City Commission Workshop Meeting

APPROVED: 6/27/2013 City Hall City of Eustis, Florida 10 North Grove Street Post Office Drawer 68 Eustis, FL 32727-0068 Meeting Minutes - Final* City Commission Workshop Wednesday, June 5, 2013 5:00PM City Hall CALL TO ORDER: Mayor Muenzmay ACKNOWLEDGEMENT OF QUORUM AND PROPER NOTICE Present: 5 - Linda Bob; Albert Eckian; Michael Holland; Karen LeHeup-Smith; and Kress Muenzmay I. Workshop Item 13108 Workshop for Presentation of Police and Fire Pension Study Report. Paul Berg, City Manager, introduced the workshop explaining the topic is the police and fire pension plans. Jim Myers, Finance Director, stated the purpose of the review is to determine the future costs of the Police and Fire pension plans and present viable alternatives to manage the rapidly increasing costs. He introduced Eric Brust, an actuary with Matthews Benefit Group, to present the results of the study. He explained the history of the increasing costs to the local pension plans noting the declining investment returns over the past five years and the value of their portfolios. He cited the pension plan goals and reviewed the impacts of the economic decline. He emphasized that decreases in plan value and income result in increases to the City's required contributions. Mr. Myers then reviewed a comparison of the pension costs as a percent of payroll and of the City's property tax revenues from 2002 through 2013. He presented a comparison of the basic pension benefits of the City's current pension plans versus what is required by FSS Chapter 175 and 185 and the benefits provided by the FRS Special Risk pension. He stated that following the consultant's presentation, they will ask for direction from the Commission to do one of the following: 1) instruct staff/consultant to provide further information; 2) direct staff to pursue/evaluate any of the alternatives included in the study; and/or 3) ask the Boards to obtain updated actuary reports for both plans for 9130/2013 to determine contributions for 101112014. Eric Brust, Matthews Benefit Group, explained how they evaluated the plans. He stated that the highest cost of any plan is the actual retirement payments. He explained they compared the current benefits with the national standard and both the police and fire plans are above the national standard. He stated the second highest benefit for a plan is early retirement. He expressed support for a cost of living increase noting they are recommending for the police plan that they have a variable cost of living up to a maximum of 3% rather than a set annual 3%. Mr. Brust explained the volatility of a defined benefit plan due to the actuarial assumptions with the primary one being the discount rate or assumed return on assets. He stated they reviewed the historical averages for the assets the police and fire plans are invested in and determined that the expected return for the police plan should be between 5.8% to 7. 7%. He stated that they found a similar range for the fire pension investments with a range of 5. 7% to 7.5%. He then stated their recommendation for use of a 7% discount rate; which would immediately make the plan more expensive but would reduce the volatility over the long-term. He commented on the recent reduced returns stating that the City's contribution has gone up over the past four years due to the reduced returns. He emphasized that the losses will stay on the books for the next 30 years. He further explained that returns over the discount rate would reduce the cost but in order to make up for the average 3% loss over the past four years, the fund would have to experience an approximate 20% return for the next four years. He stated that, if the City adopted the recommended 7% assumption, City of Eustis, Florida Page 1 Printed on 611212013 City Commission Workshop Meeting Minutes - Final June 5, 2013 it would result in an increase of approximately $130,000 in required contribution for the firefighters and $460,000 for the police. Mr. Brost further explained the City's actuarial cost method based on the employee's entry age and stated a benefit of the entry age method is that it provides a level contribution over the life of an employee as a percentage of compensation. He added that it also amortizes the gains and losses over 30 years so that the City does not have to immediately make up for a large loss. He reviewed other cost methods and stated that a benefit of other methods is there is not an amortization period as the current cost is fully funded. Therefore, if a plan is frozen or terminated, there is not an amortization period. He added that those methods are more volatile and typically more expensive. He explained the "legacy cost" of the plans stating the cost as $440,000 for the firefighters and $650,000 for the police. · The Commission asked for an explanation of the unfunded liabilities of the plans due to discrepancies between the reports with Mr. Brust explaining his figures are the annual cost to the City for the unfunded liabilities. Mr. Myers added that the figures in the audit are from 2011 . Mr. Brost stated one method that smooths the returns is using an actuarial value of assets; however, that is not equal to the market value of assets. He compared the plan annual legacy costs based on market value rather than actuarial value of the assets. He emphasized the importance of recognizing that when there have been asset shortfalls, gains or returns in the trust will not immediately affect the required contribution. The Commission asked about the comparison of the City's contribution as a percent of the property tax collections and why the City's contribution has increased from the previous year despite improved returns on investment. Mr. Brust explained that when assets are smoothed, only about 25% of any asset gains, would be calculated so they don't receive the full effect of the positive return on assets. He added there may be other outside experience including the amortization of the liabilities over 30 years. He stated that, if the method used limits the actuarial value of assets to either 110% or 120% of market value, there may be a gain but the actuarial value of the assets may stay the same. Mr. Myers added that the City's required contributions aren't based on returns but on the actuarial studies and the percent of payroll. The Commission confirmed that any return below 8% increases the City's contribution with Mr. Myers noting that the actuarial studies being used were performed when the returns were at their lowest levels. The Commission further questioned the amount of the City required contribution despite recent improved returns. Patrick Donlan, from Foster & Foster the Fire Pension Board actuary, explained when they do the evaluations they project the results one year ahead so that when the City is doing their budget they know the requirements for the following year. He stated that the requirements for 2013 were developed as of October 1, 2011 for the Police Pension and for the Fire Pension as of October 1, 2010, because the Board did not do an October 1, 2011 report. He further stated the numbers reflect the previous downtown in the market and not the upturn since then. The Commission asked if the reports were updated based on the September 30, 2012, returns if there would be a reduction in the required contribution. Mr. Donlan responded there would not be a great difference due to their use of a rolling four-year average. Mr. Brust then commented on recent plan changes made by other cities throughout Florida as well as entities outside of Florida, and explained for the Commission the meaning of "financial urgency" and "stop and restart". City of Eustis, Florida Page2 Printed on 611212013 City Commission Workshop Meeting Minutes - Final June 5, 2013 Mr. Myers explained that the state insurance premium revenues have been decreasing. He further explained in 1999 the State passed the statute that says any insurance funds received in excess of what the City received in 1999 must be used for new benefits. The Commission discussed the change in values of the City's plans between 1999 and current and whether the City is borrowing from the pension funds to cover day to day operations since the plans are not fully funded. Mr. Brust explained how defined benefit plans are set up and how the gains and losses are smoothed out over time. The Commission asked if a "stop and restart" would freeze the City's liability. Mr. Brust responded that it could actually increase the liability. He explained what would occur if the City stopped the defined benefit plan and how it would increase the City's contribution due to the stopping of the insurance premium revenues. The Commission asked at what point the City could be overwhelmed by the funded ratio and not be able to catch up. Mr. Brust expressed the belief that anything less than a 100% funded is a bad situation for a City to be in. He explained how the unfunded liability can increase from year-to-year and stated that the breaking point is when the benefit payments are the majority of the City's liability and there are insufficient funds to cover the retiree benefits. The Commission confirmed that the breaking point would be when the money going out to beneficiaries is more than the contributions plus the investment gains. The Commission questioned how long the $2 million cushion will last based on future retirees. Mr. Brust indicated they had not done that calculation but it could be done with the Commission indicating they would like to see that calculation. Mr. Myers expressed the need to set some parameters, assuming the City's current contribution level remains the same, at what point in time do those expenditures rise to the level of the revenues. The Commission and Mr. Brust discussed the retiree benefits versus annual contributions with Mr. Brust stating that as long as the City makes the required contributions every year, the plan should never reach that point; however, if the required contributions are ever more than the City can pay, then they will have a problem. The Commission and Mr. Brust discussed whether the other cities had fiduciary problems or was it just based on the problems with the economy and the issues created by the Chapter 175 and 185 rules. The Commission discussed the issue of the actuarial report having been done two or three years ago and if it would be preferable to have them done annually. Pete Strong, Gabriel Roeder, stated the Police Pension Board did an annual evaluation up until 101112011. He explained they went to a biannual report to save money. Mr. Myers indicated that Florida state law requires actuarial reports to be done every three years. Mr. Strong commented on the inherent smoothing in the calculations so there would not be an immediate change based on one good year. Mr. Brust explained that most of his experience is in the private sector. He stated that the private sector is required to do annual actuarial reports within three months of the beginning of the plan year. He expressed the opinion that the City should look at a hard number every year. He added that it may or may not affect its decision but it would be good information to have. City of Eustis, Florida Page3 Printed on 611212013 City Commission Workshop Meeting Minutes - Final June 5, 2013 Mr. Brust reviewed what changes could possibly be adopted including freezing the plan to new hires which would immediately increase the cost due to falling out of compliance with Chapter 175 and 185. He reviewed the cost to the City noting it would still have liability for the next 60 years. He explained a defined contribution plan that should meet the requirements of Chapter 175 and 185 and those costs and benefits. He recommended the use of a 7% return assumption for either the defined benefit or contribution plan. He explained that, in theory, the cost of either a defined benefit or a defined contribution plan should be the same. He explained the benefit of a defined contribution plan so that the City is not responsible for the return on investment and the cost to the City would stay level year to year. He reviewed the valuation of both plans using the alternative actuarial assumptions. He stated the last page of the report shows where they obtained the information utilized for the study and noted that assumptions are usually wrong. II. Commission Discussion The Commission questioned if it would be possible to offer a different plan for new hires with Mr. Brust indicating it is possible but could put the City out of compliance with Chapter 175 and 185 which would increase the cost to the City. The Commission discussed changes that could be made and still be in compliance. Mr. Donlan stated that in the last year the State changed its interpretation of the requirements which may allow for reduced benefits for new hires and still receive State funding. He expressed support for a suggestion by Mr. Myers that the pension boards request an interpretation from the state. Mr. Myers commented on efforts by the legislature to get pension requirements changed at the state level and an attempt made to retract the letters previously provided by the Dept. of Management Services to other cities. He stated that is why he recommended both pension boards request letters of interpretation. Mr. Strong stated that at the state pension conference in May a statement was made that pension plans would no longer have to request a "Naples letter" but that would be the new standard interpretation. The Commission discussed whether or not any changes to the plan would apply to all employees or just new hires, the effect on the City's contribution, and the possibility of not making any changes for those employees within ten years of retirement. CONSENSUS: It was a consensus of the Commission that all current employees would retain the current plan and that any changes would apply only to new hires. The Commission discussed why employees retiring at age 52 would not have an expectation of getting another job for supplemental income until age 65 noting that the firefighter retirees receive 100% of their salary for life. Gary Winheim, Police Pension Board Chair, responded that the City has the best officers and to retain the best officers you have to pay for that. The Commission discussed what will be necessary to keep the pension plan sustainable including the possibility of lowering the multiplier for new hires. The Commission discussed defined benefit plans versus defined contribution plans and the lack of skill of many employees to choose their own investments with Mr. Brust stating that a defined contribution does not have to be opened up to allow individuals to select their own investments. He stated the contributions could be pooled for investment and could also be closed to allowing loans. The Commission questioned what the City needs to provide to be competitive with other departments. Mr. Strong stated that they have accumulated some statistics regarding other cities indicating that 94% nationwide and 99% in Florida offer police and fire pensions. City of Eustis, Florida Page4 Printed on 611212013 City Commission Workshop Meeting Minutes - Final June 5, 2013 The Commission discussed retaining the existing plan for new hires while keeping an eye on the actuarial reports, the need to remain competitive with surrounding departments, the possibility of adjusting the plans for new hires while still staying competitive, asking the pension boards to research what can be done for new hires to keep the funds more stable, requesting annual actuarial reports, considering some of the Gabriel Roeder recommendations and asking to have the Gabriel Roeder report revised with different multipliers. III. Public Input Mayor Muenzmay opened the floor to public comment at 6:54p.m. Tim Totten, 2617 Waterview Drive, addressed the question of why the City would pay someone for all of their lives. He compared the number of hours a firefighter works each year to a normal employee and commented on the fact they risk their lives while on the job. He cited the need to compare the City's benefits with more than just the small local cities and commented on the number of Orange Co. Sheriff and Orlando Police Dept. employees living in Eustis. B.E. Pace, City retiree, stated that between age 52 and social security the retiree just tries to survive since they don't get cost of living raises. He commented on the effects on their health from the job and cited the amount of contributions in the past by the employees. Mr. Strong recommended that the defined benefit plan be sustained. He expressed opposition to defined contribution plans and commented on most employees not being able to invest properly if they have a defined contribution plan. He further commented on mortality assumptions and stated 401 k plans were intended to be a supplement not a replacement for normal pension plans. Brad Carroll, City firefighter, thanked the Commission for making the commitment to existing employees to maintain their pension plan. He commented on the life expectancy for firefighters noting that his uncle was a retired firefighter who died just a few years after retirement from hepatitis and another uncle is a retired firefighter who is being treated for cancer. There being no further comments, public input was closed at 7:09p.m. IV. Commission Direction Mr. Berg confirmed the Commission's desire that all current employees retain the current plan. He cited the following issues to be further researched: 1) changing some of the parameters or benefit levels for new hires within the defined benefit plan; and 2) figures for a defined contribution plan with professional investing services and no loans available. Mr. Berg questioned who should run the projections for different multipliers for new employees and whether or not the Commission also wanted to look at variables for the COLA formulas. He asked how many alternatives the Commission wants and whether or not they also want to see the minimum state requirements. The Commission discussed which variables they wanted to see additional figures for with a consensus to have figures for the 2, 2. 5 and 2. 75 multiplier. The Commission discussed the possibility of structuring the benefits to provide 100% of salary with a reduction once Social Security is received. Ken Carpenter, Fire Pension Board Chair, asked about integrated and nonintegrated plans that take Social Security into consideration. Mr. Strong responded that is usually seen in the private sector where benefits may be tiered. Mr. Donlan stated that is already available as an option. He added that Chapter 175 and 185 require that the normal retirement has to be ten-year certain. City of Eustis, Florida Page5 Printed on 611212013 City Commission Workshop Meeting Minutes - Final June 5, 2013 The Commission discussed changes that may be made by the federal government to Social Security benefits with the possibility of something being included in the plan to allow for revaluation in the event of changes to Social Security. The Commission discussed getting information from the actuaries regarding the affect on new hires only of different multipliers and COLA formulas. Mr. Berg confirmed the Commission wants both boards to have annual actuarial reports prepared and asked if they also want figures from Sept. 30, 2012 as well as Sept. 30, 2013. He commented on the timeframe suggesting they get figures as of Sept. 30, 2013, and then proceed. Mr. Donlan and Mr. Strong indicated they can have the actuarial reports within 60 days after receiving the figures from the City. The Commission discussed the need to use audited figures with Mr. Myers explaining that the City's auditors use the previous year's actuarial reports in conducting the audit. He added that the only difference is usually a state payment that is received in October. The Commission discussed how soon to reconvene to review the additional information and who has the authority regarding the actuarial assumptions adopted by the City. Jack Evatt, Bogdahn Group - the Fire Pension Board investment consultant, responded that all of the assumptions are set by the pension boards with the expectation that they are as correct as possible. Mr. Donlan explained the checks and balances noting that the Boards' makeup is statutorily set with two positions selected by the Commission to provide their representation. He also cited Chap. 112 FSS which says the City has to pay what the actuaries say. He noted that the State also has actuaries that review the reports for reasonableness. Mr. Winheim explained that most of the assumptions just changed were made at the recommendation of the finance manager and actuary. He then indicated that the additional reports requested by the Commission would have a cost and would have to go before the boards for approval. He explained that the Police Pension Board had been receiving annual actuarial reports but the City asked them to not accept the last one and to not do annual reports. Mr. Myers confirmed that it would be better to wait and do the reports as of September 30, 2013. He explained that it was recommended by the City's auditors that they may not want to do the actuarial reports every year. He then suggested that when the reports come in they be rated effective October 1, 2014, due to the millage rate already being set by that time. The Commission discussed whether or not to have the GRS report revised with the discussed changes with Mr. Strong explaining that revising the report would take more than just plugging in new numbers. He provided an estimated cost of $6,000 to run all six scenarios discussed. CONSENSUS: It was a consensus for the City Manager to obtain a written estimate for revision of the report for his consideration and authorization with the possibility of having the information prior to the July budget workshops. Mr. Berg summarized the Commission expectations as follows: 1) Current employees will stay the same; 2) the GRS report will be revised as discussed; 3) annual actuarial reports will be performed unless there are reasons not to have them done; and 4) information will be provided regarding alternatives for a defined contribution plan as long as professional investment services are provided and it would provide 100% of salary until Social Security is available. Mr. Berg informed the Commission that the MSTU ordinance will be on the June 27th meeting for first reading; however, the contract runs out July 4th. CONSENSUS: It was a consensus of the Commission to schedule a special meeting at 4:00p.m. on June 26th to hold first reading with second reading to be held at the June 27th regular Commission meeting. City of Eustis, Florida Page6 Printed on 611212013 City Commission Workshop Meeting Minutes - Final June 5, 2013 V. Adjournment - 7:51p.m. City Clerk Mayor/Commissioner *These minutes reflect the actions taken and portions of the discussion during the meeting. To review the entire discussion concerning any agenda item, go to www.eustis.org and click on the video for the meeting in question . A DVD of the entire meeting or CD of the entire audio recording or verbatim transcript of the meeting can be obtained from the office of the City Clerk for a fee. City of Eustis, Florida Page 7 Printed on 611212013