Fort Walton Beach Council minutes — 06-12-07 regular minutes — reading text

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 really work for those kinds of Plans and, he believed, would be contrary to the State 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 contribution was a high figure and stated for a Plan like the City' s which has an automatic cost- of- living feature 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 compare themselves, not to the universe but to other Plans that have cost- of-living benefits. He explained how the actuarial methodology smoothes the results over a five year period to try to dampen the volatility of the economic effects on the financing of the Plan through asset averaging and liability amortization. Mr. Hartwell commented it seemed that practice puts the City at risk and more vulnerable whereas a 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 good point but that means the City would have to change the structure of their Plan; they have a defined benefit plan which means the City has promised benefits and they have to pay whatever it is and they assumed all the risks. He said if the City did not want to assume the risks, then they need to have a Plan where the employees assume the risk. Mr. Hartwell commented he was just wondering if the City had the right vehicle for their Plan in today' s market. Mr. Tierney replied that is a very good question and deserves its own attention at its own meeting. He said a lot of people are asking that question and he has done numerous studies in the last two years on that question for other Cities, and there is no easy answer. The Mayor commented Council does not have enough information to make a decision tonight and 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 schedule would be better. Mr. Tierney did not think so but stated that is another question because it involves the philosophy of which generation of taxpayers should be charged and it depends on how Council wants to handle the financing of the Plan over the long term. Mr. Tierney addressed the question posed earlier on if the contribution requirement made the Plan fully funded. He replied the answer in this case is no, but maybe the answer is yes; it would not make it fully funded on the financial statement measure of funded status but it would make it fully funded on an accrued benefit what people have earned to date funded basis, so the answer is yes and no. 22 Regular Meeting 6- 12- 07 REVIEW OF PENSION PLANS cont. 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 I, defined contribution plan, the information on the employee' s statement has nothing to do with their dI, 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 and taking money required for the Plan is by State Law and Council can choose to do anything equal to or more and it is Council' s prerogative to decide. He said he would strongly recommend taking a report and having a year 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 City was starting to have cash flow problems and liquidating and selling investments starting in 2002. Larry Cole with Merrill Lynch commented the Advisory Board is a good idea; there may be better ways to handle the cash flow as right now the amount of money going out every quarter is just slightly more than the contributions coming in so the Managers do not have to sell assets every quarter to fund the retirement benefits; that most cities are probably putting in the minimum contribution required by the actuary; and the majority of people that have 401 K options put it in more conservative options. Mr. Minich received confirmation from Mr. Cole that his firm would be able to provide written comments with suggestions. Angela Ballant with O' Sullivan Creel, mentioned the GASSY 25 and GAS BY 27 are the Governmental Accounting Standards Board that basically govern the accounting, presentation and display of what is required for the City' s pension plans. She pointed out that Note 6 in the Audit has all the pension plans broken out as well as all the required disclosures. She briefly explained under the u Governmental Accounting Standards Board they have to record what the City is actuarially required to fund, and even if the City were not going to fund that they would have to book liability for the difference and if the City were not funding what was actuarially required they would be making a comment as auditors they have a problem. She said the City has always funded what they have been actuarially required to fund.  23 Regular Meeting 6- 12- 07 REVIEW OF PENSION PLANS cont. Ms. Ballant further explained the unfunded AAL is just an estimate, it is good information and a good indicator of what is happening but it is just a point in time snap shot, it is disclosure information on page 70 of the Audit and on page 71 there is a ten year history of the annual required contribution and what the City has done, and they have always contributed 100% or more of what is required. She said they feel, as the external auditors, that the Plans are in good financial condition, obviously the costs are going up, and thought there are some forward thinking suggestions in what the Finance Director put together. Mr. Miller expressed the need to digest the information and maybe make a motion at the next meeting. He said he would like to have the evaluation of the recommendations from Mr. Tierney, Mr. Linn and Mr. Cole. The City Attorney suggested the motion be in the form of direction, they are professionals that are working for the City and if they cannot meet the timeline they will let Council know they cannot do it. Mr. Miller moved to direct the consultants provide the necessary information so that Council can make a decision at the June 26, 2007 Council meeting. Mr. Garvie seconded motion. During discussion on the timeline it was pointed out the information would need to be provided by June 21 for the June 26th meeting. Mr. Linn expressed that timeline would be a little quick for him and it would be better if they had more time. Mr. Minich moved to amend the motion that the consultants provide the information for the first meeting in August. Mr. Hartwell seconded motion. Mr. Minich commented that the information was not available when the agenda was published and expressed the hope that the information will be thoroughly reviewed and discussed and coordinated with all the staff so that it comes back to Council as a cohesive piece of staff work. Dr. Pullen commented there was a lot of work put into the information and was made available as soon as possible, it was given a short term and done outstanding in the period of time available. The Mayor called for the vote on the amendment to the motion and it carried unanimously with Holmes, Miller, Reeves, Garvie, Pullen, Hartwell, and Minich in favor. Mr. Minich expressed the hope that the information will be shared with all staff members and each consultant so everyone can review all comments so that what comes to Council is a unified position; there are some great ideas, and that all backup documents are included when the agenda is published. The City Manager concurred they need to review the recommendations and have a unified position from the City to bring forward to Council and she is committed to work with the Finance Director, the Actuary, the Pension Attorney, and the Auditors so they can bring to Council the ordinance required amendments at that time and have it all as one comprehensive package if Council is ready to move forward. She said she is committed to working together and they all need to be involved because it is a city- wide decision. The Mayor received confirmation that the information would also need to be shared with the Advisory Committee. Mr. Miller