Fort Walton Beach Council agenda — 06-26-2007 regular agenda — reading text

in terms of how the Plan in Fort Walton Beach compares with the universe of Plans out there. He said, to put the General Plan in context which has been characterized as having these problems, he would point out that if they just look at their own Police and Fire Plans and look at the total required contributions for those Plans for this year, the total required contribution for Fire is 25. 7% which is the combined employee/ employer stake, the total required contribution for Police is 23. 9%, the total required contribution for the General Plan is 20. 95%. He said no one likes to see contribution levels even that high but he would urge before taking action on any of the recommendations to look at it in terms of what the other Plans are doing and what other Plans around the state are doing. He concluded by saying that much of what the Finance Director presented to Council has merit, there are things said that are certainly worthy of Council's consideration, they are policy issues. He said whether Council wants to give more independence, more authority to the General Pension Board is a policy issue that ultimately Council would decide. He pointed out a lot of things said he could not follow the basis and some of the recommendations, one in particular, would violate the law and because they did not have an opportunity to talk about it in advance of the presentation he was not able to convey that to the Finance Director before he conveyed it to Council. Mr. Minich wished to know how long it would take Mr. Linn, after his review of the recommendations, to come up with his recommendations on the recommendations. Mr. Linn replied two to three weeks.  21 6- 12- 07 Regular Meeting REVIEW OF PENSION PLANS cont. Mr. Hartwell asked Mr. Linn' to enlighten Council on which recommendation is illegal. Mr. Linn replied, based on his understanding' on the recommendation that the City needs to have ,a fixed contribution amount and needs, to stick to that fixed contribution amount, that is really hot the way that defined benefit plans work and it is not the way the law works for defined benefit plans. He said a fixed contribution amount is fine if there is a defined contribution plan like a 401 K where the employer c ' decided they will put in 5% and that is it and whatever the employee wants to contribute that is it and 1 then what ever the account value is, that is what the benefit is. He said in a defined benefit plan there is a promise of benefits, there is a formula to get X percent per year and when you retire you can calculate what your benefit is worth. He said because of the nature of the plan it is funded in a different way in an actuarial, it is required by law to be funded in an actuarial fashion which means that the City is required to put in whatever is necessary to maintain the Plan on a sound actuarial basis, and that is what the Actuary brings to the City and that is why setting a fixed contribution amount does not work for those kinds of Plans and, he believed, would be contrary to the State really law on funding these Plans. Mr. Miller commented Council will meet again in two weeks and asked if Mr. Linn could return with his evaluation and recommendations then. Mr. Minich called a point of order that Council has not heard from the Actuary and it is not known how long it would take for his evaluation. Mike Tierney, Actuary, first stated he agreed with the recommendation on getting a second opinion, it is a good idea and he would welcome it. He addressed the comment that the 14. 95% City!""', i', contribution was a high figure and stated for a Plan like the City' s which has an automatic cost- of- :\ livingfeature of 3% it is actually a lower than average cost as not a lot of Plans have an automatic':; cost-of- living feature which add 30% to the cost of the Plan. He said because of that they have to He compare themselves, not to the universe but to other Plans that haVe cost- of-living benefits. explained how the actuarial methodology smoothes the results over a five year period to try to dampen thevolatilityof the economic effects on the financing of the Plan through asset averaging and liability amortization. a'" Mr. Hartwell commented it seemed that practice puts the City at risk and more vulnerable whereas set amount contributed, like a 401 K, by the City then it is the stock market that helps the Plan grow and it is not the City having to make up the difference in the lean years. Mr. Tierney stated that is a Plan; they have a good point but that means the City would have to change the structure of their defined benefit plan which means the City has promised benefits and they have to pay whatever it is and assumed all the risks. He said if the they did not want to assume the risks, then they need to City if have a Plan where the employees assume the risk. Mr. Hartwell commented he was just wondering the City had the right vehicle for their Plan in today' s market. Mr. Tierney replied that is a very good are asking that question and deserves its own attention at its own meeting. He said a lot of people and he has done numerous studies in the last two years on that question for other Cities, question and there is no easy answer. and The Mayor commented Council does not have enough information to make a decision tonight recommended Council look at it and not make a decision tonight. Mr. Miller mentioned the City has a 15 year amortization schedule and wished to know if a 30 year because it schedule would be better. Mr. Tierney did not think so but stated that is andther question involves the of which philosophy of taxpayers should be charged and it depends on how generation Council wants to handle the financing of the Plan over the long term. . made the Plan Mr. Tierney addressed the question posed earlier on if the cdntribution requirement is it would not make fully funded. He replied the answer in this case is no, but maybe the answer yes; it fully funded on it fully funded on the financial statement measure of funded status but it would make earned to date funded basis, the answer is yes and no. an accrued benefit what people have so 22 Regular Meeting 6- 12- 07 REVIEW OF PENSION PLANS cant. Mr. Miller asked if the City could elect not to put in 20% but to put in 10%. Mr. Tierney said the requirement is the requirement under the State Law rules to determine the minimum amount to make, they can choose to make more but they have to make at least that, but if they want to change the amortization method, then they can make the legal requirement be less. Mr. Tierney addressed the question on the 8% budgeted but not put into the Plan and said it is not a 0 defined contribution plan, the information on the employee' s statement has nothing to do with their benefit. He said whether the City contributes 2% or 8% the employee gets the same; they have no interest in whatever that amount is. He said the question was asked if the City paid 8% in 2002 would .. they be better off and the answer is probably not because that is when they lost 8%, but that is not a fair way to judge it and thought to do some sort of averaging method is reasonable. He said if they are less than 80% funded they would not get in trouble with the State Actuary, and relative to what he has seen the City is in good shape; the goal is .100% but it does not mean they have to be there today. He believed relative to the investment performance the City is doing thing, hiring professionals that are allocating the assets at 8% and pointed out the investment policy is the important factor. He commented the Plan has never had a negative cash flow even though it is a mature Plan arid taking money required for the Plan is by State Law and Council can choose to do anything equal toar more and it is Council' s prerogative to decide. He said he would strongly recommend taking a report and having a yea.r delay in its application so that. the 2006 report would be used to determine the requirements for the 07/ 08 Fiscal Year so that when they set the budget they will know the contribution and there will not be an issue between budget and the requirement. Mr. Garvie wished to know if there is a way to set up the Fund to level out the amount going out every year. Mr. Tierney replied they have to have the reserve funds to use at times when contributions are lower or take out when contributions are higher, so they can try to pay a fixed amount even though they cannot do it by law, they can do it by their own side funds to help through the loops, and it takes more money than the requirement. He mentioned there is a City with a model that if the City contributions got too high then the difference is split with the employees, so they share the cost of excess cost. He said that is one way to help with the funding of the current Plan without having to actually change the Plan structure. The Finance Director pointed out starting on page 129 of the backup describe that the