%, for a total of 19. 9% of payroll. The most recent Actuarial Report advises that this rate should be increased to 20.95% for FY2008, with 15. 95% coming from the City. Current required contributions for FY2007 total $ 1.6 million of which $ 1.2 is from the City. This is a substantial increase compared to prior years, and a significant burden on the City' s finances. City Manager and Staff have discussed possibly abandoning the Plan due to this cost, and City Council requested an inquiry into alternatives at the Strategic Planning Workshop on 1/19/ 07. The reasons previously given to City Council for the Plan' s current situation have been 1.) retirement options). poor investment returns and 2.) increases in employee benefits ( early 1 Page If\i; My examination has provided two additional reasons: 3.) minimum City contributions in years of poor cash- flow and investment performance, and 4.) history of redirecting budgeted City pension contributions to other budget needs. The GE Plan can be Changes can be made to maXImIze funds, develop improved. oversight, and improve its financial condition. A list of recommendations is provided as follows. Recommendations The following changes or improvements to the GE Pension Plan are recommended: 1. The roles of the City Council as the Board of Trustees vs. the " GE 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 differentiation 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. 2. The Advisory Committee membership should be changed. a. The Finance Director and HR Director should be removed as voting members the Advisory Committee. b. These members should be replaced with two ( 2) non- employee members who can contribute outside expertise to the Plan. c. Members should be appointed with staggered terms, and should consider term limits. 3. A second- opinion of the Actuarial information should be obtained. a. A peer- review that includes an experience study, and a check of the computed contributions and liabilities should be performed. b. A comparison of the GE Plan to other Plans should be performed. c. Periodic independent critique (peer- review) should be performed every five 5) years. d. The amortization period used to smooth overpayments or underpayments should be reviewed. Note: A second- opinion of the current Actuarial Valuation has been recommended by the Advisory Committee. 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 ( 26 times per year). d. The Plan should take measures to reduce the volatility of City contributions. 2 Page + 7  e. Changes in the City contribution rate should be recommended by the Advisory Committee and require specific approval by the Board of Trustees. 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. 6. Continuing education for the Advisory Committee should be made a priority. a. Travel to public retirement trustees seminars should be encouraged. Attachments to this Report A 10- year history and averages of the Plan contributions and returns were presented and discussed at the 5/15/ 07 GE Pension Plan Advisory Committee meeting. Copies of the minutes and handouts provided are attached. The GFOA ( Government Finance Officers' Association) " Best Practices" for pension funds were presented and discussed at the 6/ 12/ 07 GE Pension Plan Advisory Committee meeting. A copy of this handout is attached. Additional Research and Documentation I have provided the City Clerk' s office with a complete copy of my extensive research file on this subject, and supplemental documents. These are available for further review, if so desired. Please let me know if you have any questions. 3 Page 4 8  Attaelunent 7 Minutes of Meeting June I2, 2007  r~' I," 1 3