Item 8E v~.
AGENDA ITEM # 8E
OCTOBER 23. 2006
CITY COMMISSION MEETING
STAFF REPORT
AGENDA ITEM: Cost of Living Adjustment for Retirees
SUBMITTED BY: Jim Hanson, City Mana
DATE: October 12, 2006
BACKGROUND: The Mayor and Commission considered the recommendation of the
Pension Boards to grant a 3% cost of living adjustment (COLA) for city
retirees at the meeting on September 25, 2006 and deferred consideration
on the item until the meeting on October 23, 2006. This staff report is to
pass along some thoughts and observations on that subject.
First, the cost of our pension plans is high and will continue to rise in the
next yeaz. You (the Mayor and Commission) recently expressed concern
over the increasing cost of the pension funds and asked me to check with
our financial advisors for advice on whether the city should stay with the
Defined Benefit system, or instead change to a less expensive form of
retirement in the future. A report dated August 22, 2006 was submitted
„~, for your review shortly thereafter. A copy of that report, along with the
portions of the yeazly actuary statements for the two retirement funds that
raised the concern for the Commission, are attached. Since the time of
~„ that report, final decisions have been made as part of the 2007 budget
adoption process resulting in payroll increases for city employees that aze
above the actuary's financial assumptions. Unless the return from the
~„ invested funds is considerably greater than anticipated, the cost for the
pension funds will rise again next yeaz. Any COLA for retirees would
increase pension costs further.
A second issue to bring to your attention is one that was identified by the
City's Finance Director during the last report about who would be eligible
to receive COLA. Several of you have expressed sympathy for long term
city employees (20 years plus) who have retired from the city and who are
counting on the city's pension (plus Social Security) as their sole means of
retirement. Most of the city's retirees do not meet that definition. With a
five yeaz vesting requirement, most retirees are drawing benefits after
working less than 20 years for the City. Should a 5 year employee get a
*~ COLA? Some people have only recently retired, having left the city
during the last yeaz. Should they be given a COLA increase if they have
been retired for less than one year? There are some other people who have
left the city's employment and who aze vested but will not be eligible to
receive retirement benefits when they reach a certain age. Should they be
given a COLA? Also, several employees have entered the DROP plan
AGENDA 1'CI:M # SFi
OCCOBER 23.2006
a~w
whereby the retirement system considers them to have been retired,
although they are still working for the city. Their monthly retirement
~"" benefits are going into a 401 Plan which they can utilize after they stop
working. Should these people receive a COLA?
One last observation of the city's plan is that it is very generous. With 33
years of service to the city, a police employee can retire receiving 100% of
their final average salary. Social security benefits are on top of that.
~" Consequently, after retirement, they begin receiving more in retirement
benefits than they were making while they were working for the city. Most
other defined benefit plans offer amounts for long-term employees that are
~. much less. While some other pension plans, although rare, offer an
automatic COLA adjustment to their retirees, the amount a retiree receives
is almost always far less than if they were covered by Atlantic Beach's
®. plan. An long-retired employee from Atlantic Beach would probably still
be making considerably more from their Atlantic Beach pension than an
employee retiring from a different company that had an automatic COLA
~.
adjustment each year because it would take many years for any COLA to
"catch-up".
BUDGET: Refer to the staff report dated 9/7/06 which is attached.
~, RECOMMENDATION: In light of all the factors listed above, it is my opinion that this is not an
appropriate time to provide a COLA increase to the city's retirees. Any
available funding should be used for salary and benefits for current and
,~„ future employees.
ATTACHMENT: (1) Staff report from Pension Boards dated September 7, 2006.
(2) Memo to Mayor and Commission dated August 22, 2006 concerning pension
costs.
(3) Computed employer contribution comparative schedules for General and
Police retirement systems
(4) Required supplementary schedule of funding progress for General and Polio
retirement systems
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AGENDA ITEM # 8E
CITY OF ATLANTIC BEACH OCTOBER 23, zoob
CITY COMMISSION MEETING
STAFF REPORT
AGENDA ITEM: The General Employee and Police Employee Pension Boazds have
requested that the City Commission grant a one time three (3)
percent cost of living adjustment or COLA, for city retirees and
beneficiaries.
SUBMITTED BY: General Employee Pension. Board, and
Police Employee Pension Board
DATE: September 7, 2006
BACKGROUND: Previous to this request, retirees and their beneficiaries have
received three previous cost of living adjustments. These were in
the amount of 12.5% in 1987, 3% in 1997 and 5% in 2001. In
1993, as a separate adjustment, retiree and beneficiary benefits
were increased by raising the multiplier related to each respective
plan.
'" During the August 10, 2006 pension board meetings, both boards
reviewed the need for a cost of living adjustment and voted to have
the plan administrator propose a one time cost of living adjustment
'~ of three (3) percent to the City Commission for approval. The
boazd was asked if they wanted to consider other options such as
restricting the eligibility for the COLA in order to reduce cost.
Options such as requiring the retiree or beneficiary to have been
receiving a benefit for at least five yeazs, as an example, was
discussed. Both boazds did not want to "discriminate" with the
~.
eligibility criteria.
Attached is the cost estimates prepared by the plan's actuary,
Gabriel Roeder Smith and Company.
BUDGET: If a COLA is approved, the action will affect the budget for the
City and for the City's pension funds. The City will have to
budget and transfer additional funds as calculated by the actuary to
amortize the cost of the increased benefit over fifteen years. The
pension fund will have to budget and pay the additional costs of
the increased benefits being paid out.
City Budget:
The actuary report attached estimates that the increased
contributions to the General Employee Plan would be $2,414 per
yeaz for a one (1) percent adjustment. A three (3) percent COLA
would therefore cost $7,242 per year for fifteen years. This will
~• require an additional 0.21 % increase in contributions as a percent
of payroll.
~*
AGENDA ITEM # 8E
OCTOBER 23, 2006
The actuary report attached estimates that the increased
contributions to the Police Employee Plan would be $3,039 per
year for a one (1) percent adjustment. A three (3) percent COLA
~* would therefore cost $9,117 per year for fifteen years. This will
require an additional 0.60% increase in contributions as a percent
of payroll.
Pension Budget:
Both of the above increases in the City's budget for transfers to the
pension fund will be revenues in the pension fund. This will off-
set the increased expenses of the additional benefit to be paid. For
the General Employee Plan this is estimated at $9,625.83 per year
'" and for the Police Employee Plan the increased cost would be
$10,261.23 per year.
~"' RECOMMENDATION: The City Commission consider the request of the General
and Police Employee Pension Boards to provide a three (3) percent
Cost of Living Adjustment to all retirees and beneficiaries as of
'~"" September 30, 2005.
REVIEWED BY CITY MANAGER
~. ATTACHMENTS:
,~, • Supplemental Actuarial Valuation to determine the costs associated
with providing a cost of living adjustment for the General Employee
Pension Plan
• Supplemental Actuarial Valuation to determine the costs associated
with providing a cost of living adjustment for the Police Employee
Pension Plan
AGENDA ITEM # SE
nCTOBER 23. 2006
August 22, 2006
MEMORANDUM
To: Mayor and Commission
From: Jim Hanson, City Manager
Subject: Pension Costs
During a recent meeting to discuss negotiations with the city unions, the levels of benefits,
ti including the pension plans, were discussed. The Mayor and Commission expressed concern
over the increasing cost and decreasing funded ratio of both the police and general pension plans
after many years. A question was asked about the city's fiduciary responsibility both to the
~.
employees and to the citizens of Atlantic Beach in light of this continuing trend. One issue was
at what point should major changes to the plan provisions be considered? You directed me to
check with the city's auditor to obtain an answer to the question. This memo is to report the
auditor's comments, recommendations and other related information.
Ron Whitesides, a partner with Purvis, Gray & Company, the city's current auditors,
acknowledged in a phone conference earlier this month that "the cost of the plan is high." He
recommended that we first consider what is causing the unfunded liability to increase in the two
~,,, pension funds. There are three reasons for this in recent years; salaries have gone up more than
the assumptions, pension benefits have increased and the market return for investments has been
lower than expected. He thinks the assumptions of a rate return of 8%, raises of 5 '/2% and a 5%
~„ discount factor are OK and in line with those of other cities. He advised "if you believe that
recent market trends are an aberration and will change back, then you should leave the funds
alone". He personally believes that we are in a downturn in the economy and that the returns
will improve in the future. Although the six year return on investment is below expectations at
5.1 % for both plans, both have a 9.3% rate of return since their inception. He advises the city to
"stay the course unless we come to a conclusion that the costs are to great". What is too great?
„~, We have to determine the value of the retirement plan in attracting and retaining good
employees. Ron noted that "today's work force is more transient and therefore retirement
systems may not be as important" as they have been in the past.
~.
If the decision is that the costs are too high, then changing the retirement benefits is one way to
lower the costs. Note that the city has recently taken two actions to reduce the City's cost for the
general employee pension plan. These actions reduced the multiplier for the general employees
from 2.85% to 2.5% per year of service effective April 11, 2005 and also increased the general
employees' pension contribution rate from 2% to 5% in 1% increments with the last 1% increase
~• to be effective in September 2006. The change to the multiplier only applied to employees hired
after the date of the change whereas the change in the general employee pension contribution
rate applied to all general employees within the pension plan. Another option noted by Mr.
.~
Whitesides was that some, but not many, cities have changed to a defined contribution plan
recently because of cost increases.
Before considering any changes to the pension plans, it is important to understand that the city
has much less flexibility in the police pension provisions than for those of general employees.
The general employees' system is somewhat more flexible. Benefit changes can be made
relatively easily subject to union negotiations. Any changes to reduce the benefits can only affect
new employees hired after the date of the change. .,
For the police department pension, many Hiles are imposed by the state legislature in exchange
for insurance premium tax proceeds that go into the pension fund for enhanced benefits. Police
and fire unions have had tremendous success for many years in getting benefits for city/county
police and fire employees mandated by the state legislature. These have resulted in police and
fire pensions being some of the most generous of any groups of public or private employees in
the country. The State insurance premium tax, referred to as Section 185 funds, received by the
City totaled $108,000 this year. Even with these tax premiums, the City contribution rate for the
Police Pension Plan increased from 17.73% to 19.85% in the last year as compared to the City's
contribution rate for the General Employee's Pension Plan being reduced from 16.09% to
13.99% (due to recently adopted plan changes). Because of the state requirements, the only way
the city could reduce the pension benefits and thereby lower the cost in the police fund would be
to forego any state revenues. To the best of our knowledge, no other cities or counties in the
state have done this.
Another source of advice on pension cost is the city's pension fund accountant or actuary.
Actuarial reports for both the police and general employee pension funds are now available for
the year ending 9-30-OS from the city's actuary; Gabriel, Roeder, Smith & Company. Both
reports will be presented to the Commission at the next meeting on August 28~'. While each is
lengthy and contains a considerable amount of data, you may be interested in the "Comments"
section of each report on page A-4. A portion of those comments are quoted as follows;
"The funding objective contemplates achieving a funded ratio of 100% over a period. of up to
30 years. The recent trend of the funded ratio has been falling away from 100%. This is not a
cause for concern based on two critical measures of vitality of the retirement system. Those
two measures are the cash flow needs and the contribution history. The cash flow is currently
positive and existing assets can meet current expenditures for over 15 years without any
additional contributions or investment income. The contribution history is of high credit
quality over the last 10 years because contributions have been made at the recommended
levels and in a timely manner. If you think in terms of a mortgage on a house, the retirement
system has 69% equity [general employee system] and a history of making payments on time.
Not bad"
The funded ratio for the police plan was 68.2%.
One other portion of those actuarial reports that you may want to reference is on page D-3 which
includes a table showing the funded ratio and unfunded liability of each fund from 1994 through
~•
AGENDA ITEM # 8E
OCTOBER 23. 2006
2005. This was the information upon which the Mayor and Commission expressed concern at
the recent meeting.
This information is the best advice that is available from our experts; the city auditors and the
pension system actuary. There is no simple formula to determine when, and under what
°" conditions, major changes to an employer's pension plan should be made. Like many complex
issues, this one ultimately comes down to a value judgment for the Mayor and Commission to
consider; Is the city's cost to provide retirement benefits to city employees necessary to attract
~'" and retain the employees needed to provide the services to the citizens of Atlantic Beach? Most
cities and counties still provide defined benefit retirement plans like ours, although the trend in
private industry is clearly moving away from those in favor of defined contribution plans. To
~° remain competitive in a labor market, we should probably continue to provide defined benefit
plans for our employees. However, it is certainly reasonable to consider changes to those plans
in light of increasing costs. If we can provide any further information or if you have any
questions, please do not hesitate to ask.
cc: Ron Whitesides
Nelson Van Liere
George Foster
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AGENDq ITEM # 8E
OCTOBER 23, 2006
CONTRIBUTIONS REQUIRED AND CONTRIBUTIONS MADE
The City's funding policy provides for periodic employer contributions at actuarially determined rates
that, expressed as percentages of annual covered payroll, are designed to accumulate sufficient assets
to pay benefits when due. The normal cost and actuarial accrued liability are determined using an
entry age actuarial funding method. Unfunded actuarial accrued liability is being amortized as a level
percent of payroll over periods of 3 to 30 years.
~„ During the year ended September 30, 2005 contributions totaling $544,992 -- $464,893 employer and
$80,099 employee -- were made in accordance with contribution requirements determined by an
~. actuarial valuation of the plan as of September 30, 2003. Employer contributions represented 14.6%
of covered payroll during the year ended September 30, 2005.
COMPUTED EMPL
Fiscal
Year Valuation
Ending Date
September 30 September 30
OYER CONTRIBUTION COMPARATIVE
SCHEDULE
Contribution Rates Dollar Contribution
As Percents of Valuation For Fiscal Year
Valuation Payroll Payroll Computed Actual
1994 1992 9.07 % $1,669,325 $164,069 $163,165
1995 1993 * 9.57 1,818,597 188,594 188,594
1996 1994 * 10.85 1,910,275 224,597 224,597
1997 1995 * 11.12 1,757,893 211,824 213,538
1998 1996 * 11.99 1,927,373 250,417 250,416
1999 1997 * 11.94 1,990,938 257,597 257,597
2000 1998 11.58 2,067,310 259,414 259,411
2001 1999 11.24 2,185,131 266,148 266,148
2002 2000 11.41 2,329,877 288,070 288,070
2003 2001 * 11.81 2,462,229 315,106 315,106
2004 2002 12.72 2,767,895 381,518 381,518
2005 2003 * 15.02 2,856,303 464,893 464,893
2006 2004 16.09 3,051,289 532,028
2007 2005 13.99 3,182,450 482,364
* After changes in benefit provisions and/or actuarial assumptions and/or actuarial cost methods.
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w ~ City of Atlantic Beach General Employee Retirement System D-1
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AGENDA ITEM # SE
nCTnRRR 23. 2000
CONTRIBUTIONS REQUIRED AND CONTRIBUTIONS MADE
The City's funding policy provides for periodic employer contributions at actuarially determined rates
that, expressed as percentages of annual covered payroll, are designed to accumulate sufficient assets
to pay benefits when due. The normal cost and actuarial accrued liability are determined using an
entry age actuarial funding method. Unfunded actuarial accrued liability is being amortized as a level
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;ti` percent of payroll over periods of 3 to 28 years.
During the year ended September 30, 2005 contributions totaling $342,995 -- $208,555 city, $25,622
employee and $108,818 premium taxes from State -- were made in accordance with contribution
requirements determined by an actuarial valuation of the plan as of September 30, 2003. Employer
contributions represented 22.6% of covered payroll during the year ended September 30, 2005.
COMPUTED EMPLOYER CONTRIBUTION COMPARATIVE SCHEDULE
Fiscal
Year Valuation Contribution Rates Dollar Contribution
Ending Date As Percents of Valuation For Fiscal Year
September 30 September 30 Valuation Payroll Payroll Computed Actual
1994 1992 10.34 % $ 744,717 $ 83,443 $ 84,912
1995 1993 * 11.32 740,734 90,863 92,120
1996 1994 * 14.95 768,662 124,525 124,483
1997 1995 * 14.56 831,573 131,202 148,774
1998 1996 * 18.90 837,853 171,596 182,213
1999 1997 * 18.98 820,949 168,846 168,802
2000 1998 17.67 940,002 179,988 180,020
2001 1999 16.70 1,018,459 183,091 183,091
2002 2000 17.10 1,213,234 224,812 224,812
2003 2001 * 18.05 1,155,404 225,991 226,041
2004 2002 18.74 1,194,950 242,637 242,637
2005 2003 * 24.31 1,129,034 297,361 297,361
2006 2004 23.76 1,360,051 350,161
2007 2005 25.70 1,402,444 390,494
* After changes in benefit provisions and/or actuarial assumptions and/or actuarial cost methods.
of Atlantic Beach Police Officers' Retirement System D-1
AGENDA ITEM # 8E
REQUIRED SUPPLEMENTARY INFORMATION ocTOSEa z3, zoos
SCHEDULE OF FUNDING PROGRESS C
Actuarial
Accrued Active Unfunded AAL as
Actuarial Liability Participant a Percentage of
Value of (AAL) Entry Unfunded Funded Covered Active Member
Valuation
Date @ Assets
(a)# age
b AAL Ratio Payroll Covered Payroll
)
( (b)-(a) (a)/(b) (c) ((b-a)/c)
1994 $4,549 $6,061 $1,512 75.1 % $3,068 49.3
1995 5,546 7,200 1,654 77.0 3,054 54.2
1996 6,517 8,290 1,773 78.6 3,107 57.1
1997 7,435 9,275 1,840 80.2 3,305 55.7
1998 8,457 10,404 1,947 81.3 3,609 53.9
1998(w/o Fire) 7,127 9,144 2,017 77.9 3,007 67.1
1999 4,650 5,796 1,146 80.2 2,185 52.4
2000 5,229 6,462 1,233 80.9 2,330 52.9
2001 * 5,587 6,986 1,399 80.0 2,462 56.8
2002 5,747 7,479 1,732 76.8 2,768 62.6
2003 * 5,951 8,186 2,235 72.7 2,856 78.3
2004 6,273 9,005 2,732 69.7 3,051 89.5
2005 6,802 9,822 3,020 69.3 3,182 94.9
Dollar amounts are in thousands.
* After changes in benefits and/or actuarial assumptions and/or actuarial cost methods.
# The actuarial value of assets used before 9/30/97 plan year were at market value; the asset method used after that
date is shown on page B-4.
@ Includes Poli,, e and•~''ire prior to 1999 except one case in 1998.
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Analysis of the dollar amounts of the actuarial value of assets, actuarial accrued liability, or unfunded
actuarial accrued liability in isolation can be misleading. Expressing the actuarial value of assets as a
percentage of the actuarial accrued liability provides one indication of the system's funded status on a
going-concern basis. Analysis of this percentage over time indicates whether the system is becoming
financially stronger or weaker. Generally, the greater this percentage, the stronger the plan. The
unfunded actuarial accrued liability and annual covered payroll are both affected by inflation.
Expressing the unfunded actuarial accrued liability as a percentage of covered payroll approximately
adjusts for the effects of inflation and aids analysis of the progress being made in accumulating
sufficient assets to pay benefits when due. Generally, the smaller this percentage, the stronger the
plan.
City of Atlantic Beach General Employee Retirement System D-3
AGENDA ITEM # 8E
OCTOBER 23. 200(
REQUIRED SUPPLElV1ENTARY INFORMATION
SCHEDULE OF FUNDING PROGRESSO
aluation
Date*
Actuarial
Value of
Assets
(a)# Actuarial
Accrued
Liability
(AAL) Entry
age
(b)
nfunded
AAL
(b)-(a)
unded
Ratio
(a)/(b)
Active
Participant
Covered
Payroll
(c)
Unfunded AAL as
a Percentage of
Active Member
Covered Payroll
((b-a)/c)
1994 $4,549 $6,061 $1,512 75.1 % $3,068 49.3 °Io
1995 5,546 7,200 1,654 77.0 3,054 54.2
1996 6,517 8,290 1,773 78.6 3,107 57.1
1997 7,435 9,275 1,840 80.2 3,305 55.7
1998 8,457 10,404 1,947 81.3 3,609 53.9
1998(w/o Fire) 7,127 9,144 2,017 77.9 3,007 67.1
1999 3,393 4,089 696 83.0 1,018 68.4
2000 3,791 4,615 824 82.1 1,213 67.9
2001 4,068 5,016 948 81.1 1,155 82.1
2002 4,230 5,334 1,104 79.3 1,195 92.4
2003 4,373 5,986 1,613 73.1 1,129 142.9
2004 4,534 6,405 1,871 70.8 1,360 137.6
2005 4,775 6,997 2,222 68.2 1,402 158.5
Dollar amounts are in thousands.
* After changes in benefits and/or actuarial assumptions and/or actuarial cost methods.
# The actuarial value of assets used before 9/30/97 plan year were at market value; the asset method used after that date
is described un page B-4.
@ Includes General and Fire prior to 1999 except one case in 1998.
Analysis of the dollar amounts of the actuarial value of assets, actuarial accrued liability, or unfunded
actuarial accrued liability in isolation can be misleading. Expressing the actuarial value of assets as a
' percentage of the actuarial accrued liability provides one indication of the system's funded status on a going-
~; concern basis. Analysis of this percentage over time indicates whether the system is becoming financially
stronger or weaker. Generally, the greater this percentage, the stronger the plan. The unfunded actuarial
accrued liability and annual covered payroll are both affected by inflation. Expressing the unfunded
actuarial accrued liability as a percentage of covered payroll approximately adjusts for the effects of inflation
,, and aids analysis of the progress being made in accumulating sufficient assets to pay benefits when due.
+~N;
Generally, the smaller this percentage, the stronger the plan.
City of Atlantic Beach Police Officers' Retirement System D-3