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

those amounts were usually related to the prior year contribution. Recommendation 1: The roles of the City Council as the Board of Trustees vs. the GE Pension Plan A~ visory 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. Although we support the general recommendation of re- evaluation, it is not for the reasons provided. It is our belief that the current role of the pension plan Advisory Committee has been expanded beyond its original intent; therefore, either the Council C~~=~~ ts Page 4 Ms. Lisa Absher August 2, 2007 Page 5 should reaffirm this original intent or consider other configurations that it might currently prefer in carrying out its responsibilities to the pension plan. There are other cities which also have the city councilor city commission also serving as the pension plan' s board of trustees. In those cases, there is usually an advisory committee or committees to whom are delegated ongoing plan responsibilities. It is uncommon for city councils or commissions to carry out the ongoing relatively there is either a fiduciary responsibilities for investing pension plan assets. Usually pension board or a retirement committee that carries out those functions. If investment responsibilities are delegated, a city usually sets up a separate pension board of trustees ( that also could be called an investment committee) to carry out this function. A separate board of trustees mayor may not also handle the ongoing plan administrative responsibilities. For example, the City of Jacksonville has a separate board of trustees that handles the investments and is responsible for the overall administration of the plan. However, the board has advisory committees to handle administrative functions such as approval of eligibility and amount of pensions. Administrative advisory committees usually comprised of employees, while are have 40%- 60% outside pension boards or investment advisory committees usually are usually the city representation (citizens with investment experience); the remainder finance director, risk manager, and/ or audit manager ( those employees with finance and/ or investment experience). We recommend the City Council first decide what extent of involvement they wish to have with to their in investing plan assets. Based on this fiduciary responsibility regard decide what types of policy decision, the City would then be in a better position to boards or committees to configure in the delegation of its overall responsibilities to the plan. In general, we recommend separating the investment and administrative functions as the performance of each are significantly different in terms of knowledge and experience. Recommendation 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 with two ( 2) non-employee members replaced who can contribute outside expertise to the Plan. c. Members should be appointed with staggered terms. A_~ fi.::~ t=-:-:: Conc~~ ts Page 5 Ms. Lisa Absher August 2, 2007 Page 6 As for Recommendation I, we believe these suggestions to be premature. However, we do not believe in configuring one committee to carry out two differing functions to be the most efficient arrangement for the City. Recommendation 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. A policy for periodic independent critique should be established. 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. In general we support the policy of obtaining a periodic peer review of the actuarial information provided to the City. However, this peer review does not necessarily need to include a complete second actuarial valuation ( although that is certainly an acceptable option). In general, experienced actuaries can review another actuary' s work and provide an overall opinion as to the reasonableness and appropriateness of the valuation results and conclusions without necessarily having to perform an independent second valuation. The " overall review" approach is the one most often used and is usually cheaper. Regarding item 3a, an experience study is normally not included as part of a peer review; this is usually performed by the plan actuary, the reason being that the plan actuary is the one responsible for changing the assumptions if indicated, and the plan actuary would have to perform an independent review of the outside experience study in order to accept it for use. Thus, this approach is rarely used. With regard to item 3b, comparisons to other general employee plans certainly seems a reasonable thing for the City to consider; however, there is significant risk in performing such studies as it is very difficult to create" apples to apples" comparisons. Most plans have different benefits ( such as cost- of-living or no cost- of-living), use differing actuarial assumptions, and use different funding methods. Some cities have discharged their unfunded actuarial accrued liabilities (UAAL) through the issuance of pension obligation bonds; some cities have changed plans recently while others have changed plans further in the past, thus leading to different funding positions. If the City chooses to do such comparisons, much caution is advised. r;~; t::=.:: Conc~ Qts Page 6 Ms. Lisa Absher August 2, 2007 Page 7 With regarding to item 3c, believe this goes along with and is consistent with we recommendation 3b in that a periodic peer review policy should be adopted by the City, and we support that recommendation. With regard to item frankly have no idea what is intended by this 3d, we recommendation. Overpayments or underpayments are not amortized at all; to be overpayments remain in the plan and underpayments generally are required made on or before the end of each fiscal year. Recommendation 4: City contributions should be fixed and promptly remitted. a. City contributions to the Plan should be set as 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. e. Changes in the City contribution rate should be recommended by the Advisory Committee and require specific approval by the Board of Trustees. With regard to item 4a, although it is possible to " set" current year' s contribution requirements as a percentage of active member payroll, it is much more common to determine each year' s requirement as a dollar amount then express that as a percent of known expected applicable fiscal year payroll. In this manner, the budgeted amount is and will not fluctuate based on a percentage of payroll that is not known until the actual end of the fiscal year. Recommendation 4 in general states that City contributions " should be fixed".... Item 4b expands on this to suggest the rate " should be set on a long-term basis." As the s pension attorney pointed out at the June Council meeting ( and we concur), City' that a fixed rate having a fixed rate would probably be illegal under Florida law. (Note would work so long as the fixed rate is always higher than the ARC as defined by Florida statutes. However, over the long term that is unlikely to be the case unless a well intended, it is just not possible in financing of very high rate is set.) Although defined benefit plans to adopt and be able to live with a " fixed rate." A_ ~~:..:.:: f~.::~ Conc~ Qts Page 7 Ms. Lisa Absher August 2, 2007 Page 8 It should be noted that the actuarially derived contribution rates are intended to be stable" at least in theory in that if all actuarial assumptions are realized, the permanent cost element of the pension plan ( referred to as normal cost) is developed as a series dollar amounts for each year in the future that result in those dollar amounts being a level percent of each future year' s expected earnings. This is performed separately for each individual and added together to determine the plan' s normal cost. This normal cost then is expected to remain level as a percentage of expected payroll in the future for the group currently being valued. In future fiscal years, as employees retire and new employees are hired, this