Committee Minutes
Pension and Insurance Committee
May 13, 2009 - - 4:00 p.m. - - A101
Minutes
Present:
Mayor Brown, Flannery, Storstad, Christensen
Absent:
McNamara
Matter of Actuarial Valuation Report.
Eric Roling, Deloitte and Touche, was present to give the annual actuarial valuation report. He began by reviewing with the committee the process used to prepare the report and the plan assumptions. He noted that this year there is a change in the rate of return assumption from 8.25% down to 7.75%. He also noted that the actual expenses of the plan were down this year as the investments were converted as part of the move to transition away from our active managers and to the State Investment Board for investment management services.
Roling reported that as expected due to market conditions in 2008, there was a loss in plan assets this year. Overall, the plan incurred a -24.3% return. The City uses a 5-year smoothing method to recognize gains and losses in the plan, therefore only 20% of these losses are recognized this year. He explained that the purpose of using a smoothing method in your plan is to even out some of the drastic market gains and losses that can occur from year to year. He added that the smoothing method takes away the effect of these sharp swings and allows for better budgeting. He stated that a 5 year time frame for smoothing is common in municipal plans. He noted that there are some state plans that incorporate a longer term smoothing in their plans, but that would not be an appropriate option for our plan especially since it is a closed plan with a relatively mature membership.
Roling reported that the actuarial value of assets fell to $44,191,838 this year and the funding status dropped from 72.4% to 65.8%. He noted that the funding level would have fallen further if we did not have the smoothing method utilized in our plan. Roling continued that the unfunded liability is amortized over a decreasing term and we have 26 years left. Based on that term, this year’s recommended payment includes $1.9 million toward the unfunded liability and an employer normal cost of $1.1 million for a total recommended contribution of $3,000,210. Roling noted that without the smoothing method in use in our plan the recommended contribution would have been $3.9 million. The presentation concluded with a review of graphs depicting the projected contribution through 2019 under three different rate of return scenarios. Roling pointed out that the contribution will climb over the next few years as the remainder of the 2008 loss is recognized, then will level off.
Flannery inquired what time frame the present value of future benefits is calculated over. Roling stated that it goes through when the last participant in the plan retires.
Mayor Brown inquired why we wouldn’t want to pay more now as opposed to paying more later if it is the same amount in total that needs to be paid in. Roling stated that most prefer to smooth the payment to assist in planning and budgeting. He stated that the employer can always pay in more than recommended at any time, especially if you have the funds available and feel that the market is right to capture a good return.
Storstad asked whether the full amount of the unfunded liability has to be in the plan by the end of 26 years. Roling replied that actually no it does not, and may actually have 40 or 50 years to pay all in. He stated that once all participants in the plan are retired, then will no longer be a normal cost and full amount still owing becomes unfunded and that there needs to be enough funding going into the plan that it does not run out of money to meet benefit payments as needed. He stated that once get to 10 year term left it may be appropriate to change the amortization time to a rolling five year term, but for now current method is more appropriate.
Christensen inquired whether there would be a similar report for the DC Plan and NDPERS plan, and in particular the contribution needs for each plan for the 2010 budget. Staff reported that each of these plans has a flat contribution rate and is budgeted as separate line items and will provide a summary report to committee members.
Jerath stated that in the past a couple of times some Council Members brought up the possibility of selling a bond to cover the liability in the plan and asked Roling to address the benefits and detriments of using a bond sale to cover pension liability. Roling stated that some communities have decided to sell bonds to pay down their unfunded liability and in particular when they feel that they can secure a bond at a low interest rate and then obtain a rate of return on their plan investment that is above the bond cost. The downside of this would be if you sell the bonds and then are not able to obtain a rate of return on your assets greater than the interest cost on the bonds and you would then have to make the bond payment and still make a payment into the plan. The benefit is that there is a dedicated funding source for the pension plan, but does pose a difficulty if a market problem like we saw last year occurs. He stated that in the case of our plan he does not see that it would be something that we should pursue for our plan. Christensen stated that City of Duluth, MN is looking at doing this now, but there plan is in quite a different position than ours and that he agrees that this is not something that we need to look at now.
Storstad stated that she had reviewed the contribution included in the 2009 budget and that of the $3 million recommended contribution, approximately $2 million would tie to the general fund and that we did budget $1.68 million. She continued that there will be about $340,000 still to fund, but that could be covered through wage slippage and a transfer from loan and stabilization. She explained that there is about $500,000 in loan and stabilization fund and that should be enough to assist us with pension expenses for this year and next.
Pete O’Neill, Fire Chief, asked what impact there is to the plan when people work past their elected retirement age. Roling stated that those individuals actually help the plan, as they are making more years of contributions and the City has that many less years to make benefit payments to them and that usually the actuarially accrued benefit from additional years of service is less cost than the additional contributions that are made into the plan. He continued that in our plan in particular there are a high percent of those that have elected age 55 retirement that do not retire until at least 62 or 65, and many at age 62 election that wait until age 65 to retire and large reason could be the cost of obtaining health care is typically a big factor in participants postponing retirement.
Jerath asked Roling to address a change in the way the contribution cost is allocated to departments of the City. Roling explained that presently the cost is allocated on a percent of payroll basis. He stated that this could pose an issue as more participant’s continue to retire. He explained that for instance, the Wastewater Treatment Department has one participant, when that person retires, they will no longer be assessed for any part of the annual employer contribution, despite that there will be retirees from their department drawing retirement. He continued that the change would be to calculate a benefit accrual for each covered life in the plan, both retired and current employee, and allocate the employer recommended contribution to departments based on that percent instead. He will be completing these calculations and should have done in about a week. Staff will then call a Pension Committee meeting for review of the information.
Other.
Jerath provided an update on the transfer of management services for Defined Benefit Plan assets to the State Investment Board. She stated that all accounts at ING, Riversource, Voyageur and Alerus Financial were closed and assets were transferred to the State on April 30, 2009. Alerus Financial will have a small transfer to make at the end of May for some dividends related to the close out that will be paid out in May and that will finalize the transition. She stated that the City will continue to maintain the Aetna account for payments to retirees and has arranged for the State to work with Aetna on monthly transfers to fund the benefit payments.
Jerath stated that staff members willing be going to Bismarck to become familiar with State Investment Board staff and processes and made the opportunity available to Committee Members to accompany them if they are interested. Flannery expressed an interest in going and staff will make him aware of the dates once they are set.
Meeting adjourned 4:50 p.m.
Respectfully submitted,
Saroj Jerath, CPA
Interim Director of Finance and Administrative Services