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

Director Date Reviewed and Concur: it // 7/ 01 Q~~- J y e anahan, elVM ity anager Date Attachments: 1. Report from Actuarial Concepts, GE Pension Plan Actuary 8/ 02/ 07 2. Report from Angela Balent, City Auditor 7/ 25/ 07 3. Report from Jim Linn, City Pension Attorney 7/ 30/ 07 4. Linn Memo regarding Budget Transfers 8/ 08/ 07 5. Shanahan memo regarding Pension Recommendations 6/ 11/ 07 6. Absher memo/ Staff Report for 6/ 12/ 07 Meeting 3  Attaclunent 1 Report frolll Mike Tierney Actuarial Concepts Actuary 8/ 2/ 07  5 Conci~ts Nenl18cmcnl AdVic50FJ3 13endils cBpecialic5ls August 2, 2007 Ms. Lisa Absher Finance Director City of Fort Walton Beach P. O. Box 4009 Fort Walton Beach, Florida 32549 Dear Lisa CITY OF FORT WALTON BEACH GENERAL EMPLOYEES RETIREMENT FUND RESPONSE TO CITY FINANCE DIRECTOR RECOMMENDATIONS The City Council has requested we review and comment on the City Finance Director recommendations presented to the Council on June 12, 2007, as well as to comment on the following items: Opinions on certain past pension' plan practices related to budgeted City contribution requirements, pension plan cash flow and budgeted contribution information on employee statements. Comment on current pension plan funded status. Comment regarding other statements made during the June 12 presentation regarding the pension plan. Our comments on the items listed above follow. A summary of the recommendations presented by the City Finance Director is then repeated below for convenience along with our comments. Budgeted Contributions The recent past practice of the City in budgeting contributions for any fiscal year has been to set the budget at last year' s annual required contribution (ARC) amount. Then, when the actuarial report applicable to that fiscal year is published ( usually several months after the start of the fiscal year), the City would adjust its actual contributions payable to equal the ARC. This approach is standard practice for cities that fund their plan based on the current year' s actuarial valuation report. Prior to 2003, the City did budget a standard 6% of payroll as pension contribution estimate irrespective of the ( lower) prior year ARC. However, that procedure was changed on and after 2003. 30'20 MarUcy Rd., 6uite 250, JBdsORVjJJC. l'L 32251 Phone: (904) 26'2- 30ro. lux: 90.) ( 268- 3') 74 r:-tina.il: aa@aduana! collcepLs. com Page 1 Ms. Lisa Absher August 2, 2007 Page 2 In years where the ARC turns out to be greater than the budgeted amount, additional funds are allocated within the s budget. In years where the ARC is less than a City' budgeted amount, contributions are adjusted downward to reflect the ARC. Several questions have been raised regarding the appropriateness of how adjustments to the budget have been made. As that is more of a legal issue, we will leave that issue to others. However, as part of this review of past practices, we have asked several of our other city clients as to their practice in handling adjustment to the pension items in their operating accounts and whether this procedure was outlined by ordinance or by procedure. A summary of what was gleaned follows: All cities reported that adjustments to any expense line item ( such as pension contributions), so long as they do not increase the overall city budget, are normally made without further city council or city commission approval. All responses indicated that any adjustments to the pension line item that would an increase in the total city budget would require additional specific require council or commission approval. One city had the budget adjustment procedure specified in the city ordinance code; the remainder of the cities address it as part of their financial statement operating procedures. If the City had contributed the budgeted amount in 2002 ( rather than contributing only the ARC), would the Cityhave been better off?" was a question asked during the session. With hindsight, our opinion is the City would not be better off. This is because amounts contributed in 2002 would have experienced a significant decrease in value, since invested assets declined during period consistent with the poor overall that financial market conditions. Thus, increased contributions in subsequent years where yields were positive would have served the City better than contributing greater amounts in 2002. We recommend the focus be on required contribution amounts, not the annual budgeted amounts. Whether or not to pay budgeted amounts is irrelevant; funding the ARC is what is important and what virtually all financial advisors recommend be done for sound funding practice. Conc~ Qts Page 2 Ms. Lisa Absher August 2, 2007 Page 3 Cash Flow Starting in 1991 the City changed its pension financing approach from that of a bundled provider" to an " unbundled" approach separating the functions of investment advisor from the plan custodian. As part of that process, pension plan" cash flow" previously handled automatically by the " bundled provider" now needed to be addressed by the plan administrator, periodically authorizing the transfer of amounts from invested accounts to payment accounts as required. For cities using " unbundled providers," the above- described procedure is standard practice. However, depending contributions, dividends and interest) upon where " new money" ( city and employee are placed, different magnitude of adjustments would apply. Some cities allocate city and member contributions to the custodian' s benefit payment account, while others allocate to an investment account. Usually, dividends and directly bond interest remain in the account that generated those cash flows unless specifically instructed otherwise. It is incorrect to suggest that pension plans that cannot meet their benefit payments only and member contributions have " or " funding issues." Since the with city problems" function of plan is to make retirement payments, and since pension primary a pension plans generally now are required to pre- fund their pension promises, a normal activity of a pension plan is to convert a portion of its investments to cash in order to make cash allocation of its " new payments to retirees. Depending upon how a city handles the account can be maximized or money," the allocations to the pension payment minimized. To the specific question " Did the City have ' cash flow' problems in 2002?; does the City have cash flow now?", the answer is of course not. As the City financial problems statements showed for fiscal year ending September 30, 2002, the pension plan actually had a funding " surplus" ( defined as a negative unfunded actuarial accrued liability). With a GASB- 27 funded percentage of 105.65%, at that point the pension plan had more amounts would be. To describe normal cash money than normally targeted funding flow activities between the trustee' s invested accounts and the payment accounts as problems" is misdirected and without merit. Employee Statements The City has historically provided benefit statements to employees to emphasize what the City is spending on behalf of those employees, especially for elements other than direct wages. The purpose was to increase the employee' s awareness of what it costs the who City for their employment beyond the cost of their wages. For plan sponsors choose to produce " total benefit statements" ( and there are many), it is standard A~t~(~~~ ig2tS Page 3 Ms. Lisa Absher August 2, 2007 Page 4 practice to use applicable information from the year prior to the year of the statement; usually employee benefit statements are produced before knowing what costs are for that year. It is important to note that the cost estimates shown on the statement are average costs. It is not intended to represent the actual cost allocation for that employee. ( This would instead of one valuation, the req~ re separate actuarial valuations for each employee; City would receive close to 400 individual valuations!) It is also important to note that what the City contributes toward the employee' s pension is not directly related to what the employee will receive in pension benefits. The obligation the pension plan has to the employee is defined by the retirement benefit formula, and is unaltered by the financing contribution plan adopted by the City. The Finance Director made a statement at the City Council meeting in June to the effect that budgeted amounts shown on the employee statement were not paid as " supposed to." The budgeted amounts were never " supposed to" have been paid. The ARC is the only amount that was " supposed to" have been paid and it was. The recent past practice of the City was to set the then current year' s budget at the prior year's actual requirement. For example, for fiscal year 2002- 2003, the ARC was approximately 7% of payroll ( shown as 6.99% in the actuarial report). For fiscal year 2003- 2004, the budgeted amount was set at 7% of payroll, the prior year' s ARC. Thus, recent employee benefit statements generally did relate to average percent- of-payroll ARC amounts; it' s just that