Working Session
MAYOR COUNCIL WORK SESSION
Wednesday, June 6, 2007 - - 4:00 p.m.
A101
Present:
Mayor Brown, Bakken, Brooks, Christensen (joined meeting in progress), Gershman, Kreun, McNamara.
Absent:
Glassheim.
Others Present:
Pete O’Neill, Mark Hall (Alerus Financial), Darren Schimke, Brandon Bartholomew, John Packett, Al Grasser, Earl Haugen, Allen Anderson, Emily Fossen, Maureen Storstad, Tom Helle, Michael Hedlund, Paul Houdek, RaeAnn Burger, Roxanne Fiala, Daryl Hovland, John Schmisek, Todd Feland.
Gershman called the meeting to order at 4:05 p.m.
Matter of NDPERS
.
Mayor Brown introduced Sparb Collings, Executive Director of the ND Public Employees Retirement System. Brown stated that he was here to share information with the City on the opportunity for the City to offer NDPERS as an alternative to our existing pension plan and to answer any questions that the Council would have on the NDPERS plan. Brown continued that if this plan were offered, we anticipate that all of the participants in our current DC Plan would elect to switch to the NDPERS plan and there would be a resulting increase in cost due to the fact that the employer contribution in the NDPERS plan is 5.12% rather than our existing 4% in the DC Plan. The total increase in cost to the general fund as a result of the switch would be $60,000 for the 226 employees affected.
Collings provided a handout with information on the membership in NDPERS and its plan performance and funding information. Currently, the NDPERS plan has 18,370 active members and 6,538 retirees and annual benefits paid out last year of $65,558,022, which increases each year. He reviewed the membership of the investment board that sets the asset allocation and makes investment decisions for the plan. He stated that the goal of the plan is to provide a retiree with 90% of his final average salary, with 50% coming from pension and the remaining 40% coming from social security. There is no guaranteed cost of living adjustment to the benefit as all changes in the plan must be approved by the State Legislature. He continued that there have not been any cola increases in recent years, but they have given out a 13th check some years and have approved a 13th check for next year that will be equivalent to ¾ of a normal monthly check. He reported that another factor in the plan that has been changed in the past is the multiplier for determining the benefit which was at 1.04 in 1977, but is now at 2% and that the increases in that factor have all been done through approval at the legislative level and only at times when the value and return of the plan allow for the changes to occur.
Collings stated that the NDPERS plan uses an 8% rate of return assumption, which is average for most public plans with a normal range being between 7 ¾ and 8 ½%. He stated that an annual actuarial report is completed and based on its results an investment strategy is set. The investment strategy is then turned over to the state investment board who then hires managers to invest based on the strategy. He continued that one benefit they have is that their plan assets can be commingled with those of the teachers retirement plan which increases the size of the plan that is being managed and thereby get lower management fees. Because the plan is funded at over 100% based on market value, which is cash on hand, the overall investment strategy used is fairly conservative. In regards to actual returns, as of yesterday, the plan is at 18.5% for this year. He noted that the actuarial value of assets is different than the market value of assets and is typically less than the market value due to a smoothing method used in the plan whereby 20% of gains and losses are recognized each year. Collings reported that the current market value of the plan puts it at a funded status of 107% and the actuarial funded status is 89%. He added that based on the actual rate of return this year he would see both of those increasing when the new report is done after June 30, 2007.
(Christensen joins the meeting.)
Collings reviewed the basic plan factors including contribution percentages and vesting. He also noted that by participating in the plan participants also receive a health credit account which goes to defer future health insurance premium costs.
Gershman inquired as to the breakdown of the increased contribution. Hovland stated that the full cost of the additional 1.12% comes to $98,369, with $$61,615 being attributed to the General Fund. Schmisek commented that we are looking at a change in how the Defined Benefit Plan funds are managed and if the change is made there would be a saving of about $300,000 to $400,000 per year in fees. He inquired what the fee is for the service hat they provide for the City of Bismarck in managing their plan assets is. Collings replied that Steve Cochrane is the contact that would work with that side of it, but he believes that the fee is about 30 basis points. McNamara inquired which Cities participate in the plan. Collings distributed a listing of where the participants are located and noted that for schools that are listed it is only the noncertified staff that are in the NDPERS plan and the teachers are in the teachers plan. He also noted that many of the larger cities in ND are not participants as they already had existing defined benefit pension plans when the PERS plan started and still have active plans today so do not choose to participate.
Gershman inquired what the benefit would be to making the change. Schmisek responded that this is a defined benefit pension plan and much better benefit for the employee. He continued that many departments have faced recruiting and retention problems, with the pension plan being cited by many as a factor in their decision to leave or not come to the City for employment. He commented that to be a stand alone entity with a defined benefit plan can be too expensive for some to maintain, but when combined with a number of other entities as in the NDPERS plan it spreads the risk and thereby lessens the cost and risk. He stated that would be similar to the situation that we found with health insurance and why we elected to stop having our own plan and become participants in the NDPERS plan.
Christensen stated that all defined contribution plans have the same concerns that ours does and why the conversation is coming up and what other cities have. The group discussed that Bismarck and Fargo both have active defined benefit plans and that even though they may have gone through times with unfunded liability issues, they never closed their plan and made the switch that we did.
Collings explained that if the City decided to join the NDPERS plan the benefit would be a prospective benefit and that participants individually could choose whether or not to purchase past years of service. Participants could choose to roll in money from their DC Plan to buy years of service. If they did wish to purchase additional years of service, an individual actuarial calculation could be requested directly from NDPERS by the participant. There are a variety of ways that service payment can be done besides rollover, but that would be options that the individual would work out directly with NDPERS. Collings explained that the letter that the participant would receive would be valid for 90 days and there is no additional fee for requesting the calculation. He cautioned that if there were a large number of requests for calculation that came in all at one time the calculations could take longer than individual requests normally do just due to work load of their staff, but would work to complete them as soon as possible.
Gershman stated that we would still have our existing plan which is in arrears and is cautious about going into another plan of the same type when we have no guarantee on what could happen in the future and asked if there is additional risk to the City moving to the NDPERS plan. Schmisek replied that there is always some risk with a pension plan, but that as been discussed the NDPERS plan has been very stable historically and with their conservative investment strategy. Schmisek continued that, as staff, we would not be recommending it if we were not comfortable with the plan looking forward. Collings stated that the risk is much less with the state plan because of their plan’s funded status and therefore they do not need to have as aggressive investment portfolio, but rather can carry more fixed income holdings which have very stable returns. He continued that the other factor that keeps the plan stable is that any changes to the contribution rates or benefit structure must be approved by the legislature.
McNamara stated that in previous discussions the savings from changing investment method for our existing DB Plan had been discussed as going toward paying down the unfunded liability, but today talked about using part of that to cover the increased cost for moving the DC Plan participants into the NDPERS plan. Schmisek responded that the Pension Committee will need to look at that and make a recommendation to Council on how they want to proceed.
Gershman asked whether we were not able to hire or if we are losing employees. The group discussed that particularly in the public safety area, that there are still individuals that apply and may start employment with the City, but then as they look at the benefits, pension in particular, and compare to other opportunities that they have, they leave after a year or two just when they are really becoming proficient and then have to rehire and retrain. The group also discussed that some employees are leaving to go to Minnesota, but that we may not be able to support the wages and benefits that are paid there. Sgt. Hedlund commented that even if we can’t keep up, if the City would be willing to take some steps to narrow the gap it would help.
Hovland inquired how many times the contribution rates have been increased. Collings responded that they have not.
Baken asked what the average age in the plan was. Collings replied that it is about 44 – 45 and gradually increasing. He also provided that the average years of service is 10.6, average salary is $30,000. Bakken asked whether the plan doesn’t need more young people to stay viable. Collings stated that age does not determine whether the plan is viable, but rather having enough funding put into the plan to meet all liabilities makes the difference and they have that.
Fiala provided a real life example based on one of the employees in her department who is currently in the DC Plan and what a difference it would make in his retirement to be able to change to the NDPERS plan.
(Mayor Brown departed from the meeting.)
Hovland stated that in the past the Council has stepped forward to address issues with wages and making them competitive to attract applicants to our open positions and that has been very successful. He stated that this would now do the same on the benefits side to make us more competitive to retain those employees and encouraged the Council to consider this.
Meeting adjourned 5:10 p.m.
Respectfully submitted,
Sherie Lundmark
Administrative Specialist Senior