Working Session

MAYOR COUNCIL WORK SESSION
Wednesday, June 21, 2006 – 5:00 p.m.
A101

Present: Mayor Brown, Bob Brooks, Doug Christensen (joined meeting in progress), Hal Gershman, Gerald Hamerlik, Dorette Kerian.
Absent: Eliot Glassheim, Curt Kreun.

Staff Present: Rick Duquette, John Schmisek, Candi Stjern, Maureen Storstad, John Packett, Roxanne Fiala, Pete O’Neill, Brad Gengler, Al Grasser, Daryl Hovland, Al Morken, Todd Feland, Don Shields, Bev Collings.

Gershman called the meeting to order at 5:00 p.m.

1. 2007 Budget Resolution.

Schmisek stated that the information distributed by e-mail yesterday and in hard copy today has no new information, just detail on items that were discussed last week.

Gershman inquired in regards to the pension plan and if the $15 million unfunded liability would be what the City would need to pay if we closed the plan today. Schmisek responded that we have a plan in place to pay in $1.3 million per year towards the unfunded liability so that within 30 years we will have it covered and that we have had a budget shortfall for this expense each year and for past several years have brought forward a budget amendment to move in the funds to make the payment into the plan and would like to see just included in the budget as it is a liability that we need to pay. Brooks inquired what the auditor’s opinion is of this liability. Schmisek responded that it is the same as in the actuarial report and must be listed as an unfunded liability in the annual financial report, along with our plan for covering the liability. Duquette added that the actuaries worked with us to come up with a plan to solve the underfunding and should stick with it.

(Christensen arrives.)

Kerian asked for some background information on the pension plan. Schmisek stated that this plan started in 1970, has had some changes along the way, including having all employees hired after January 1, 1996 participate in a separate plan and that change was made due to funding problems in the plan and that had worked its way back up to 102% funding status in 1999 and then market conditions fell and now back where we were in early 90’s.

Christensen commented that he felt there is no need to make a large payment in on this unfunded liability at this time, as we have a number of years before the liability will be due and there are a lot of other plans that have unfunded liability and does not understand the need to do this in 2007. Schmisek responded that in the past municipal plans have been given more leeway in their funding status, but that is changing and the federal agencies are tightening this up because they have found some severe problems with some of these plans and we need to be able to show that we have a plan in place to cover our liability and that we are sticking to our plan.

Duquette asked if the reason for the focus on this area at this time is because of the desire for more cuts in the proposed budget. Gershman responded that the consensus of the Council had been to have 7 mills cut from the budget and that they are trying to look at areas where cuts could be made and this, the dike, etc. are areas that have been mentioned.

Hamerlik stated that he is in favor of making the pension contribution, but thinks that maybe a different source of funding could be used, as he does believe that a 7 mill cut would be appropriate. Christensen stated that the Mayor of Duluth is resigning because he wants to be able to devote time in the private sector to solving their city’s underfunding, so this is not uncommon. He continued that they are in negotiating with employees maybe need to discuss market wage adjustment, pension, benefits, etc. and may need to have trade-offs and maybe can’t fully fund health care, etc., if want one have to not get something else as he is not sure that we need to take from citizens today to pay for a future obligation and not fair to the elderly that are here now to do that and whoever is sitting here in ten or fifteen years when this is due will figure out how to pay it. He compared it to social security, and that he is now paying in to fund the retirement of others and which his son will be paying into to fund his (Christensen’s) retirement. He continued that staff is making a recommendation and he has a difference of opinion on how to handle that obligation and overall you have a set dollar amount to work with and Council doesn’t care how you allocate it, but don’t get any more.

Kerian stateed that if a comparison is being made between the City plan and Social Security that is scary, because that is also underfunded and if you fund it as you go much easier, and it becomes very tough to try and get adequate funding if you wait too long. Christensen responded that we have money in reserves and maybe just take that and payoff the liability then, but don’t use mills for it. Schmisek responded that we do not have much in reserves that is not allocated to a specific purpose, such as construction funds and debt service funds, and those can not be touched for something other than their specific purpose. Christensen sighted $3 million in General Fund and $10 million in water fund and hard to take and present a message and then have to micromanage, we said here’s what you got now work with it. Gershman said if you look at 3.63 mill reduction presented and take 2.5 mills from the dike then almost at 7 mills. Schmisek stated that he and Mayor both feel this is a short-term small saving that will cost citizens more in the long-term. Christensen said that we sold bonds with expectation to pay off in 2022 and shouldn’t take more money now to pay off in 2014 than just let it run its term. Schmisek corrected that it will take less money to pay off in 2014 and will pay $2 million less than if you let it go till 2022. Gershman commented that to advance fund is always a good decision, but only if you have the cash flow to do so and really feels that some of the citizens don’t have cash flow today and would rather see a small saving starting now. Christensen added that if we get aggressive with our annexation process and get all the land within the City limits annexed then we’ll also get the cash from those and can special assess them and pick up more money their.

Brooks commented that he knows financial statements and if auditors have in there and it’s important and we need to keep on the plan to get this funded again and not talking about bond rating or anything else, but important to keep financial statements in order. He added that this is another case to move toward a six year plan so that we can get whole picture of where we’re going and then also helps us be able to educate the public on where we’re going and how we’re getting there and what it will cost to get there.

Mayor Brown commented that they have worked hard to put together a responsible service neutral budget and maintain the services that we have been providing. Brooks responded that this is why we need to take a look at the $2 million savings and see what that does to the years preceding it. Gershman stated that by moving the dike money in gets us a mill cut without cutting any services and on the benefit side maybe look at health care. Gershman inquired what deductible is. Hovland responded that depends on which option of plan employee has. Gershman continued that he changed the deductible at his business and as a result saved a lot of money and then if we took a look at that and then maybe fund half of it and self insure the difference. Christensen said could have Health Savings Account and then what not used drop into 401K and that would save. Grasser provided that historically we used to self insure and to cut costs got in with the State on their plan and probably do not have control over deductible and that type of option to make change, but have what the state offers and overall that has saved us a lot over cost of going in to the private market to try and get coverage. Gershman responded that maybe we just need to take a look at some of those things as potential to decrease costs.

Kerian stated that she is in favor of funding the pension, as we have a commitment to our employees to do that, where as with the paying off earlier than planned for the dike, maybe let that go this year and reconsider it another year, because we have some other uncertainties and maybe even a dollar a month might make a difference to some, as we are still sticking with our earlier promise even if we don’t pay off early.

Christensen stated that perhaps the group should talk about a resolution as a courtesy to Hamerlik and Kerian, before they are done serving. He continued that he feels that we need to continue to try and lead the way on holding costs to taxpayers down. He noted that the results of the school district election was very interesting and variety of opinions on what that means, given that 9% of population voted. Christensen would like to see math and detail on what says this level of pension contribution would cover the unfunded. Schmisek stated that this is all actuarial calculations and not only our actuaries numbers, but hired another actuary to audit the results and they got the same number, so confident that this is accurate and something that we need to address. Christensen asked when that information is distributed. Schmisek responded that it comes to Council annually in the actuarial report and will make sure that Christensen gets a copy of the report. Brooks commented that the big thing to decide is do we keep going along and not address it or do we do it, and if we do it, how do we fund it and thinks that we need to fund it and may have to back off from the mill reduction if that’s what it takes to fund it. Christensen said maybe not take it from the mill reduction, but maybe need to back off on the market dollar allocation.

Duquette stated that he agreed with a lot of Brooks’s comments and that the Pension Committee had made recommendation to Council over the years on how to handle this unfunded liability and did decide to go with the plan now in place and if want to revisit this later might be more appropriate.

Hamerlik stated that he had made a proposal a couple of meetings ago as to a potential resolution, but then was gone for a meeting and not sure what happened with what he suggested, but has not yet seen a draft of anything and would like to see this get done and that resolution that is passed makes the call for equalization of cuts for all entities clear. He continued that his suggestion was that each entity cut ¼ of a mill for each percent of the mill levy that they are and if this was passed that would put the City at about 6-7 mill cut, but would also set a challenge to those other entities to make a proportional cut and if all did that would end up with about a 25 mill reduction overall and should maybe note in the resolution that this would be a minimum level of cut. Hamerlik commented that we have talked about trying to get all the entities on board with us in trying to make cuts in the mills and this might be way to send a message. The group discussed whether this could be passed prior to the outgoing Council members terms ending. Duquette stated that at the COW meeting on Monday, could by unanimous vote could adjourn to City Council and then vote on this and pass it. Christensen stated that could write up a resolution and get on the agenda and then as part of the resolution include that all money from new construction and growth remains with the City. Gershman stated that we should also state that excess sales tax will be kept as well. Schmisek commented there are a couple of factors that affect the budget one is construction and new growth but also even without growth of the City will still have some inflationary increases in costs and should be understandable that the City needs to retain funds to cover this and further, that if we had kept growth since 1999 we would have had $2 million more in the General Fund now and would not be in the situation we are in now. Christensen stated that this will also say to everyone that we are doing our share and we’re doing a good job with your tax dollars and now you need to talk to some of the other entities and get them to do their share. The group discussed that this will also send a clear message and challenge to the other entities to do their part in keeping the mill rate down.

In regards to the process for passage, Hamerlik commented that it might be cleaner to call for a special City Council meeting to be held at 7:00 p.m., prior to the COW meeting for the purpose of passing this resolution. Motion by Brooks and Christensen to call for a special city council meeting at 7:00 p.m. on Monday, June 26, for which the agenda item will be 2007 budget resolution.

Christensen noted that if we are all together in this then the Mayor can say we at the City have done this. Mayor Brown commented that staff will proceed with providing a budget that they feel is in the best interest of the City and responsible and what we need to get the job done with plowing streets, police, fire, and if want more taken off might hurt the City we love and what we are accomplishing and won’t suggest to you that people pay $2 million more for their dike because that’s not reasonable and would not be professional on our part and ethical for us. Hamerlik responded that won’t be paying $2 million more, but will be paying exactly what they expect to pay, and we may have a potential way to reduce that expectation by $2 million but may not be in our best interest to do that. Mayor Brown stated that he feels we should take advantage of the opportunity to save the $2 million. Christensen commented to the Mayor that he wants to be careful and that you don’t want us to start talking about how large is our staff, what are we doing about downsizing, how are we paying you on your market pay plan or benefits, we have never blinked once and don’t make future Councils blink on that and say you’re right and add a couple of mills and it will come from some place else and be careful about what we say we’re going after each other on. He continued that staff had made a recommendation and have a difference of opinion. Gershman stated that really is a philosophical difference and not that far apart. Mayor Brown stated that the staff had made their recommendation and now Council is the decision maker and will need to decide what to do with the recommendation. Council Members discussed that are at 3.63 mills proposed cut and if take the dike add another 2.5 mills and brings it to 6.13 mill reduction and could make that 6.5 or maybe 7 mill reduction with just a little more from somewhere else and would be right where we should be under the proportional resolution that is being considered.

Motion by Hamerlik, Second by Kerian for a resolution to be drafted which calls for a 6.5 mill reduction and challenges a minimum reduction by each taxing entity of ¼ of a mill for each 1% of the 100% mill levy that the entity receives. Aye: All. Nay: None. Motion Carried.

Kerian commented that she is glad to see the resolution work complete and that she wants to express that there is a need to discuss what we are getting for the mills we are taking and need to look at our principles and maybe make some decisions on what are the right services to provide for the community and good to hear that people are open to some of these discussions for the future and coming up with long term plan.

Schmisek stated that a big part of the plan that needs to be determined is the financial policies that we work on such as the 15% reserve in the general fund and if that is not how we want to operate then need to look at it and make a change.

Gershman declared the meeting adjourned.

Respectfully submitted,


Sherie Lundmark
Admin Spec Sr.