HomeMy WebLinkAboutAgenda Budget Oversight 032306CITY OF PALM BEACH GARDENS
10500 N Military Trail
Palm Beach Gardens, Fl 33410
BUDGET OVERSIGHT COMMITTEE
NOTICE OF MEETING AND AGENDA
Please take notice that the Budget Oversight Committee of the City of
Palm beach Gardens will conduct a meeting of the committee at the
above location on March 23, 2006 at 8:30 am in Council Chambers.
I. Roll Call
II. Pension Update
III. Capital Projects budgeting process
IV. Comparative budget data- other agencies
� V. Approval of minutes from the January 11, 2006 meeting
VI. Approval of minutes from the February 23, 2006 meeting
VII. Adjournment
DISABILITY INFORMATION
In accordance with the Disabilities Act and F.S.S 286.26, persons with
disabilities needing special accommodation to participate in this proceeding
should contact the Human Resource Department no later then seven days
subsequent to the proceeding at (561) 799 -4223 for assistance, if hearing
impaired, telephone the Florida Relay Service Number at 800 - 955 -8770
(voice) for assistance.
APPEAL NOTICE
If a person decides to appeal any decision made by the board, with
respect to any matter considered at such meeting or hearing, he will need to
ensure that a verbatim record of the proceedings is made, which record
includes the testimony and evidence upon which the appeal is to be based.
Report to the City Council
In our report to you sent in 2005, we emphasized the Council should shift some
budgetary emphasis to control of expenses. Our concern stemmed from an obvious future
drop in the rate of tax base growth. The City is approaching the final stages of
development as agricultural and fallow tracts are built out,: including, those of Scripps
and associated proiects, some of which is tax exempt. We placed particular emphasis on
the increase in the number of employees, compensation and benefits. We should note
that with the recent County decision to award Scripps to North County, the tax base
should continue to grow. Heweym the need to ret:nainvigilant in eentrelling expenses
Since then we have done a limited amount of research and have concluded the City's two
pension plans ( "Defined Benefit Plans ") are significantly under funded. The magnitude of
the problem is severe. The total unfunded liability is approximately $21.7 million
dollars - $13.1 million for the Firefighters' Pension Fund and $8.6 million for Police
Pension Fund. Both of these numbers are valued using an 8.5% interest rate, which
our committee thinks is optimistic. If the pension liabilities are valued using
realistic /conservative assumptions, based on current financial markets and economic
conditions, the true unfunded liability will be even more severe. We should note that the
method used by the actuaries slightly overstate the plan termination liability but this is
more than offset by the optimistic assumptions. At a minimum, we strongly urge the
council not to approve further non - mandated benefit increases in either plan. Once you
are in a hole, it is important to stop digging. Without further significant funding
increases or benefit decreases we have doubt that the heretofore promised benefits can be
paid.
Let us now look at each of the respective plans. It is important to understand how the
problem arose. Then our committee will propose workable solutions.
Police Pension Fund
Overly Optimistic Assumptions
Assumptions are made to value pension liabilities and arrive at the pension cost. Actual
experience can vary from these expectations. During the past 9 years the plan has
experienced heavy experience losses (`experience losses" refer to the actual results being
poorer than prolectedf, totaling $6.1 million dollars. This accounts for a significant
portion of the plans total $8.6 million unfunded liability.
Year Ended 9/30
Gain Loss
1996
(284,232)
1997
(994,552)
1998
(674,477)
1999
(424,754)
2000
68,592
2001
(435,534)
2002
(2,162,823)
2003
(949,324)
2004
246, 347
The two most significant assumptions are the assumptions for compensation increases
and investment return. The actual rate of compensation increase has been well beyond the
assumed rate and investment returns have been below. The aetuary- pension board stated
there will be an increase in the salary assumption from 6% to 9% in the next valuation.
Year Ending
Investment Return
Salary Increases
Actual
Assumed
Actual
Assumed
9/30/1990
9.1
8.0
9.1
6.5
9/30/1991
8.6
8.0
9.5
6.5
9/30/1992
8.2
8.0
10.9
6.5
9/30/1993
8.8
8.0
14.1
6.5
9/30/1994
2.4
8.0
0.6
6.5
9/30/1995
18.2
8.0
12.8
6.5
9/30/1996
5.2
8.0
3.6
6.5
9/30/1997
10.3
8.0
11.5
6.5
9/30/1998
9.2
8.0
10.0
6.5
9/30/1999
9.6
8.0
8.4
6.5
9/30/2000
9.0
8.0
5.9
6.5
9/30/2001
6.3
8.5
1.1
6.0
9/30/2002
-1.6
8.5
11.8
6.0
9/30/2003
3.7
8.5
7.4
6.0
9/30/2004
3.9
8.5
16.4
6.0
Average for
Years Shown
7.3
N/A
8.8
N/A
Also, we have a concern with the investment assumption. During the past 15 years the
plan actually earned 7.3 %. This period included one of the greatest bull stock markets in
history — an era many experts think will not be repeated. The actual return earned by the
plan has slowed dramatically. During the most recent 5 year period the plan earned only
a compound rate of 4.20/4 ^. I In the 5 yearsprior to that the plan earned a compound
rate of 10.4 %. . .
0
. We don't think that the plans past performance, amyei mix, and
the markets overall outlook justify an 8.5% assumption. Therefore, we think the
investment return assumption merits a change to a more reasonable /conservative
assumption.
Overly long amortization periods
That being the case, the funding for the "deficits" also is on a very slow schedule. The
above experience gains and losses are amortized over 30 years. We feel this period is
way too long, and contributes significantly to the plan's underfunding problem.
Specifically, we feel that the amortization period for a net experience gain or loss should
be shortened to 5 years. Also, the amortization period resulting from changes in
actuarial assumptions should be shortened to 10 years. These changes are the standard
amortization periods in private industry. (Note: The 30 year period does comply with
the government pension accounting standard GASB No, 25_) Please see the content of
the appendices. This recommendation comes with a significant cost but we feel that
council must step up to the plate and recognize the problem. This is the nature of a
defined benefit plan. Any shortfall is clearly the responsibility of the city.
Extent of unfunded liability and actuarial soundness
The chart below clearly shows the magnitude of the unfunded liability problem.
Comment [a1]: Most recent 5 year
return doesn't appear to agree to the
above table. l calculated 4.26.
9000000
8000000
7000000
6000000
500=
400=
3000000
2000000
1000000
Lktu-ded Liability
a lJrfuxied Liability
In the last 10 years the unfunded liability has grown from less than $300,000 to $8.6
million. It is important to note that our committee believes that the problem is more
severe than portrayed because of the overly optimistic interest assumptions.
In calculating the amount of the-Unfundedthe "Unfunded Actuarial Liability ", the plans
have been using a discount rate which we consider to be inappropriately high. Currently
this is 8.5 percent. In comparison the 10 year and 30 year U.S. Treasury Notes rate isare
about 4.5 percent. With the present set of assumptions the Unfunded Liabilities of the
plans have steadily and dangerously increased. This calculation is extremely sensitive to
the rate being used. When using a more realistic /conservative rate, the liabilities 4 -are
very much higher and the financial condition backing the promised pensions that much
weaker.
GASB No. 25 requires a schedule of funding progress. Both the magnitude of the
unfunded liability and the funded ratio are important.
Actuarial
Valuation
Date
Actuarial
Value of
Assets
Actuarial Accrued
Liability (AAL) - Entry
Age
Unfunded AAL
Funded
Ratio
10/1/1995
3,517,565
3,807,393
289,828
92.4%
10/1/1996
4,443,592
4,855,280
411,688
91.5%
10/1/1997
5,511,310
6,954,077
1,442,767
79.3%
10/1/1998
6,700,726
8,988,231
2,287,505
74.5%
10/1/1999
8,162,736
11,019,072
2,856,336
74.1%
10/1/2000
9,795,534
14,097,068
4,301,534
69.5%
10/1/2001
11,417,844
16,106,731
4,688,887
70.9%
10/1/2002
12,303,486
19,140,962
6,837,476
64.3%
10/1/2003
14,231,515
22,196,413
7,964,898
64.1%
10/1/2004
16,405,794
24,962,551
8,556,757
65.7%
As the unfunded liability increased, the funded ratio has decreased. Both: trends are
going the wrong way. We heard various {testimonies before council that the
plan is actuarially sound. The pension plans are considered to be "actuarially sound" as
the respective sets of assumptions being used by the plans apparently meet statutory or
regulatory guidelines. While that may be true, from a current economic and financial
view our committee believes the current assumptions are no longer appropriate. We feel
that a judgment of actuarial soundness can be rendered from the above table. In our
opinion, the plan is far less netseo inancialh, sound than it was 10 years ago.
Proposed Benefit Increases
The only mandated benefit increase is the supplemental monthly benefit of $12.50 per
year of service provided from the Chapter 185 funds.
The Chapter 185 baseline contribution is $235,818. Any increase in state revenue over
$235,818 must be used to provide additional benefits. Any decrease in State revenue
below $235,818 must be made up by the city. The Chapter 185 revenue is $411,407.
The excess of $175,229 per year must be used to provide additional benefits. The
additional funds will provide a supplemental monthly benefit of $12.50 per year of
service. This is the full extent of the required Chapter 185 mandated benefit. The
Chapter- 185 has abseltitely nothing to de with inereasing the multiplier- frem 9 te 3.5 or
Ordinarily, our committee has no comment on the level of benefits. That is a policy
matter for others. Our concern is with having the resources in the respective plans to
pay the benefits. However, in light of the severe fundingproblems of the city defined
benefit plans, we urge the city not to make any improvements in the multiplier or the
cap. The proposed increases are like pouring gasoline on a fire. The proposed change
using the 8.5% assumption, will increase the unfunded liability from $8.6 million to
$13.2 million. -We think the magnitude of the funding problems, preclude benefit
increases for the foreseeable future.
Peripherally, the plans each offer non basic options, "DROPS" and the ability to opt for
cash outs instead of an annual pension. These, while not being used to a great extent at
this time can adversely impact funding levels.
Firefighters Pension Fund
The problems encountered in the Firefighter's Pension Fund are similar, but the fund is in
worse shape than the Police Pension Fund.
Overly Optimistic Assumptions
Assumptions are made to value pension liabilities and arrive at the pension cost. Actual
experience can vary from these expectations. During the past 3 years the plan has
experienced heavy experience losses. The magnitude of the losses is not explicitly stated
in the Actuary's Valuation Report, but we are confident that the losses are substantial.
Again, the two most significant assumptions are the assumptions for rate of individual
compensation increases and the investment return. The actual rate of compensation
increase has been well beyond the assumed rate and investment returns have been below.
25.5 °,0. These plans are similar- derivairies. `..1 iffl the Ui deFlTiflg salgi- 5, ifffeases
eppfoprieEe enly if the Aetuafy expeets the advenseexpeFi _e. in the mest
the City drametiealb, lowered thesalar-y iner-eases. if this-Hi
Comment [82]: Per M. Cohen, delete
or make it a footnote. Context is
different
Comment [a3]: Per M. Cohen, delete
or make it a footnote. Context is
different.
Year Ending
Investment Return
Sala Increases
Actual
Assumed
Actual
Assumed
9/30/1995
17.40
9/3011996
8.70
9/30/1997
18.43
9/30/1998
11.38
9/30/1999
13.75
9/30/2000
9.67
9/30/2001
-14.48
9/30/2002
-9.62
8.0
8.9
6.5
9/30/2003
11.72
8.5
28.5
6.5
9/30/2004
10.09
8.5
7.7
6.5
Average for
Years Shown
7.16
N/A
N/A
N/A
Also, we have a concern with the investment assumption. During the past 10 years the
plan actually earned 7.16 %. This period included one of the greatest bull stock markets
in history — an era many experts think will not be repeated. The actual return earned by
the plan has slowed dramatically. During the most recent 5 year period the plan earned
only 6.8 %. �n the 5 years_p6 r to that the plan earned 12.8 %. ^ lse. we looked at the
funds. and 689,6 of the plan's assets are ink,esied in equity -We don't think that the plans
past performance, rrsset-nriv, and the markets overall outlook justify an 8.5%
assumption. Therefore, we think the investment return assumption merits a change to a
more reasonable /conservative assumption.
Overly long amortization periods
That being the case, the funding for the "deficits" also is on a very slow schedule. The
above experience gains and losses were amortized over 30 years. The plan shortened the
amortization period to 15 years, commencing two valuations ago. While this is a step in
the right direction, we feel this period is way too long, and contributes significantly to the
plan's underfunding problem. Specifically, we feel that the amortization period for a net
experience gain or loss should be shortened to 5 years. -Also, the amortization period
resulting from changes in actuarial assumptions should be shortened to 10 years. These
changes are the standard amortization periods in private industry. - (Note: The 30 year
period does comply with the government pension accounting standard GASB No, 25).
Please see the content of the appendices. This recommendation comes with a significant
Comment [a41: 5 and 10 year returns
don't appear to agree to above table. I
calculated 1.48% and 13.93 %. For all
years I calculate 7.7%
cost but we feel that council must step up to the plate and recognize the problem. This is
the nature of a defined benefit plan. Any shortfall is clearly the responsibility of the city.
Extent of unfunded liability and actuarial soundness
The chart below clearly shows the magnitude of the unfunded liability problem.
��nu�
AY.:. n-
0 ltM- d9dA4L
In the last 4 years the unfunded liability has grown from less than $1.3 million to $13.1
million. The rapid deterioration of this plan is very disturbing. The Funded Ratio is
only 38.3%. The problem is more severe than portrayed because of the overly optimistic
interest assumptions. In calculating the amount of the -U nftinded.the '`Unfunded
Actuarial Liability ", the plans have been using a discount rate which we consider to be
inappropriately high. Currently this is 8.5 percent. In comparison the 10 year and 30 year
U.S. Treasury Note rate is about 4.5 percent. With the present set of assumptions the
Unfunded Liabilities of the plans have steadily and dangerously increased. Please see
Appen&E Ne-.3 -This calculation is extremely sensitive to the rate being used. The
method of determining the unfunded liability tends to overstate the plan termination
liability. However, when using a more realistic /conservative rate, the liabilities are very
much higher and the financial condition backing the promised pensions that much
weaker.
GASB No. 25 requires a schedule of funding progress. Both the magnitude of the
unfunded liability and the funded ratio are important.
Actuarial
Valuation
Date
Actuarial
Value of
Assets
Actuarial Accrued
Liability (AALI) - Entry
Age
Unfunded AAL
Funded
Ratio
10/1/1999
3,942,554
5,313,384
1,370,830
74.2%
10/1/2000
4,810,175
6,065,624
1,255,449
79.3%
10/1/2001
5,415,408
6,675,372
1,259,964
81.1%
10/1/2002
5,753,548
12,576,613
6,823,065
45.7%
10/1/2003
7,183,143
17,441,151
10,258,008
41.2%
10/1/2004
8,146,028
21,254,309
13,108,281
38.3%
As the unfunded liability increased, the funded ratio has decreased. Both; trends are
going the wrong way. We heard various festimenytestimonies before council that the
plan is actuarially sound. The pension plans are considered to be "actuarially sound" as
the respective sets of assumptions being used by the plans apparently meet statutory or
regulatory guidelines. While that may be true, from a current economic and financial
view our committee believes the current assumptions are no longer appropriate. We feel
that a judgment of actuarial soundness can be rendered from the above table. In our
opinion, the plan is far less aefwarWfinancially sound than it was S years ago.
Summary and Recommendations
It is our guess that to bring the funds to a level where there is a comfort factor where
assets are sufficient to cover benefits, the contributions would need to be increased
substantially. We believe the next budget should reflect this. We understand the City is
engaging an actuarial firm to make independent calculations.
We offer the following recommendations:
• Benefit formulas should not be increased until analysis of funding is completed;
• The optimistic salary increase and investment assumptions have greatly
contributed to the underfunding. The assumptions should shift from "optimistic"
to being both "reasonable /conservative and appropriate under current
conditions ".
• The amortization period for experience gains and losses should be shortened to 5
years
• The amortization period for changes in actuarial assumptions should be shortened
to 10 years.
• In view of the 30 year period used to amortize the basic pension liability, Tthe
peripherally but non basic options, DROPS and cash outs should be eliminated to
protect the basic pension benefit;
• If, with the new conservative assumptions, a plan has an unsatisfactory funding
level, then there should be no increases in benefit formulas.
One of the difficulties of the analysis being requested by the Council with the
engagement of an independent actuary is the absence of guidance from the Council. We
suggest the consultant should present the results from an array of assumptions, the
starting point should be with the factors currently utilized by the respective plans, moving
toward a set 4- reflecting current conditions, such as listed in the table below.
• Salary level increase----------- - - - - -- - - - - -9 percent;
• Investment Return -------------------- - - - - -6 percent;
• Years to amortize experience gains and losses - -- 5 Years
• Years to amortize changes in actuarial assumptions - -- 10 Years
We are available to answer questions.
Respectfully submitted,
Appendices
(1) Clipping from The Wall Street Journal
(2) Business Week Article
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