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HomeMy WebLinkAboutMinutes 2006-20081liembers Present: Aiembers Absent: Stiff Present: Others Present: Blue Ribbon Committee Mecting APPROVED 6r t 8r2009 BLUE RIBBON COMMITTEE Police and Fire Pension Plans MINUTES Wednesday, June 18, 2008 7:00 PJ I CIVIC CENTER, 2100 RIDGE AVENUE, ROOM 2404 Mark Metz, Peter .Morris, Gerry Gordon, Alex Granehalek, Jim Young, William Testa, Sandra Shelton Gregory M. Beard Michael J. Vasilko of Vasilko Architects & Associates, Alex Rivera of Gabriel, Roeder, Smith Consultants and Actuaries Presiding: Mark Metz 1. Call to order by Chairman Metz at 7:07 p.m. It was the general consensus to interrupt the meeting when Mr. Rivera arrives. II. Report on the meeting with Bill Stafford and Ted Windsor. G. Beard is preparing a full report on the meeting which he expected to have done by tonight but he was called out of town. When the report is received it will be distributed. The verbal report from M. Metz was that Ted Windsor was very forthcoming and articulate in explaining what his assumptions were and why they were what they were. He refuted in a very direct fashion the very notion that his assumptions were not reviewed for change for this period of ten or twelve years. They were carefully examined each and every year. He detailed each assumption. lie did a good job of explaining it. He defended what his assumptions had been and how actuarial assumptions and actuarial funding plans work. Ted Windsor explained it in a manner that was clear. Alex Rivera of Gabriel, Roeder, Smith Consultants and Actuaries arrived. Everyone introduced themselves and exchanged cards. III. Comments by and questions of Alex Rivera of Gabriel, Roeder, Smith Consultants and Actuaries. (GRS) The Chairman thanked Mr. Rivera for coming. M. Metz gave a brief history about the committee noting that the committee is not clear as to their purpose. The committee has decided to put together a report that addresses (written in a way that any interested party can understand it) the 140 million dollars of unfunded actuary liability, recommendations for corrective aetion(s), where in the budget they might look, where the city can come up with the money and including a best practices section that the City Council might adopt to oversee the operation of the plans. The Chairman felt there are a lot of people looking for a "smoking BLUE 111354N COMMITTEE Poke ana Fws Pen,.an Pam MINUTES M-tdatsdit. ha 1 L 20% 7M P?1 Pagt 1 d t! 4 Blue Ribbon Committee Meeting APPROVED fit 182008 gun". He has been approached in the street and charged with finding the person(s) responsible. M. Metz continued that he feels there is no defined methodology, no ill intent, and no wrong -doing. fie feels there has been a confluence of multiple events, each of which seemed to go against the funds in the last several years and compounded the problem. There's no quick fix. What the Blue Ribbon Committee (SRC) is trying to do is figure out where the City stands. After these introductory remarks, the floor was turned over to Alex Rivera followed by questions and comments. Alex Rivera: "There were some very good questions about the past, the history, the experience, and the markets — what happened in '01, '02. That's something that was beyond the control of the trustees. They did the best they could. But there's really not much that could be done. That's not unique to Evanston plans; it also happened to private and public sector plans. That in itself caused a deterioration of the funded status. Some other factors are also important, but eventually the plan would have self - corrected itself. The benefits are what they are. Eventually more contributions would've been made to pay benefits. You pay now or you pay later. You pay more now, you pay more costs later. That would've been self-correcting. The critical issue here, within the constraints of the statutes, is what funding level would the City of Evanston be comfortable with and over how many fiscal or point years. The level of unfunded liability although it is large, what's more relevant is the relationship of actuarial liabilities to assets first of all and then secondly contributions expressed as a percentage of pay. That number is something that the Finance Directors and the City Council are very well aware of. 40% of the pay instead of 50% of the pay isn't going to grow if the funding status isn't cured. Those are the real key issues; how to ensure that the funded ratio is improving within the constraints of the statutes. Secondly, the question is how to manage the contribution level for the City. No one wants to hear raise taxes to shore up the pension. But if the status isn't improved now it just means more will be needed to be paid later. That's a decision the City needs to address." M. Metz: "Isn't the contribution set based on the assumptions in your report, except for the funding method, they choose that right?" A. Rivera: "Yes." G. Gordon: "What is meant by funding method?" A. Rivera: "There are statutory constraints to the funding method. Let's assume the methods are defined by statue. The amortization period really dictates the contribution level. So if you have a reasonable funding method, whether it's Projected Unit Credit (PUC) or Entry Age, if the amortization period by statute is 20 years versus 30 versus 40. That amortization period will have a bigger impact on the contribution than the actual funding method. The constraint is really statutory. It's not really the actuary saying the PUC is better than the Entry Age, it's really the amortization period that I think is the real challenge here." P. Morris: "Depending on the methodology, if you choose the PUC you have a growing contribution level as opposed to a level payment." A. Rivera: "Are you referring to the normal contribution or the arc?" P. Morris: "I was referring to the Annual Required Contributions (ARC)." A. Rivera: "Yes, that was a good point but the difference as long as the number of members that are failing into the group — as long as the population is roughly the same there's not a significant disparity. PUC is not a bad method. It does the job. GLUE RI>f6fNi COMMITTEE Paco and F" Penww Puns Mim.- S %VdwwAy. Jaw M WA tuo rm Past 2 of 15 Blue Ribbon Committee Meeting APPROVED 618r2008 Entry Age depending upon the demographics of the group could fund the plan faster than PUC — it really depends on the demographics. One may actually fund it quicker, but both are sound and reasonable but the amortization period, that's the one that really needs to be controlled. If unfunded liabilities are amortized over 50 years (such as the State of Illinois)... some have 40, some have 30. Police and Fire are roughly at 26 or 27." • W. Testa: "Isn't the statutory limit 30 on Illinois downstate pension, or Police & Fire?" A. Rivera responded that it is reducing, it's a closed period, and so every year it's less." • P. Morris: "For Police and Fire does the funding ratio by statute have to be 100%?" A. Rivera: "If the statutes are not changed, the actuarial liability and assets should be the same at about 2033. • P. Morris: "That's only Police and Fire. Is Evanston considered downstate?" A. Rivera: "Anything outside the city of Chicago is downstate." • P. Morris: "When you get to 100 by 2033, you can say to the next 15 years, I'm going to fund at a different rate?" A. Rivera: "It tells you the formula of what to fund. It's the normal cost + the amortization of the unfunded actuarial liability and it's a closed amortization." • P. Morris: "It is not clear to me that for the next ten years you have to fund at today's ARC." A. Rivera: "The ARC will change every year as experiences emerge. • P. Morris: "If I could choose for the next 10 years out of the next 26.7 years remaining on the amortization period to fund a ratio of 75% and then at the end of 15 years go up?" A. Rivera: "You can't backload or frontload. It gives you a formula, you have to contribute the normal costs plus the amortization of the unfunded." • P. Morris: "The only two components that can be manipulated are the funding methodology?" A. Rivera: "...and the assumptions." • G. Gordon: "Didn't you or Mathew Grady or Julia Carroll offer a program which would chose between 75% and 90% funding?" A. Rivera: "That was the Pension Obligation Bond (POB). A deposit is made into the fund that would increase the budget ratio to a target. 70%, or 80% but then after that point, then the funding policy would continue but the amortization of the unfunded actuarial liability would be lower. So you're shoring up a plan." • G. Gordon: "...and your annual payment would decrease," A. Rivera: "But then the bond would pass." • A. Granchalek: "Is there significance to that 70% or 80%? Is that sort of arbitrary, there's no sort of break-even?" A. Rivera: "No, it's just a target. Analysis is performed to determine whether it's more beneficial to start at a target of 70% or 80% or even 60% . It's more arbitrary." • W. Testa: "This ARC for 26 years was being met under the old actuary assumption before 2007. All in all in one year with a different set of actuarial assumptions there might be some wiggle in the market for that one year the liability went from 100 million to 140 million. There are some curiosities that to need to be addressed. We just don't understand the difference in the former evaluations, mortality table, assumptions and your estimates of the unfunded liability. There's a line in there "change in actuary for example," The presentation dated September 5, 2007 pages 8-9 BLUE RIBBON COMMITTi'E P06ce SM Fri Pennon Puny MI\LIE5 w.amay�, Jrnt M ma 7:00 ►%1 ?Me 3 of I! Blue Ribbon Committee heeling APPROVED W 1612008 was referred to. "I think everyone is at the point where they understand the amortization in terms ofdecades makes a bigger difference on this but still it seemed like in one year there was this adjustment and a change in assumption. I think it would just be helpful to understand." I suspect that Mr. Rivera did not understand it completely because he lacked the old model. I suspect that Mr. Rivera might have guessed that this point. A Rivera: "These are educated guesses. The first thing we look at is called an expected actuarial liability. That's a basic formula: actuarial liability + normal costs + benefit payments and an adjustment for interest. So we would expect as numbers get closer to retirement the liability would increase. The first calculation is an expected actuarial Iiability. Expected assets at the assumed return. Then that differential is what's called the expected Unfunded Actuarial Liability (UAL). It's based on the prior actuary's valuation. Then we calculate valuation of the unfunded liabilities, then we update it with the change in systems. Each actuary has its on proprietary software. We do calculations based on the same set of assumptions and plan provisions. What we're trying to do is replicate his liabilities. Our professional standards allow us to be within 4% or 5% in the aggregate. So if we match their valuation then we've done a good job of replicating. If not, we usually go back and ask why it's different." • W. Testa: "Is the firm backcasting to check your 4% or 5% before you go forward to the starting point?" A. Rivera: "Yes, it's called a change in actuary. Comparing it to the unfunded isn't really a good representation. It really should be compared to the actuary liability. If we do that, it's well below the 5% target. ne next part in the exercise is to do a projection of the assets and liability — well emerging experience, based on the actuaries starting point. After we've replicated the prior actuary's liabilities and we've measured emerging gains and losses both on the asset and liability side, then we start making changes." • W. Testa what Mr. Rivera stated regarding the ongoing experience emphasizing liabilities and assets. • J. Young: "Is there is much deviation between the asset calculation of the first and second actuary?" A. Rivera: "No. There may be a difference in how our interpretation of how we apply interest, as far as middles of the year we may weight the interest, but it's very close. We're going to be off because it's a complex set of calculations and we're using proprietary soft►►•are to generate the liabilities. We know we're going to be in expenses. Then and once we're past those two hurdles then we start changing assumptions and methods." • J. Young: "Could you clarify the difference in the mortality between UP84 to GAM83?" A. Rivera: "It looks odd because it looks like we're using an older table but we're not. The GAM83 is a more modem table. it is not the most modern table. There's a 2000 version, but that's used only in the private sector. The next table we would use is the UP94. In a few years, the uninsured pensioners table based on the UP94 experience is the next table we would use. Titre key difference is really that using GAM83 assumes that the members on average will live longer so more benefits will be paid." • J. Young: "What is the average age or what's GANi83 use? A. Rivera: Proof annuity mortality - it's based on insurance data that includes a provision for a margin effectively for longevity. It would be based on more current data that tells us that OLUE RIBSON rOMMITTIT P^.iC! xa:ue We+vrn Pia*a M1�ITF5 14rW ftdAJ. JHW IS. Zoaa T-00 I%1 P.6s 4a 15 Blue Ribbon Commiltce Mccting APPROVED 6/18r20o8 retirees are living longer. "The key takeaway here is that we went to GAM83 from the UP84. It caused an actuarial adjustment to the plan, a loss if you will, in other words the unfunded net liability grew because the GAh183 you assume that people are going to live longer, so you're going to need more money to pay more payments." • J. Young: "I need a sense of how outdated is the UP84 table." A. Rivera: "The UP84 is still within the range of reasonableness. It's still a legitimate table, but remember, the prior actuary had not changed that table for over ten years. So it was time to consider recent experience and especially mortality." • M. Metz: "For the sake of the committee members may 1 restate a part of my conversation with Ted Windsor, and again I'm paraphrasing, the reason he didn't change that is because there is data out there that suggests that policemen & firemen don't live as long as the general population. So he felt staying with the table that had a little bit shorter mortality was appropriate." A. Rivera: "Five or six years ago that's a very practical and legitimate position. Right now, the 1994 table is available and there's another version called the Group Annuity Reserve table, (GAR). There's more data and what the data is suggesting is that with medical technology there is a longer lifespan, longer life expectancy." • h1. Metz asked for clarification on the data being examined, and asked about mortalities studies in Evanston's plan. A. Rivera: "No, it's too small a population for a study." • M. Metz: "That is consistent with what Ted said." A. Rivera: "There are studies on very large public sector systems. For example, we do a study for state employees and universities of Illinois. So that data we would say has a lot more credibility. When we see that it's not in synch with our assumption, we'll make the appropriate adjustment. We perform an experience study every rive years for those large statewide systems. With a smaller plan such as Evanston's police and fire funds, we could look at the experience but, it's not really as useful especially mortality. It's more in general what's the overall mortality trend. Are people living longer? And that I think is the key issue here. Longevity is really an issue. We need some level of conservatism in our actuarial calculations." • P. Morris: "Did the firm do an experience test on Evanston's population against the national data to get a correlation?" A. Rivera: "It wouldn't be credible." • Both the hi. Metz and IN'. Testa chimed in and agreed the population is too small. P. Morris said he understood that but inquired what would it look like. A. Rivera gave a gross example. • W. Testa: "As a percent of the importance of mortality and liability could these be large adjustments to that in 20 %." A. Rivera: "Yes, the liabilities increase by roughly G% to 7 % due to the change in the mortality table." • W. Testa: "in general are these plans sensitive to mortality assumptions?" A. Rivera: "First is the investment return assumption, secondly, the salary increase could have a big influence on the projection of active benefits, thirdly would be the mortality, and pre -retirement termination would generally have a small impact. Another impact would be the incident of disability. With termination, if a person takes their portion of the contribution out does that leave sort ofan unfunded hole or is there some rippling effect? Alex replied that would be an actuarial gain. The valuation assumes that this person continues to work and receive a pension benefit, BLUE R1860% COWLEIT7EC Pine"frn Penvon Punt M VITGS N edae"A?.line It. Mot 7.W r%1 PWlul l7 Blue Ribbon Committee Meeting APPROVED 6r18R008 but if they terminate, with a return of contributions, the difference between the projected liability based on service earned to date versus the accumulated contribution what you'll see is that generally results in a gain to the plan. But typically what happens is that person who terminates is typically replaced by another police officer, firefighter. You would see an immediate gain, but then that immediate gain wears away as the new member continues to earn service." J. Young: "I would like a better understanding of the mortality issue. UP84, when was that data as of?" A. Rivera: "The details are on the construction. I don't have all the facts committed to memory as far as the construction of this mortality. There's a lot of detail. Basically it was 60 or 70 large pension plans primarily from the private sector. 1 think the data was collected around the year 1980. But remember it takes time to collect data. Then once the table is issued then it's given the year in this case this is the naming convention they used. So this primarily reflects an uninsured pension or table. The GAM 83 is used for the reserving of group annuity products. The GAM83 was based on a collection of large insurance companies that had pools of annuity contracts. And it includes provisions for margins in other works the insurance companies want to make a profit. So even though they collected data their rational was we know individuals will live longer so we're going to include a margin. That's the GAMM83 table. Then there's something called the GAR94 table, Group Annuity Reserving table. That one is used for insurance companies, it includes a margin, but some practitioners remove the margin then it's called the UP94 table. The key here is that the UP83 table we are using assumes people will live longer; maybe a year or two on average and that liabilities will increase by roughly 6% or more. I think that's the real conclusion." • M. Metz: "Using mortality as an example, if in our plans we experience either an actuarial gain or actuarial loss, how do you take credit for that? Three, four, or five guys die early in a year so there's an actuarial gain but that comes before the table will assume." A. Rivera: "There is a release of liability." • M. Metz: "How is that reflected in next year's cost? You don't take the whole gain." A. Rivera: "No, there is a release of liability because these pensioners died sooner than expected. That gain or loss means effectively you're actually lowering the actuary liability. In that actuary liability causes the unfunded actuary liability to decrease. So, that gain is amortized over the remaining period which is roughly 27 years or so." • P. Morris: "is there is a benefit change though for widows that basically equalize?" A. Rivera: "Not 100% but that .will negate part of the gain." • W. Testa: "Where are the benefit changes in the table?" A. Rivera: "Those are historical changes. We didn't look at the history and the impact of the benefit changes historically. W. Testa appeared to understand that those numbers are in the model already. A. Rivera stated that those benefit changes should have been reported in the prior actuary's assessments. So, if there's a change in benefits, that report should include a provision that shows the impact to the plan. That was in the starting point. We did find one or two things in interpretation we thought they were interpreting, such as survival benefits, differently and we made a provision in our report to update that interpretation. But even with that update the change in actuary liability was still OLVE RINSON COMMI"FE Po" aM Fr* Pvtum PL2n% Yl-St'TLS 14 rdanda/. J#W Ili. MM im FA1 rya 6 of 15 Rtuc Ribbon Committee Meeting APPROVED 611812008 well below the tolerance level. Each actuary has an idea how a certain benefit should be valued and they use a simplifying technique and we decided to value it more explicitly." • A. Granchalek asked Mr. Rivera to talk about disability effects. A. Rivera: "Disability numbers are not as easy to assess because of the experience. For disability we use data for other downstate plans that we're familiar with and also the Department of Insurance, their assessment of all the funds. We look at their data for guidance. For disability benefits and what Evanston is experiencing it is not credible so we have to look at outside sources." • A. Granchalek: "With a population our size something like a termination of senior person or a disability, it would seem like it would have a disproportionate effect on your numbers. A. Rivera: "That would generate a significant loss." • J. Young: "Out of curiosity, how many other police & fire funds in the state of Illinois do you work with?" A. Rivera: "Maybe 10 or 12 plans." • J. Young: "With those other 10 or 12 plans, are you using the GAM83 tables? A. Rivera: "Yes." • J. Young: "The other assumptions like the 7.25% rate of return...?" A. Rivera: "7.25% is on the high side. We have some plans that are using 6.75. Seven is more less in the middle." • M. (Metz: "For the benefit of the committee Mr. Rivera , would you explain your arrival of 7.25%." A. Rivera: "We use a capital assumption model. We look at history and what the funds have done historically but then we also look at the future based on capital assumptions model. What equities are expected to earn, bonds, cash, etc. We do a simulation of the portfolio. That simulation will generate a range of results. We took at the 25th to 75th percentile per our professional standards. We'll simulate the portfolio for 25 to 30 years and see where the cumulative returns fall." • M. Metz: "What model is used, actual or real rate returns?" A. Rivera: "We look for forward looking assumptions. The history is used to make an assessment on the expectation of the future, It's not just looking at the historical returns of equity but it's a consensus of what an asset class is expected to earn in the future based on inflation projections and real returns." • G. Gordon: "Regarding investment performance, you came up with 7.25% for Evanston, is that based on Evanston's performance or the whole state?" A. Rivera: "We looked at the asset allocation of Evanston, the portfolio of each one. Because of the 45% equity constraint, it's harder to defend an overall return of 7.5% for example. 7.25% falls at probably the 65`h to 70" percentile. Slightly aggressive." • P. Morris noted it looked like the returns %vere also gross of fees spaces rather than net of fees in certain instances. A. Rivera: "Our valuation when we project liabilities, is we're assuming that the rate of return is net of investment fees. So we have to strip those out." • P. Morris: "100% stripped out?" A. Rivera: "They should be stripped out. We stripped them out from our assumption," • G. Gordon recalled Mr. Rivera saying there are some plans that he advised the City to use, 6.75% and 7%. He asked why and why was Evanston at 7.25°%. A. Rivera: BLUE RIBBON COMMMEE POK* and Fee Par&W Pwd M1ILYES N edseb").7nw 11.20M UJO F%J his. d 1s Blue Ribbon Commiticc blcctin8 APPROVED 611812008 "We gave the Finance Director and the City Management results at different rates. 6.75%, 7% and 7.25. Our recommendation was we gave them all the facts and the likelihood of earning different returns. We also gave them our information on our experience with other plans. In other words, based on this type of portfolio, your peers are more likely to use 7% than 7.25%." • P. Morris: "In your simulations where was your highest coefficient correlation?" A. Rivera: "I don't have that committed to memory, but we used capital market assumptions from an investment consultant." • P. Morris: "But if you're using a range and if it's simulated, you still have to at some point say given statistical forecasting.....correlation and coefficient." A. Rivera: "We have a set of capital market assumptions, correlations and coefficients between each asset class. We worked with investment consultants, they provided that information and they also provided the net returns and the standard deviation of each class. They also provided the inflation expectation based on a time series model — long term and short term. The correlation of inflation with each asset class." • P. Morris: "The answer is?" A. Rivera: "The answer is that there is a lot of data. There is a matrix that's ten by ten." • P. Morris: "GRS is making a recommendation at 7.25% and there is presumably a body of data that says 7.25% is better than the 7% is better than the 6%..." A. Rivera: "That's not true, 7% is better than 7.25%." • M. Metz: "Better means it's more likely to achieve." • J. Young drew a bell curve to help explain to P. Morris the rate and what it means in relationship to Evanston. He drew the curve and said that the middle point is the median number. • J. Young: ""'hat I hear Mr. Rivera saying is that that would be basically 7%. 6.75% would be here (pointing to his illustration) and we're taking the more aggressive assumption of 7.25% because the assumption that I'm using is that if you use 7.25% the normal cost that goes into the calculation is lower." • G. Gordon: "You gave the city management a choice between 6.75% and 7.25% and for political considerations, they choose 7.25% and you followed it." A. Rivera: "My responsibility is to provide information to the plan sponsors and make recommendations." • G. Gordon: I wasn't trying to be critical, I'm just trying to understand." A. Rivera: "No that's alright, I gave them a range of results and results that can be supported in accordance with our professional standards of practice. If the decision makers are willing to accept more risk by being more aggressive with the assumption set, that's their prerogative." M. Metz: I agree. The risk they took when they said alright lets use 7.25% instead of 71/o or 6.75%, is that the likelihood that they will have to put in more money later is greater than it would be if they used a lower interest rate assumption." G. Gordon reiterated that is a political decision. N1. Metz agreed. • W. Testa: "Another way to look at this though is that from an actuary's point of view. This is not core essential to what they should be recommending, they're not investment analysts. They go out and get good information as best they can. So there's more reason to give a range here than there might be for a mortality table or something in which they're actually trained in insurance sciences." P. Morris: "You BLUE RIBBON C'OSMMEL Poke "Fus Pens*i Pons WWI CS µ tdnnds). Jant 1 & Me r:oo r.0 Pact 9 ur 1, Blue Ribbon Commitice Sleeting APPROVED 6rt snnos do the mathematical forecasting." W. Testa: "Yes, but he's a consultant so it's a secondary service that they're performing in some sense." A. Rivera: "We don't pick the stocks, we help evaluate the asset allocation so that there are consistency with assets and liabilities." • W. Testa: And you're not coming up with return on asset classes either?" A. Rivera: "No, we're not trained." • M. Metz: "Think 30 year data, 30 year projections over market cycles. This is nearly becoming theoretical as compared to looking at the individual fund managers that the plans employ to manage assets and stocks are not anywhere near that level of specificity. These are long-range capital market projections; it comes very close to being theoretical." P. Morris: When you strip the theories side, you're looking at around 25 million dollars worth of difference between 7.25% and about 6.75%." • M. Metz: "If it happens." " The risk is it is likely the City will have to add more money later than it would be likely if they used the low interest assumption. It's not necessarily true. It just depends on what happens. Experience will tell." • W. Testa mentioned he would like to cover other things. M. Metz stated there was about 30 minutes left and asked if Mr. Rivera would like to stick around a little longer. He said fine. • J. Young: "I am trying to understand that you have 6 or 8 key assumptions that go into the overall analysis (covering the effecting factors) on the bell curve and what's the most likely outcome. If we're using assumptions all the way out here (pointing to his bell curve) then we know what we're being more aggressive in our assumptions." A. Rivera: "It's mandated that we stay in a certain range and if we fall outside of that range then we have to caveat and really qualify the report." • J. Young: `Because again if the had been using 7.5% which was out here (pointing to his bell curve) our mortality assumption which was out here (pointing to his bell curve) it just starts to add up one after another." A. Rivera: "That's a good observation" • J. Young: "If all the assumptions we're using are a standard deviation of two, then the probability of actually having that actual experience being the reality is highly unlikely. It could happen, but the probability of it happening on a consistent basis is highly unlikely." A. Rivera agreed. J. Young: "Whereas the assumptions are closer to the media, i.e. you'd be a little more conservative, then you're going to hit the mark more." • P. Morris: "Why was the switch made on the entry age versus the PUC?" A. Rivera: "The switch was made because in general 93% of public sector plan sponsors use entry age normal." • P. Morris: "Even though in the state of Illinois there are lots of public plans that use PUCT' A. Rivera: "There are statewide plans that use PUC. But if you look at nationally, entry age normal is the predominate method in the public sector. Private sector, PUC, is the pre -dominate method. The reason is in the private sector, it has history and has 87 accounting. The accountant decided that using PUC was easier to allocate the cost. The assumptions are different too. When you do an 87 calculation you're using a bond rate instead of a long term investment return. So the liability using PUC and a bond rate could actually be higher. That's another issue, that's a private sector and I don't think we should confuse the two." aLt:r RIRSON COMAJI7TEE Pau aM iw Pwsym Rua YINLILS N'ed"SW?.Use Is. WN 1:00 PM pap g of, Blue Ribbon Committee Meeting APPROVED 61t M008 • P. Morris: "No, there are lots of State of Illinois funds that use PUC." A. Rivera: "Yes the state wide plans use PUC but the reason for that I really do not want to go into because they're our client. But we do not endorse that cost method for a public sector plan. That was a mandated assumption. We would not recommend PUC, that would not be our first choice." P. Morris: "Why?" A. Rivera: "The entry age normal produces more stable costs as a local percent of pay." M. Metz: "You put away more than what your actual mortality charge is." P. Morris: "I understand that but when you make a change like that together with all the other assumption changes that have resulted in a substantial negative impact upon the city today, it causes one to want to take a look at this. Can we turn the city's finances around on a dime in order to fund at this acceptable costing methodology?" • G. Gordon: "Can I ask a couple of questions?" You sent an email to Matt Grady, a copy of which we received in our packet at start-up in which you compare your numbers to the Illinois Department of Insurance ([DO[). You show that the GRS is roughly 30% higher than IDOL A. Rivera: "No, GRS was relatively close to the IDOI numbers. Are you looking at the same fiscal year?" G. Gordon confirmed he was looking at Mr. Rivera's email dated October 12, 2007. A. Rivera: "By cost do you mean the contribution or the actuarial liability?" G. Gordon: "Your summary sentence says (G. Gordon passed the document to Mr. Rivera) the preceding two tables show the GRS actuarial process produces contribution amounts that are approximately 30% higher than the IDOI's suggested tax levies." A. Rivera: "It is the amortization that is causing the difference." G. Gordon: "Why should all of the interested parties, the pensioners, the taxpayers, the active police And fire, why should they be looking at a 30% higher contribution from the city?" + W. Testa: "There is another effect that I didn't consider that the employee contributions under what time pattern you choose to take dollars out means you're going to be drawing from a higher salary base to pay for people who are retired. The percent equals out. You take an equal percent but you're taking a percent in later years when these guys have bigger salaries. So a fatter percent gives you a big kick at the end." A. Rivera: "That's an assumption and if the expectation is that police officers and firefighters will continue to earn 5.5%. P. Morris: "Is that on an annual basis?" A. Rivera confirmed that it was. • G. Gordon: "Does the Department of Insurance assume 7% earnings? A. Rivera: "Assets will care 7% on average. • G. Gordon: Is there enough difference between a 5% and a 5.5 % salary increase to account for a 30% difference?" A. Rivera: "You're basically reducing the amortizing factor and because of the leveraging effect, basically its 1.07 divided by 1.055 then that amortization, there's more that's being funded in the future. But that's just one part of the equation. There's about four more. The IDOI's interest rate or discount rate is conservative and we're okay with that assumption. Salary increases because of the amortization of the retiree liability we think they're 5.5%. Although it may be okay for all downstate plans, the 5.5% should really be based on the future expectation of the City of Evanston, not what the Department of Insurance is using for all plans. This is an overall average. Mortality they're using a 71 table which is less conservative than the 83 table. So the difference there is about 3%. Our preference is to use 83. Very few plans use the 71 tables. When you look at all of the eLUK RIS". COU IIt7tt Pap and Fre Peron PWw M1N1J1C5 W rdwda7. J+r I C IU a T;W MI rap 1DaI7 Blue Ribbon Committee blteting APPROVED 611812008 factors in combination, you have this big difference. Now, the interest component is key. The DO] they're calculation assumes that the contribution will be made at a specific point in time. But if the contribution is delayed, if it is made 24 months after the time when it's calculated, it's interest that the fund could've earned. And if our calculations were assuming that, that additional forgone interest should be picked up somewhere." • P. ,Norris: "Is that a significant item with regard to Evanston because S. Dmzner mentioned, and I was not aware of it, that the fiscal year for Evanston ends in February. And so in the 08 fiscal year you actually won't make the contribution until 09?" J. Young: "Basically the whole point is that there is a time line." P. Morris: "With a 16 month timeline I thought there was." G. Gordon: "is that different than other downstate plans? That time line?" A. Rivera: It's up to the Finance Director to use this information and make a decision. The pension trust is not receiving that contribution at the point and time of the calculation it is receiving the contribution 15 or 16 months later." • G. Gordon: "Is that normal for downstate pension plans?" A. Rivera: "Most of the reports that we have reviewed from other consultants make it an adjustment for interest. It's a generally accepted actuarial practice to make an interest adjustment to the contribution if it's received "x" number of months after the point and time of the calculations." J. Young: "As long as "x" doesn't deviate from year to year you can basically effectively plan for it." • P. Morris: "Do you have alternatives though with regard to what the City can do to say we don't want to sit here on this amount of money and pay 7.5% on it? On the existing processes, do you want to pay ahead on it to basically bet more in synch with when the calculations is made and the cash is contributed" A. Rivera: "It's better to have a matching of expense and contribution and it's better to have that money in the trust sooner rather than later." M. Metz: "What you're suggesting is that you decouple the tax from the levy from the plan or sonic portion of it." • G. Gordon: "In your experience what are other downstate pension plans for municipalities doing? Are they also interest adjustments with respect to the timeline?" M. Metz: "You're asking when the other cities make their contribution is their timing shorter than ours?" A. Rivera: "it varies. We've seen some that are at six months and some that are at 24 months." • G. Gordon: "You said that in some municipalities you recommended 6.75%. Is that to adjust for that?" A. Rivera: "No. It's just that based on the facts that we have the given the plan sponsor, they have made a decision to be more conservative in their funding policy. So in the bell shape curve. they want to he closer to that medium. They want a higher likelihood. They want to minimize: long-term risk." • W. Testa wanted a word about other demographic assumptions before time expired. A. Rivera: "The other key assumptions are termination and disability incidents." J. Young: "Those two don't seem to be that significant yet the dollar amounts arc fairly large." A. Rivera began explaining the issue but M. Metz integected to ask about the salary increases included. • M. Metz: "Salary increase, disability, and termination arc all under this demographic assumptions in this report. Those are in the order of importance: 2, 4 and 5." A. Rivera: "The salary assumption was changed. I think I have the table with all of the 6L 1 RIB" CONINITTIC ralcm WK! Fn Pe114n?W41l1VI S W edands}. Jw M MW »ofts Pw11oris Blue Ribbon Committee Meeting APPROVED 61IW008 prior and current actuary's figures. The prior actuary had different inflation assumptions. He assumed 4.5% salary increases. We're assuming 5%. If we decrease the salary and increase the assumption, we have two different effects. Decrease in salary increase in assumption helps the amortization factor. By help I mean that your amortization factor is lower so more money will go into the fund. Then on the allocation of the past service and future service it has the opposite effect. So we have to be careful of how we evaluate salary increases because it has a positive effect on the contribution but a negative effect on the liabilities. It really depends on the relative level of retiree Iiability. Do you want to backload the amortization of the retiree liability? That's a key question. If the use higher pay then we're paying that retiree liability later as payroll increases. But if we're assuming higher salaries then that implies that the active member's benefits will be higher in the future. There's a trade off. So we're okay, 4.5% is a reasonable assumption. We would've been okay sticking with 4.5% but we actually dampened the Impact a little bit by using 5% „ • W. Testa: "Which one of these three gives us these big positive numbers here like for the ftreman's fund disability experience, termination, the salary goes the other way." A. Rivera: "Disability. We're assuming that the incidence of disability increased slightly. Let's start with retirement rates. That's another key assumption that I did not mention." • W. Testa: "is that the same as termination?" A. Rivera: "No, it's the age when the member actually retires. That's in the other demographic bucket. That's a critical one actually that should go right before disability incidence. There is a mandatory retirement age for Chicago but downstate operates a little differently." S. Shelton: "Historically, what's been the trend?" A. Rivera: "That's a good question. Much lower. Maybe 57, 58 on average and that's consistent with other downstate plans. So we would expect that these police officers once they get to maybe age 60 there's a high likelihood that they'll retire." • J. Young: "We know as part of the statute that you can only earn on your retirement fund 2.5 times the 30 year max so it's like 75% of your annual salary. So there's really little incentive other than working longer and longer and you're going to max out your 75% maximum." A. Rivera: "If a fireman or policeman retires at age 70 that means less pension checks — right? And then you also have a longer period to finance that liability because you're financing it over their after -working lifetime. This assumption we could not accept, we had to change it." • S. Shelton: "To recap, our greatest expt -lire seems to be the area of interest at this point. The interest in investment retiring, the remaining exposure. Because it seems like you've corrected it, you've brought us back to the median and some of these other adjustments, but in terms of the investment return at 7.25%." A. Rivera: "That's still on the aggressive side. Given all the other assumptions and the aggregate, we're moving more towards that middle point. So sometimes if you have one assumption that's a little on the aggressive side, you have enough conservatism with your other assumptions so that in the aggregate it produces a reasonable contribution rate. • P. Morris: "I want to return to the interest for a second. The decoupling of when you levy and when you make a contribution and when the contribution calculates. My quick and dirty without having a big super computer is right now that's about 1.1 BLUE RlB30N COMMIT7£L PW and rwo PonLan Pura MISLIES WfdandAy, Jose 11L WN 7;M r, I PA&e 37 of I S blue RiWm Committee NI"ling AI'1'ROVEb 6118r ON million dollars." A. Rivera: "At 7%." P. Morris: "7.5%0 of the contribution of which is around 10 million bucks." A. Rivera: "I don't disagree, its real money." P. Morris: "And it compounds also." A. Rivera: "It compounds less ifthusu funds are in the pension trust sooner." P. Morris: "That's exactly ►►Mutt I'm saying. If you decouple the thing and tend to match up when the calculations arc made and ► hen time contributions are made, you could save today L I million dollars which that number keeps increasing if you look at the table that we're looking at under the one that you all prepared. We're looking at the last year like 26 million dollars is your contribution level." J. Young: "To clarify we're looking at the rate of return 7.75%, that's a nominal rate of return. You're thinking about this in nominal terms because the assets are denominated in nominal terms, the liabilities are also in nominal terms. So we're thinking apples to apples." A. Rivera: "Yes, our inflation assumption I believe is 3.25% for long term employees. I don't have that in front of me but we make assumptions about inflation in our model too." A. Cranchalek: "This might seem like with a pension population of Evanston's size a disability or two or three could have a pretty significant effect." A. Rivera: "You are absolutely right and that would be a huge loss." A. Rivera gave the example of a 40 year old who becomes disabled, assuming that they're going to retire on average at age 57 or 58 as supporting the loss to the plan. J. Young: Returning to S. Shelton's question, to an extent that if we're Iooking at page 8 and we see that we started basically with the prior actuary this is the unfunded actuary liability, you came on board, you made some changes in the assumptions we're now effectively going from 100 million to 140 million. If we fast forward, this is as of March 31, 2007, now we're looking at March 1, 2008, the one variable that would really change would just be the rate of return and you kept it at 7.75%. Would that be the experience?" A. Rivera: "Yes, if we were to do the evaluation at 3/1/2008 it would have one component for emerging gains and losses." J. Young: "If we're looking at 100 million under the old actuary and 140 million under you as of 3/l/07, what's the number as of NUN?" A. Rivera: "I don't know because they haven't done the evaluation. i can tell you this, it will probably brow. It's not going to remain fiat. The unfunded liability will tend to brow under these types of plans. One area is investment performance. I can't think of too many plans that have earned 7% lately. As of 6/30/08 we're seeing a lot of plans that have negative returns. So right there that's going to be a loss, that's almost a given. Unless there are liabilities that are liability gains, in other words, more terminations than expected, that may not be enough to offset the asset costs. My guess is that the UAL will increase by 3/l/03." + J. Young: "When do you conduct that analysis?" A. Rivera: "We're collecting data right now." Ni..N1etz: "%l'hcn would an evaluation typically be done?" A. Rivera: "I don't want to commit to a date, typically six to eight weeks," J. Young; "With today's technology, where's the constraint on getting your data that you ncuil." A. Rivera: "We work with Sir. Drazner's group and there's also an audited financial statement. That report needs to be reviewed." • S. Shelton: "So the trade off is continue to have losses using 7.25% that we know is not realistic versus putting more in. Do we pay up front now or pay more later?" A. Rivera: '"That's the key decision." ELL[ JUSBCT CO►I]t ME Pore x4 Fw Pero cn PWa 61MMS Wtdnadi). Jem I & TOd i:00 fit PW 13atIs ` Blue Ribbon Colnmillee ,Nlerting APPROVED 6 I W008 • G. Gordon: "Right now we're in a difficult financial setting. In earlier years we were gelling 9% or 10:'0 on returns. 1 suspect that as hard as times are now it's going to turn around, In future years we're going to be making more than 7.25%. The problem is that in these difficult years we're not getting into the fund what we need to. Later on when things are better we can't exactly offset that unless performance is really great, A. Rivera: "I'm sure you're all aware what happened in the 2000 and 2002 markets. '['hat's happening now. So, experience is going to tell us that if we have 1-2 bad years, it's going to drag. Ni. Metz: "What the funds earn is the single biggest contributor to actuarial gains or losses. Which way it goes is relative to the assumption. A. Rivera: _"Right." • P. Morris: "7`hc question 1 have is is there a way that we could issue General Obligations Bonds at the tax exempt rate for a different purpose that frees up cash in the City's general budget." M. Metz: "When you make the G.O. issue are you not required to state what its for?" P. Morris. "Yes." M. Metz: "I'm not a lawyer but what you can't do directly, you can't do indirectly." • J. Young: "-the assumptions that we're operating under is that we are required to have our liability 100% funded by 2033. We recognize things change in our city and that appears to be an issue that 1.) does it remain at 100%, and 2.) does the 2033 date get pushed back — your speculation?" A. Rivera: "I think the 2033 will be extended. 'llrirty years will be the target." M. Metz asked for an example of the worst case scenario. A. Rivera: "This is purely a guess but I would say when you bet anywhere near 22 years or so give or take three years or four or so somewhere around that point, they'll probably adjust the amortization period." • S. Shelton: "liven given that there still is a liability to be paid, something needs to be done. At the end of the day this money will still have to be paid out." M. Metz: "For now the ARC, Annual Required Contributions, has to be paid." A. Rivera: "It's in the statute." M. Metz: "it's in the statute." P. Morris: "A funding ration of 1 GO%." A. Rivera: "it is the normal cost plus amortization of the UAL over the remaining period." Chairman Metz asked if anyone had any more questions for Mr. Rivera. Everyone thanked Mr. Rivera for coming in and said he had been most helpful. IV. Comments by committee members: • M. Metz would like to check back over his assumptions. The question was asked if the committee could research how other cities are funding their pensions. A committee member responded to the inquiry referring to bonds. Another question asked was how dill the committee know what rate the city would have topay if it were not the municipal rate. One of the members responded that probably is in the 5 or G range. W. 'Testa said is a city that doesn't change it's methodologies, able to fund it's pension. A committee member that sits on the Parks, forestry do Recrealion Board feels that Evanston has a lot of money. This is all speculation, but there will be political pressure. He feels the budget needs to be tightened more. It's not going to be a simple situation. Al I NIMA UMIM11 TI.1. PLAeo rA Fw* pwNwol o-." Y111'i ES N eda"da,. J•r I L I" 7.00 IN i'.Kr 11 c! 13 s � _ V. Blue Ribbon Committee Meeting APPROVED 611 W2008 • Another question was posed asking if the committee should be working on the final report. M. `fetz said he would like to start writing to see where the holes are and see what it needed. He posed the question about stow deep and technical should the report be. lie encouraged a conceptual conversation to address the question. • It was suggested to invite Julia Carroll to attend a meeting to review her letter particularly addressing the reference in her letter concerning increasing the sales tax revenue. Another option would be for two members to meet with her and report back to the full committee. The committee decided to extend an invitation to Ms. Carroll regarding the 1213 U07 letter to the City Council and the Mayor • In regards to the budget fiscal situation on pensions a public meeting was suggested. The committee aid to have one and that date should be communicated to City Council. It was suggested that when the committee approaches a final draft of their report that is when the public meeting can be held. Ni. Metz would like get a report, get it printed, make it publicly available and announce a hearing inviting council. Chairman Metz adjourned the meeting at 9:15 pm The next meeting date is Wednesday, June 25t% at. 6:30 pm Respectfully submitted Dolores Cortez Executive Assistant City Manager's OfTce- allr.R1NM4Co1IMMU PokmAMFnPm+mPWnMMUS * .Jwr1k"W 7�w MI PWISom Blue Ribbon Committee Meeting APPROVED 6t25108 BLUE RIBBON COINIMITTEE Police and Fire Pension Plans MINUTES Wednesday, June 25, 2008 7:00 Poi CIVIC CENTER, 2100 RIDGE AVENGE, ALDERINIAINIC LIBRARY Members Present: Gerald M. Gordon, Alcksandr Granchalek, Mark Metz, Peter D. Morris, Sandra Walley Shelton, Jim Young Members Absent: Gregory M. Beard, William A. Testa Staff Present: Steven Drazner Others Present: Alderman Ann Rainey, Jeanne Lindwall, resident Michael J. Vasilko of Vasilko Architects & Associates Patrick Dillon, Firefighter's Pension Board Timothy Schoolmaster, Police Pension Board Presiding: Mark Metz 1. Mark Metz called the Blue Ribbon Committee (BRC) meeting to order at 6:40 p.m. He noted that it is unfortunate but Julia Carroll is out of town, S. Dmzncr will imtite her to attend the meeting on July 2"d. His and Greg Beard's report on the meeting with Ted Windsor and Bill Stafford will also have to be postponed due to G. Beard's being out of town. These two items will be deferred to the next meetings agenda. 11, Discussion: Gerald Gordon referred to the difference between the Illinois Department of Insurance (IDOI) and the Gabriel Roder Smith & Co (GRS). Per Alex Rivera of GRS, tables sent to him show GRS proposing amounts 30% higher than what ]DO[ recommends. He had spoken with one State employee in [DOI who said their actuarial reports are done for 640 municipalities, cities and towns. What is emphasized in the State's report is the Annual Required Contributions (ARC) assumptions are based on all funds in the State. It is an aggregate. Gr Gordon said I guess that GRS is not far off from the average. 'The City Council asked for this blue ribbon committee to be called because they did not want to proceed with a tax increase based on the figures from GRS. Since they gave no explicate instructions, it would seem that they want to find a way to decrease taxes. The State went on to say that some communities use IDOI figures unquestioned or hire their own actuaries. or conic up with a combination of the two sets of figures. G. Gordon's contact asked who our actuaries were and said that he had never heard of Ted Windsor or Gabriel Roder. And yet, the City Manager had stated that GRS had handled over $00 communities across the country. G. Gordon suggested that the City use the IDOI figures which will reduce the levy by 30% or at best use a combination of IDOI and GRS. JimYoung asked why not use GRS. G. Gordon said that all actuaries can come up with different figures. Peter Morris thought these were all points. lie noted that the committee saw some major swings in certain areas in the presentation made by GRS. G. Gordon said the GRS would have recommended 6 3/.% earnings but for political reasons the city made it 7%. What can the BRC due to minimize this? J. Young said that he believed that the BRC should have no political agenda. lie continued, we owe the citizens of Evanston information and we need to be independent of City politics. P. Morris thought J. Young was correct but felt the GRS thought there was a lot of wiggle room in many areas. What is the difference between GRS and IDOL? ]. Young passed around a hand-out that shows the many variables available. Ted Windsor thought 7 %,% aggressive while GRS thought 10 or 11 percent was aggressive. We must fully recognize the cost per year for who we are serving. G. Gordon said that IDOI is at 7%. J. Young said there are still many variables, Mark Metz said that GRS suggested a 30% reduction in cost but recognized that is over a wide range of plans. We need assumptions drawn from the City of Evanston data. The [DOI study shows the biggest change is in interest. The three major areas of change are interest, salaries and mortality. G. Gordon said that GRS stated that Ted Windsor is 30% higher that [DOI. ,11. Mertz said that that is 30% from all communities, assumptions from The City of Evanston need to be used. Each grouping can also produce different outcomes. Alex Granchalek noted that the closer you get to a target date, the harder it is to correct an error. M. Metz said that by statuary obligation, the benefits have been accrued. G. Gordon said that benefits arc not a question. M. Metz said that the committee needs to chip away at the amount required in the future. He went on to say that he did not see a need to be fully funded for five to ten years. The State will probably extend the due date beyond 2033. G. Gordon said that we do not know what the unfunded liability is; all three sources say something different. A. Granchalek asked why the committee would take the IDOL figure. If it was higher, there would be no question. Actuaries are brought in to solve these problems. GRS was chosen to assist the City of Evanston in making a decision. That this one is lower then what another expert says is a problem only in the future if proven %rang. J. Young agreed with G. Gordon that his idea is the best process to follow, whichever actuary uses assumptions that are most logical. The City needs to pay for services within the year they are used. Some years will be good and some will be under funded but it will all equal out. But, the City of Evanston has been under funded for approximately ten years. J. Young continued that he felt GRS was logical and rational in explaining their assumptions. Things made sense. But it was noted that it raises costs and makes the unfunded amount higher. This is more aggressive and it is highly improbable that it will happen. Does anyone think the BRC should interview three more actuaries? hi. Metz asked if as a committee they should recommend a set of assumptions to work with. They would be, 1.) Level out each year's contribution to x °o of payroll, 2.) Create a lower contribution now and a higher one later and 3.) A higher (much higher) contribution now and much less in the future. G. Gordon felt the committee cannot rind assumptions unless they did the actuarial work themselves. M. ,Metz stated that the committee is not qualified to do that. G. Gordon said that Ted Windsor is closer to IDOL that GRS. As far as paying as obligations arise, IDOI has a plan, 16.89,o of annual salary. M. Metz said that there is a wide range of assumptions. G. Gordon said yes. But to take care of assumptions as they occur, use the [DOI figures. P. Morris thought M. Metz had stated the assumptions clearly. GRS's investment is conservative. [DOI is lower now but could be higher or the State will extend the amortization period beyond 2033. Where do you want to stand on it? M. Metz said no offense but none of us are qualified to do actuarial assumptions. We can debate how the City handles this. G. Gordon said that the State uses group assumptions. Timothy Schoolmaster said the City of Evanston submits the report they use to the State but the State is about eight years behind so current figures are low. G. Gordon said that the State noted that they are calculating the ARC now. A. Granchalek asked what the logical conclusion of this conversation will be. G. Gordon said that he would write the minority report to go along with the majority report. He stated we do not know the unfunded liability today or ten years from now. J. Young said that GRS used a figure from March 2007 and that it is higher in later years. fie further stated that he did not believe that 70ND would be enough to keep the figure down. M. Metz believes that the BRC needs to go to a higher level and figure out what the Cite needs to do. At that time, the actuary can be told which of the three assumption styles to use. The question is, 2 what is the best way to get there. When the City hires someone, how much do they trust the firm hired? This would get the committee out of the debate which we cannot resolve. We need to state which of the three methods we favor and which team, Ted Windsor, GRS or IDOL. The City needs to tell the chosen actuary what system to use. 1 am not worried he said about reducing unfunded liability if progress continues and especially if the State extends the years we need to be fully funded. P. Morris thought the City should use GRS due to the conservative projections. Others seem to have greater doµrisides for the City. And if the State does change the funding year, the City has a great chance to change the current standing. If the City takes the easier approach, compounding will kill them. The City owes money. G. Gordon asked how much is owed. P. Morris said that the amount changes every year. If we go on the low side the City will be hurt. G. Gordon asked Alderman Rainey if the City Council had any input to the hiring of an actuary firm. Alderman Rainey said the Council had never heard of them. It was an RFP process. GRS was presented to the City Council after being hired. A. Granchalck said that a selection team reviewed ail responses and held interviews. Debate by the City Council would not have been appropriate. T. Schoolmaster said there was no actuary for twelve years. He and P. Dillon both met with GRS. G. Gordon said. though Ms. Carroll and Mr. Grady dismissed the old firms, the new CPA firm produced a report showing the City of Evanston out of whack by forty million. A. Granchalek said that this is a stretch and is talking around the issue. M. Metz thought this would be appropriate in the "best practices" part of the final report. G. Gordon asked A. Granchalek what he would do. The response was that the BRC should vote on which of the three ways outlined should be followed, A. Gmnchalek made that into a motion. M. Metz would not recommend a motion to hire a firm. A. Granchalck said he did not mean hire a firm but to decide on which assumption method the City should employ. P. Morris thought the downside of smaller contributions IDOI could change. G. Gordon said if you think the City should be conservative, I believe 83 thousand tax payers would disagree about raising levels that may prove to be inaccurate. P. Morris said that the numbers will keep rising. G. Gordon said that in all the actuaries, figures change. In twenty-five years the City will have an average return. Many think that is what an actuary thinks/hopes. To tell a city to go with the lower number now helps the budget but it can mean the city will have a bigger burden later. I think the request to the actuary should be for level contributions. I want to be clear. I will debate strongly on property tax increase on the citizens of Evanston. The burden should be on the City to make cuts and find other sources of revenue to pay this cost without increasing taxes. If the City will not do it, then the City can cut policc/fire staff levels. Of course that will not be popular. I believe the 7.5% tax levy is all for pensions. J. Young suggested that programs be reduced 7.5% so payout is level, P. Morris said that is what we are going to ask Ms. Carroll about. If the parking meter increase can generate 300 thousand dollars aren't there other areas that can do as well'? M. Metz thought that recommending how to pay from community taxes would be a last resort. G. Gordon mentioned that at the second or third meeting the committee discussed the direction the budget went. So every year some want to close the branch libraries and groups of citizens show up against it. Tax payers and the administration are against cutting services. All increases are going to the pension fund but the fund balance is diminishing. Alderman Rainey suggested taking the unfunded liability from the experts. GRS has a good reputation. On behalf of the Council, she can state that there is disagreement of what the unfunded liability is. But, she continued, the Council wants the BRC to recommend one of the three directions the City should adopt. She agreed with the choice of more now. But, she said, taxes collected is a Very small portion of the total budget. Taxes are only about 38% of the 180 million dollars budget. It would be hard to agree to fifty percent of the taxes going to pension payments. To date, the Council has giwen eight or nine million to the pension funds a year and that is a Iot of money. She asked, what are other options, what is the unfunded liability. what are ways to face it and what are ways to fund it. G. Gordon noted that tax payers do care how their tares are spent. Alderman Rainey asked how the City can avoid raising taxes. T. Schoolmaster said that as a part of due -diligence, the Police/Fire Pension --Ae'.1 �y1l=i lxlltl.y�7��'. Yt14a 2Y .'!:,il��,"�'� f;,� IV. Boards hired a firm to review the GRS assumptions. They reported that GRS is right on the money. G. Gordon thanked the BRC for indulging him. M. Metz's said it was not indulgence, it was a question that needed to be discussed. Public Comment: Michael Vasilko passed out a sheet that stated his views. He thanked the committee for all the work they are doing. He is interested in budget deficits and urges the Council not to raise taxes. This includes this committee not recommending such an action. He said for the City to look to reducing services. Why are so many new vehicles being purchased for the Police and Fire Departments? Why is Northwestern University a hands -off neighbor? He noted that Alderman Rainey had been the only one at the last City Council meeting to vote against taking land of the tax roles for the PACE dormitory. Another question was why is Evanston responsible for pension investments to be paid by residents who have no input? Evanston has lots to offer, it is now, after many years, advertised as a destination city. There arc opportunities besides raising taxes. G. Gordon thanked Mr. Vasilko for his input to the BRC and asked if he was aware that the State Constitution will not allow pensions to be reduced? He also mentioned that what was said and suggested was important but would be better directed to the City Council. Jeanne Lindwall congratulated the committee on its dedication. She agreed that the pension liability has been accruing for a long time long before the previous administration said pay less now and deal with the question later. So, later has arrived and it must not be pushed into the future. Perhaps we (the City) should have paid more in the past. M. Metz adjourned the meeting at 8:10 p. m. The next Blue Ribbon Committee meeting is schedule for Wednesday, July 2, 2008, 6:30 p.m. in the Aldermanic Library, Respectfully submitted Phillip Baugher Administrative Assistant Finance Department tnue Ribkxm Co"mnee SleelinR APPROVED M12ooa BLUE RIBBON CO,%INIITTEE Police and Fire Pension Plans MINUTES Wednesday, July 2, 2008 CIVIC CENTER, 2I00 RIDGE AVENUE, ALDER.NIANIC LIBRARY Members Present, Gerald M. Gordon, Mark Metz, Peter D. Morris, William Testa, Jim Young Members Absent: Gregory M. Beard, Aleksandr Granchalek, Sandra Waller Shelton Staff Present: Steven Dmzner Others Present: Jeanne Lindwall, Resident Tim Schoolmaster, Police Pension Board Presiding: Mark Metz I. Mark Metz called the Blue Ribbon Committee (BRC) meeting to order at 6:30 p.m. IL He welcomed Julia Carroll, forrner City Manger, on behalf of the committee saying it was kind of her to attend and to answers question from the members. He said he would like to start with a broad question. The City has actuaries and every year the City has met the suggested payment. However, some reports say that the City is falling behind every year on the unfunded liability. The question is, while this was going on, what was the explanation you were receiving? J, Carroll: I never talked with the Actuary. Matthew Grady, the former Finance Director, brought to my attention the issue of unfunded liability. 7.51'.16 seemed to be on the high side. The second actuary felt 7.5% was too high. Under the 20K rule , the City Council would not have been included in the process. Gabriel Roeder Smith (GRS) changed assumptions changing the rate to 7.25°'0. The City followed their suggestions. It became apparent that it was not going to work and the liability went up to 140M. I felt GRS was more accurate than Ted Windsor. The State uses a--e normal and that is the method most actuaries use. GRS explained the timing of when payment is made is important. Matthew Grady, the former Finance Director, and I reviewed the past ten years. We agreed that the City should have changed its system of payment. The tax paid must be looked at. To meet this obligation is important. The City should not depend on the possible idea that the State might change the outside date. It needs to be funded by the twenty-fifth year. Ald. Rainey suggested that the City Council did not agree with GRS but I remember that they did. The Blue Ribbon Committee (BRC) must come up xvith a solution to correct this situation. I feel that going back to Ted Windsor's assumptions %vould be a mistake. The City has to find revenue increases, bonds, taxes or budget. M. NIETZ: Alex Rivera explained how assumptions work. lie said with exceptions of the funding method from the client, all other assumptions are the actuaries. And you event along with it? J. Carroll: I am familiar with the system and liked the timing of the payment. P. Morris: These spreadsheets show City funding are contributions from when the ARC %%•as calculated. J. Carroll: Yes, they are under the old assumptions. 2006 was based on 2005 taxes levied, collected and then paid. S. Drazner: The evaluation of'08 goes into the budget for 2011. The City cannot use projections since figures change each year. P. Morris: 36 months can pass easily. J. Carroll: Why is it important to use the GRS assumptions? M. Metz: One year interest cost is included but it is a three year process. P. Morris: Since we know the City's fiscal year ends February 284' and payment is March First, why not de -couple it'? J. Carroll: You mean do a projected figure and adjust later? P. Morris: Yes. S. Drazner: We did not use projections each year. J. Carroll: Get the City Councils approval to make a change (adjustment) for one year and catch-up. It will only work if actuarial assumptions are met and only if investments have a good return. G. Gordon: The current budget has twelve months for both plans. Does the City need to do it twice to catch up? J. Carroll: No big catch up was done. Now it is one-half million a year is needed to catch up. J. Young: When did you come to the City of Evanston? J. Carroll: January 2005 to June 2008. The 2006 report was the first time Matt and I looked at it. J. Young: Why make the change? J. Carroll: Matt said we are not progressing adequately. lie did an RFP and GRS was chosen. The State figure is 120 million in unfunded liability. J. Young: Since you come from Illinois and know about the pension system, did you look at it when you came to Evanston? J. Carroll: Not at first, not is the first year. In my second year Matt and I talked with council on several occasions. J. Young: So Bill Stafford was handling it until February 2006 and in June of that year Matthew Grady came in. J. Carroll: This is a long standing problem not a recent one. P. Morris: You wrote on December Seventh to the Council and the Mayor a comprehensive letter but my question is, where do we get the money to pay for this? J. Carroll: You do not have to pay contributions with property taxes. The City Council can raise property taxes but they could cut services, look to alternative revenue or do pension bonds. P. Morris: You have reviewed this for nearly two years, can you be more specific? J. Carroll: This is a policy question for the Council. I gave them suggested cuts when the budget preparation started. They chose not to use any of them. P. Morris: Are their answers part of the public record? S. Drazner: You would have to read all of the minutes of all the budget workshops to obtain that information, they are on the City web site. P. Morris: Would you do that and gather the information to us? S. Drazner: It is a massive amount of information. P. Morns: A million dollars is not a drop in the bucket. S. Drazner: I understand that. Do you mean that a recommendation made six months ago will be the same recommendation from this committee? P. Morris: I don't know. It is information we do not have, S. Drazner: Again, all that information is available. 1 just do not have the time to allocate to reading through all of minutes. P. Morris: And you don't remember? S. Drazner. No, but I do remember that at each workshop where a cut was recommended and discussed, a group of residents would be there to oppose it. P. Morris: I look at that, at the moment Steve, as being somewhat uncooperative. If you are looking at items at a 100K or more you would not be looking at dozens and dozens. J. Young: Julia, since it is a matter of public record, do you recall the four or five biggest suggestions? J. Carroll. Some of the suggestions "ere: 1.) to close the branch libraries for a savings of 350K a year, 2.) consider outsourcing such as sanitary collection estimated to save one million a year, 67 /o of Illinois municipalities outsource this service, 3.) access a fee, 12 to 14 dollars per household, to cover the cost of residential collection, 4.) the City spends 850K a year in funding community services in mental health for which I concur with a fifty percent cut, 5.) cut back on the tree replanting and save 200K a year and 6.) cut other programs. None of my recommendations were popular. P. Morris: Are all of these from the general fund? J. Carroll: Yes, the majority of services are there. P. Morris: Are the charges to `%V%VC given to the general fund from the Water Fund? J. Carroll: Yes. In March 2006 the City could have renegotiated but there is still not a resolution. chose communities owe us 500K plus. The City tried to avoid arbitration. The contract has a very strict formula for recovering cost and it is not doing the job. The Skokie contract is fixed and cannot be changed. Our attorneys have reviewed it. There is currently a high sewer rate but it will be lower in live years as bonds are paid off. P. Morris: But when the City is behind the eight ball, the compounding effect is bad. J. Carroll: There is not a tot of room to transfer funds. J. Young: Arc there excess underutilized city assets? J. Carroll: Sell the Evanston Arts Center, few dollars come in from it. Some communities 2 leverage their garages but if sold you lose control. An evaluation could be done. The City owns several parking lots that could be sold to developers to handle but, it is only a one time infusion. Steven Drazncr and Leslie Murphy are working on a report in this area. Cell tower leases arc tapped out. A refuse charge would fix the budget. N1. Metz: That would mean seven to nine dollars more? S. Drazner: I'll calculate the revenue. W. Testa: Are any TIF revenues becoming available'? J. Carroll: Downtown I1 ends this year but it is already factored into the five year plan. The Southwest TIF might be terminated early. S. Drazner: We levy a dollar amount not a percentage. P. Norris: Just the dollar amount please. J. Carroll: Most of the money will go to the schools. NV. Testa: A friend of mine in the State says the tax isn't for a lot. J. Carroll: It is only for prepared food. P. Morris: Do any present General Obligation (GO) Bonds have an aggressive maturity date? Any ideas to refinance with the same data but with a stretched out maturity dater S. Drazner: Normally you do not want a bond to last beyond the products life. J. Carroll: Most GO Bonds are for twenty years. If the bond was for the Civic Center a longer maturity date would be suggested. Most CIP dollars are for streets, etc, and they need a rebuilding in fifteen years. P. Norris: If I fix column A that reduces column B. G. Gordon: There was a document dated April Three that lists the scope of this committee. J. Carroll: When the Mayor put out the call asking for a charge for the BRC, that was my response. G. Gordon: It reads ....should not include debating assumptions of actuaries... We have an email from Alex Rivera to Matthew Grady dated October 12 stating that the two preceding payments are thirty percent higher than IDOI tax levies. Why shouldn't we use their figures? J. Carroll: Because it is a State average and not for Evanston. They are 66 and we are 42. They do not use our specific set of figures, out situation. I could not recommend it. W. Testa; We have learned that there is so much wiggle room. Actuaries talk about what Cities and actuaries are comfortable with. Did you attempt to raise the actuarial assumptions? Do you have any suggestions, procedural changes? J. Carroll: There has been disagreement between pension fund Boards and the city staff for a long time. They did not seem to see a problem. There were years when the contribution was very wrong. The old actuary was more aggressive in recommending paying less. It is an art, not a science. W. Testa: Should we expect big adjustments? J. Carroll: No. I do not see it as big adjustments. Ted Windsor had actuarial loses eight of ten years. 1 think the City needed to look to others. There are many effects. W. Testa: Can there be perpetual adjustments? J. Carroll: No. They last about eight years. GRS methodology if followed shows no major leap going forward. W. Testa: GRS suggests changing actuaries every five years. J. Carroll: Yes, change but use the same assumptions. M. Metz: If there is no change should a consulting actuary be brought in? J. Carroll: It is like looking at assumed assumptions against facts that where there by directions in one or more areas. M. Metz: So, study capital markets, study trends, assets and the stock market versus the City. J. Young: Eight of nine years are down, that is not good. INT. Metz: One bet that I'll make is the real number is not 140M. It will change every year. I thought the real job of an actuary is to rationalize the stream of contributions. J. Young: Ilow do you feel about police and fire services that we provide to Northwestern, churches, hospitals, retirement homes and the Evanston Art Center? P. Morris: Are the fees charged for recovery adequate? J. Carroll: At Northwestem. no. They should be paying one million a year for services. Alderman Tisdale received my report. They do pay for water. The City did a cost of sen-ices rate survey, which had not been done in years, and Nonhwestern now pays a higher rate due to the larger pipe installations. They also pay for permits, etc. Non -profits pay in-licu-oftaxes. If you are a tax payer, you'd pay. As a non-profit the City gives you a discount on this payment. P. Morris: Presbyterian Homes get ambulance ices? J. Lindwall: Presbyterian Homes pays property taxes. Swedish Retirement is exempt. P. Morris: The CIP programs, was any thought given to stretch out the time to free up cash to apply now to the gap? J. Carroll: All that does is avoid borrowing. If the City does not do an improvement, it does not borrow money. W. Testa: How often are rates reviewed? S. Drazner: A rate revicw is being done at present. P. Morris: Some of the water we sell costs less than 3 V what residents of Evanston pay. J. Carroll: These outside concerns pay for distribution, we do not. M. Metz: As a tax payer, what is your opinion of a pension obligation bond! J. Carroll: The key is to lock in an investment rate high enough to have a legal arbitrage. It depends on the market and the market is volatile right now. This needs to be continuously evaluated. P. Morris: During your tenure did you go to a zero base budgeting point? J. Carroll: We allowed for no increase. all else was cut. J. Young: You mentioned trce planting could be cut. Has there been a proactive grant seeking activity'? J. Carroll: Doug Gaynor, Director of Parks, Forestry and Recreation, is very aggressive as is the Health Department. All departments try for Federal grant monies. A Iot of Federal and State funds are received. Of course the City could do better. J. Young: By department or the COW J. Carroll: All are expected to seek grants. J. Young: Why is Mr. Gaynor more successful? J. Carroll: Others are successful. Public Works gets a lot ofgants. Health also receives grant monies. The Police have a few available. The City used the Randall Funding program. J. Young: If800K in Health is cut 50%, will the City aggressively pursue a grant? J. Carroll: Agencies have said it gives them leverage to get more. But, it would have been a small cut to each program. P. Morris: Thank you Ms. Carroll for coming tonight and for being so forthright. Discussion of the interview with Julia Carroll: M. Metz: 1 don't know if we heard anything new about assumptions, how we got here and solutions. J. Young: Gerald, are you comfortable using GRS after all of these discussion? G. Gordon: No I am not, because GRS compared to I1301 is asking the taxpayers to come up with thirty percent more. P. Morris: Julia Carroll seems satisfied. Tim Schoolmaster seems satisfied as is pat Dillon. G. Gordon: My conversation with [DO[ noted that they produce 639 reports for 639 municipalities each year, so I see leeway available. P. Morris: But the dollar amount of the gap is so large it may increase this year. G. Gordon: But 25 years of tax bills will be sent out. I believe the City can adjust it in ten to twelve years. But, if I cannot convince this committee, when the report is written; I'll have to do a minority report. W. Testa: GRS noted the mortality table and salaries are unreliable, all will need to be reconstructed in the future. hi. Metz: Actual date, age, etc., is not in IDOI. They just look at a head count. T. Schoolmaster: Barrington funds at 100%, St. Louis at 5%. The IDOI average is 66%. W. Testa: Is that an actuarial assumption? T. Schoolmaster: The Municipal league uses these figures. W. Testa: Does the State assume the City of Evanston is 66% funded. T. Schoolmaster: No, they know we are not. ;tit. Metz comments about his and G. Beard's mectine with Bill Stafford and Ted Windsor 1 started by saying that I had heard that assumption by assumption they were aggressive and no adjustments had been made over the years as this happened. T. Windsor defended all his assumptions stating that if he %-as still the actuary today, Ire would not change them. He continued that over a thirty year cycle they would even out. T. Windsor has a preference for the pro -cycled method opposed to the level pay of more in the beginning. GRS told us the same assumptions are reasonable in their view. T. Windsor feels that 7.5% is not out of line with a fixed income/equity of 50150. Bonds return 3.5% and stocks return 5�1/o. That is a total of 9 %9b so you bet a 4.5% return the real rate of percent on return. P. Morris: What did Bill Stafford say? M. lletz: Not much. 1 do not think Bill Stafford believes that since Evanston is a viable concern, the important thing is to keep paying benefits. If at 75% and level, that is good. 100% is not viable. P. Morris: According to the statue, what must it be? M. Metz: One hundred percent by 2033. T. Schoolmaster: The annual requirement is to amortize to zero. Jack Siegel, Corporation Counsel, says you only have to have all of it paid by December Thirty -First at 11:59 p.m., 2033. 4 P. INiorris: From the legal stand point what must we do? M. Metz: One, amortize to 100% by 2033, and two, make annual contributions according to actuarial assumptions. The range is to work towards full funding. The City has a budget crisis. Can assumptions be made that will not put a strain on the budget? Then at a date in the future change the assumptions and get the house in order. P. Morris: But with some TIFs coming off, etc? M. Metz: But this way we are going further in the hole. So, the City needs to pay more to amortize the amount. P. Morris: With these sources coming up in the future, we could stay at the Annual Required Contribution (ARC) now. The City does not have to get ahead of the ARC. M. ,Metz: Pay yearly costs and a small amount on the 140M. J. Young: Normal costs in the year and amortization of costs. But then the normal costs have to be fully understood. We need more flexibility. We need to understand the expense side not just the revenue side. P. Morris: We all said fully fund cost of normal cost of services. That is 34%. Should it be different? J. Young: Approved. P. ,Morris: I believe that over funding ARC has a downside and it will kill you. G. Gordon: Is maturation of GO Bonds and TIF actuarial information something GRS can act upon? W. Testa: No, it rarely works. M. Metz: We took away from the meeting one exception on assumptions GRS reacted to was retirement age. Ted Windsor's assumption was more aggressive. This is one of the worst decades since 1930. G. Gordon: Mark, as we have discussed, the February 28, 2007 chart of unfunded liabilities were all under Bill Stafford. Did he explain it? T. Schoolmaster: The 03104 tax levy was 0% and salary was up 3.4510. G. Gordon: The Finance Director had the ultimate say, not Ted Windsor. J. Young: The liability was 48%1 in 1997 and 3IM in 1998. It actually went down but then grew to I00M. T. Schoolmaster: Partially it is because the State changed the funding method in 1993. tit. Metz: A big problem is investment performance, returns. P. Morris: Why didn't the City adjust? J. Young: Because actuaries look as a thirty year scope. G. Gordon: Over a ten year period, unfunded actuarial liability increased by SOM per Jim Young. Bill Stafford had to be seeing it. Did he and the City Manager or City Council know and decide not to fund? T. Schoolmaster: The change by the State in 1993 caused new assumptions from level dollars to a percent of payroll. It gave a break but later it became a bigger amount. M. Metz: Was it a balloon payment? T. Schoolmaster: The Committee complained about the size of the payment so it was slowed down until 1999 and the Committee forgot that a big sum was due in 1999. W. Testa: ARC was calculated by the City. The State said only pay a part through 1999. T. Schoolmaster: No, the City chose to pay about 50%. In 2005 the Appellate Court said the City could not just make up a number. They needed to make an actuarial amount payment. M. Metz: But required contributions were made. T. Schoolmaster: No they were not. M. Metz: But it is charted in the City report. T. Schoolmaster: As 1 said, the 03104 had a zero levy but the payroll had a 3.45o increase. hI. Metz: So I cannot rely on documents I am reading? T. Schoolmaster: In the City budget, contributions include a lot. S. Drazner: In the report, columns are only property taxes, etc. in contrast to what T. Schoolmaster is saying. M. Metz: Can it be confirmed that the City made the required contributions since 2001 at or above the suggested amount? Is it true or not? If it is not true, how short was the City in its ARC payment? G. Gordon: Ted Windsor was required to consider the figure. T. Schoolmaster: Ile misquoted the figure from eleven years afro, M. Metz: Saving N for the: future backfires when \ becomes Y and you find that you have not saved enough. So actuarial loss in one year needs years to catch up. Actuaries have losses but feel they should normalize over the years. Assumptions can be aggressive of more aggressive. Are figures correct for the City contribution amounts? On the nose or not? S. Drazner A timing issue occurred. The property tax must line up with the contribution. J. Young: Mr. Schoolmaster, is it correct, you get dollars when you should? T. Schoolmaster: We know the tax levy. Originally a widow who remarries lost her pension. now she doesn't. Ted Windsor did not recognize the change in his assumptions. J. Young. Was \ funded'? G. Gordon: The unfunded liability in 2006 was 96M, in 2007 140M and only 47M in 1996. Regardless of what the actuary says, the report shows the City was not fully funding. J. Young: No chart shows 5 �i"E � - � � � � - .. .. ... :-�; ,-.c"�:,.-;.i,�ti.- - }- La'f:_ „r�.�nr-•�,= .FL'rG_.-T,, V. VT. growth from 1996 to 2006. They may have been funded but it is with actuarial assumptions. G. Gordon: No matter what the explanation, the City Manager should have changed it. J. Young: Yes, many may find the table unacceptable. Discussion Concemine the Report to be Produced M. Metz now asked the committee what form their report should take. With all the information they have gathered, he expressed having doubts. He noted that the committee needed to find ways to get money. Should GRS be asked to do a gradual actuarial giving the City time to find revenue to correct it'd Will an actuary do it? J. Young said yes if they are more aggressive. M. Metz said one; the committee needs to face this problem down. Don't wait for the State to change the final date and the market to bloom. Face it now. Two, the tax payer base will not be wild about tax increases. This year's tax increase is all to the pension fund. Can more revenue be found? And three, the City needs to move slower but that will mean more dollars later with interest. P. Morris said he has been working on this. He said he would update his ideas tonight and send them out to the committer. 31. tiletz asked the committee to think about outlines and gather information for the next committee meeting on July 10. flow much detail can we go into and stay away from concepts? People will attack numbers. Concepts arc most important. P. Morris said he weed. M. Metz noted that the committee must stick to broad contents. Then the City Manager and the Finance Director and the City Council can come up with a plan. It seems agreed for us to be more conceptual. M. Metz adjourned the meeting at 8:45 p. m. The next Bluc Ribbon Committee meeting is schedule for Wednesday, July 16, 2008.6:30 p.m. in the Aldermanic Library Respectfully submitted: Phillip Baugher Administrative Assistant, Finance Department A Approved BLUE RIBBON COMMITTEE Police and Fire Pension Plans MINUTES Wednesday, July 16, 2008 CIVIC CENTER, 2100 RIDGE AVENUE, ALDEILNIANIC LIBRARY Members Present: Gerald M. Gordon. Alcksandr Granchalek, Mark Metz, Peter D. Morris, William Testa, Jim Young Members Absent: Gregory M. Beard, Sandra Waller Shelton Staff Present: Steven Drnzner Others Present: Jeanne Lindwall, Resident Tim Schoolmaster, Police Pension Board Presiding: Mark Metz I. Mark Metz called the Blue Ribbon Committee (BRC) meeting to order at 6:32 p.m. it. Overview and Discussion of Pension Obligation Bonds (POB) W. Testa opened the discussion with the statement "Let's fund everything with bonds, pay the salaries too!" A. Granchalek noted that would be good for the short term. P. Morris asked if Bill Stafford was asked about bond swaps. M. Metz said he was not. G. Gordon asked what the advantage would be. A. Granchalek said that it is cheaper. They can be set up with more flexibility. you can set up the repayment to work the way you want it to work and they can be redeemed, any portion, at any time. G. Gordon said lets find a suburb or two that wants to swap bonds with us. A. Granchalek said that you can also do it partially and use a dollar cost averaging. P. Morris said that he liked that one even with State involvement and then sometime just say stop. A. Granchalek said "But what if things change, chunks are even better than the whole. P. Morris asked about having a tiered amortization. 50% level payment and 50% balloon. The City may get to the point where they experience nice investment results and it gives the City a chance to pay some bonds above schedule. A. Granchalek stated that it is not beyond the realm of possibility. G. Gordon asked if the City couldn't get a twenty -live year standard municipal loan gives allows pre -payment privileges. A. Granchalek said that is true especially in an arbitration situation but the repay rate would be higher. J. Young asked what the arbitrage was. A. Granchalek said, 6 1/8111�. J. Young asked what this 6 1/80,6 coupon is. A. Granchalek said it is what it is today. J. Young noted that for the City's implied rate of return the actuary used 7.25%, fly concern is that that is a very low relative spread compared to the risk. A. Granchalek mentioned an article by the Governor of New Jersey who is experiencing the same problem. l'hc Govemor said it has been two bad years. G. Gordon said that he sees it differently. We get a guaranteed nominal payment for twenty-five years even if it may require a bigger payment at the end. The City could borrow enough like Highland Park did to pay the unfunded liability possibly with a balloon payment at the end and pay normal fees until the end. I feel that this is a real advantage. As far as arbitrage, Highland Park and Northbrook took the dollars and put them in the pension fund. P. ►lords said that Timothy Schoolmaster thought one of the communities didn't do it, did not put the money in the fund and he thought Highland Park had been sued A. Granchalek thought there was a real question, a concern to turning 1.30V over to the pension boards. G. Gordon said lie would have no concerns, they have professional advisors. J. Young asked G. Gordon if he had seen the figures, had seen the performance. G. Gordon said he had seen the report and GRS thought that 7.25 is good over the lone run. W. Testa: Between the lines, GRS is going easy but we need to keep monitoring as they might have to adjust it over time. P. Morns thought that if you funded a major portion you would stop some of the interest compounding. 51. Mertz said you could cam a return of 5% or 7 million on 140 million. P. Morris said that he would like to see a cash flow sheet on the funds. On a spreadsheet show cash is 530 million dollars and 29 million dollars is the contribution in 2033. That cannot all be the normal cost or is it normal cost plus amorlization. If you fund part of the sum, something stops. G. Gordon: No more contribution to the unfunded liability because there isn't one. P. Morris: No interest. No delayed factor in which you have to earn X. No defrayed costs. J. Young: As of 3-1-08 it is now I45M unfunded liability. If the City issues pension obligation bonds, the 145.\1 in cash can go to the pension funds a soft liability, but the City has a hard liability of 145M. G. Gordon: But it is paid off by amortization. It takes the place of the payment to the amortization of the unfunded liability. P. Morris said you won't earn 20% a year on the fund so you will always have a certain amount of unfunded liability and you are legally obligated to pay it. M. Metz said, but pay if off you can then get into an increased sum. 'Be Police fund lost a year. At zero unfunded liability today, then we have a bad year and we'll be 650K in the hole, spread over 25 years with 1/25`s paid the first year. P. Morris: But you won't do away with the 1401M. IN1. Metz: if we borrow the 140M and put the money in the plan, the plan has no unfunded liability. the City has a liability. J. Young pointed out a soft liability means more flexibility and does not require rigid payments. A. Granchalek said that if the pension number the City was paying was a bond issue they would have to pay it. With a pension they do not. 31. Metz: There were years the required contribution was not made, now they are. Earlier there were more aggressive assumptions, so less was paid. But now, with hindsight, look at the City holistically. What would be gained by doing a POB? We would still owe the money. Arbitrage does not look very attractive. A. Granchalek asked what the advantage was. It would seem like we are shifting the debt from one place to another. If we borrow the stoney we still owe the money and this arbitrage does not look too promising. He further stated that a bond is attractive, to be locked in. But, no bond, allows you to take advantage of the market upside. M. Metz: I am asking, is there any likely scenario where there is a benefit to the City? P. Morris: Any other way to get cash benefits? G. Gordon said in the budget for the current year, 5.8M is paid out of taxes to Fire and 7%1 to the Police. 441 transferred from the General Fund. That is 16.8.\1. P. Morris: Is that correct, an additive effect? G. Gordon: Borrow the 145M and the 16.8N1 in the budget is not used. J. Young asked G. Gordon if lie was assuming that the payment from a POB was without risk. W. Testa said the risk is you pay of the unfunded liability, put it is the pension funds and then the pension does not perform then the debts reemerge and you have to start contributing and you need to pay interest as well as pay off the bond and make contributions. J. Young said that's my point. One of the reasons the unfunded increased this year is the rate of return was 3.2% and last year it was 7.51Z0. W. Testa said it was scary. P. Morris responded that the question remains, where does the City get the cash. W. Testa noted that Julia Carroll said it comes from taxes and reduced services. G. Gordon said the new budget already has increased fees, raised taxes and took 4M from the fund balance to pay on the pension funds. W. Testa asked where the gain was. The City eliminates fees but where does the 2 money come from. G. Gordon stated that the annual payment required to amortize a 120M loan is 10M a year for the debt service. This year it is 1.8M for Police and 1.6M for Fire. The unfunded liability will continue to climb. It is up 5M since we last talked. J. Young: It is due to bad earnings. G. Gordon: But 140M in the pension plan time 3'/.% in interest payments. A. Granchalek asked, and what if next year is bad? J. Young stated that you also needed to look at the cost of funds. The City of Evanston can only win if they generate at least a 6.8% rate of return. A. Granchalek: Let's say 3%, borrow at 6% and out perform budget but not the 7.25. You'll be behind the actuarial amount. It is more expensive. Year to year there is a continued light to use the actuarial figures. G. Gordon: Only use the ARC. A. Granchalek said if you want to over fund the ARC rather than lock in 140M. just over fund the Arc, it is cheaper in the long run. G. Gordon: Where arc the extra dollars found:' J. Young said where the 4M came from in the General Fund. S. Drazner said the unrestricted fund was at 19M and the 41M was just under twenty percent of the fund. J. Young asked µ•here these funds come from. S. Drazner stated they are mainly extra returns. A surplus will create a fund balance. A. Granchalek asked if there is a fund balance policy, S. Drazner said it is ten percent of the annual budget. G. Gordon said it is 8.33% for one month of expenditures according to the budget but Julia Carroll and Matt Grady used ten percent. S. Drazner said that he would like to see the fund balance increased to twenty-five percent, a three month reserve. J. Young asked why. S. Drazner: For emergency reserves. A. Granchalek said for example, if Cook County is late in a tax payment the City could use it to cover expenses. G. Gordon stated that the City is already paying 25% to the pension. J. Young asked if the City has a line of credit. S. Drazner said the City did not. W. Testa asked how far does the Committee go in advising the City on reserves, perhaps evert on borrowing. We cannot be budget advisors. A. Granchalek: But you cannot look at it in a vacuum. W. Testa noted that it impacts other things. II. Metz said that the committee needed to stay largely conceptual. They cannot review the budget line -by-line. P. Morris: said Julia Carroll said we could make a recommendation for zero base budgeting. I went through the budget and a lot can be cut but politically it will be wild. Ms. Carroll suggested increasing the refuse collection fee from 56.25 to Sl1.00 and the problem would be wiped out. G. Gordon: Raise refuse to pay the pension'? W. Testa But the city owes this and to suggest what P. Morris suggests would take a half page report. Unless we rind an error in the calculation, we need to stick to "how to pay'. P. Morris said that we as a committee found the actuarial consideration reasonable. We found that by ordinance and statues the City owes the money. J. Young stated that the committee saw the unfunded go from 4S.NI to 974NI and then it really jumped. The unfunded liability consistently grew and was not addressed. a\I. Metz: I heard from two non -elected staff members that they put in what they were told. Later I thought, but it was your job to know what was happening. It was political to say the actuary said the amounts were okay. The buck stops at the City Council, at the end of the day, they are responsible. G. Gordan thought that the committee needed to include the past two City Mangers and past two Finance Directors and the Mayor in assigning responsibility. M. Metz: I would agree. Maybe they thought it would be better next year, and again maybe better the next year. J. Young thought it was easy to recognize the performance of funds in the market. M. Metz: By next March it will be worse than this year. P. `torris said l do not see silver bullets in revenue but some areas deserve looking at such as refinancing our General Obligation bonds with vc*- aggressive maturity dates. Also, decoupling levy date from compilation date is an idea. S. Drazner said there is a two year delay. P. Morris asked about the option to get increased revenues from water buyers. Also think of the zero based budget methodology. The current budget goes with a built in level of coast per line item. W. Testa said that discovery has shown some possible revenues. He asked P. Morris to be specific. P. Morris suggested selling assets. W. Testa mentioned that Julia Carroll had named many areas and the only thing the committee could do was to innumerate them. P. Morris: Look at the Rose Garden, it is prime real estate. A. Granchalek mentioned tine less than trusting state between the City and pension funds. They could benefit if they worked together. J. Young thought the community needs to be aware of the pension funds and that the monies arc overseen by a board of trustees with town members from the community but the community has the liability to pay. They should know that the projected rate of 7.25 only came in at 3.2. P. :Morris said that fiduciary guidelines monitor trustees' oversight. NJ. Metz asked if they needed to only be concerned of who gets the benefits. J. Young noted that the City uses excellent firms but the performance has been poor. NJ. Metz said they need to adopt triggers to go out and do an RFP. A. Granchalek said you are supposed to change actuaries every five years. M. Nlctz said he would hire a consulting actuary cvcry three years to review all that has gone on before. have a watch dog effect. Report to the City Council. This is complicated stuff. No one in government can do this, certainly on the revenue side. He further suggested putting an index together of several areas and see what has accrued and then develop triggers. G. Gordon: `lark, you said (tire a top notch firm to oversee the actuary. GRS is hired by the City. If you hire another they will come in with something completely different. A. Granchalek said they could ask questions like "Why aren't you updating?" P. Morris thought the area of analysis is so complex that a consultant could be looking in as an outsider. ,%f. Metz said they could point out concerns. It would be oversight and the City would not have to higher new actuaries. J. Young asked. why change. If independently checked every three years then long term becomes an advantage. W. Testa stated if this committee is useful for the City, there should be commissions in other areas. There is a lot of talent in the City. P. Morris said they'll have problems and NY. Testa said they will get to it. M. Metz thought the City could authorize a lot and provide a budget. J. Young: People will still ask tite question, as of March 1, 2008 the ARC is 129M, how are you going to fund it? Options are 1) sell assets, 2) alternative revenue sources, 3) alternative financing sources, 4) reduction in services (expenses) and 5) communications. NJ. Metz said that that was a goad list. Imagine you are talking to residents asking for example would you do this or do that. Overriding all of this is that fundamentally the City may have to change how it is doing business. They just cannot continue to do business as usual. Cuts need to be increased or taxes treed to be raised. Will residents accept this. The citizens will not tolerate more tax increases. G. Gordon said the citizens tolerated a 7.450.0 tax increase, the City portion of property taxes and fee increases. No problem has been seen. S. Drazuer said the City portion is about 200,; of 7% which conics to 1.4"0. J. Young said when he heard ten percent it sounded like a lot but that is not the right calculations Communications are very important. M. Nletz said being very aggressive is not profitable. You should pay for services as you use them. Pay all in the benefit package. G. Gordon suggested recommending to the Council that on every page in the budget an allocation to the Police and Fire Pension should be included. A. Granchalek said that if you satisfy the 140\1 today, the full impact is still there. If you pay all satisfy everything, there is no incentive to budget for service_ And we did hear about problematic things that can save money. If one is out on disability, it costs, so keep your work station safe. M. Metz thought a wellness obligation could go bout ways. A. Granchalek: It can be very expensive. NJ. Metz said the City needs to live within their means. Hindsight shows it. Pay as you go. If you are not willing to pay for the cost of services, don't consume them. The City Council needs to make hard decisions. P. Morris: I think the point you are snaking is what is a legitimate city service. Looking at the budget the question is why the City is giving money away. M. Metz: Does the City 4 lmmmmmo let five Police Officers go or cut out programs? The Council/City needs to understand that they must pay the full cost as they go. J. Young suggested that there are only finite resources that need to be placed carefully. The resources are not infinite. The City cannot keep adding taxes. A. Granchalek: This is the problem. tit. Metz asked hov.- the committee felt about the following POB ideas: 1.) recommend that the City issues a POB, 2.) say nothing about a POB or 3.) we could recommend against it. P. ,Morris: I would say recommend against it now but keep looking for an opportune time. said t. A. Granchalek: I think a pension swap would be a lot cheaper. `1. Metz thought now does not appear to be the time for either strategy but the City should watch for a better window of opportunity for either option. J. Young said there should be a small note on risks and benefits. G. Gordon said it is not a problem compared to what the City is looking to pay on the amortized amount. A. Granchalek suggested that it is not a decision for the committee to give the money to the pension fund. P. Morris said that the actuary's assumption is at 7 1A isn't working and 6 1/8 as a possibility for an interest rate and that does not seem to work either. And that becomes the resident's responsibility to continually pay for an increasing unfunded liability. G. Gordon said not if you fund it all. NI. Meta stated that if the market is bad, payroll cannot pay the pension liabilities. A. Granchalek: Gerry, do you see a benefit to a locked in rate? G. Gordon said that he was looking at a I20M schedule that is 101M a year and 3AM from funds this year, 140M invested should cover that. W. Testa said 140M to the Pension Boards with earnings factored at 7 !/.'ia. P. Morris said the committee should not be totally negative about a balloon payment. The City may be allowed to invest in other places and the date of 2033 may be changed. A. Granchalek: What happens in 2033? Nothing! M. Metz said if it was at 70 — 75%, there would be no concern. III. M. Metz went on to say that he would like to charge a member to draft an outline of the final report and email it to the members. He said he would work with whoever before it was submitted to the members to review and formulate their comments. lie asked S. Dm ner to clear with Legal that the members could communicate this way. He suggested that they start with a broad area as already defined. J. Young said he would start the draft. S. Drazncr asked for the target date for the report. A. Granchalek thought it was August. G. Gordon asked about the report from the Bill Stafford meeting. M. Metz said he realized it is due and he is working on it. Ile said that he has lost a lot of his notes. He also mentioned that Ted Windsor defended his assumptions and knew that it would work out over time. G. Gordon asked if the change from 46M to 98M unfunded was by default. He went on by asking who made the decision to let the unfunded liability build up. Was it Bill Stafford who did not want taxes to go up? M. Metz said that Bill Stafford trusted Ted Windsor, his reports were compelling. They looked at figures over a thirty year period and 46M to 98M was just a small amount of increase during a bad period. They believe that historical models will repeat themselves every thirty years. 5 IV. M. Metz adjourned the meeting at 8:15 p. m. Respectfully submitted Phillip Baugher Administrative Assistant, Finance Department The next Blue Ribbon Committee meeting Is scheduled for Wednesday, July 23, 2008, 7:00 p.m. In the Aldermanic Library 6 r Approved BLUE RIBBON COMMITTEE Police and Fire Pension Plans MINUTES Wednesday, July 23, 2008 CIVIC CENTER, 2100 RIDGE AVENUE, ALDERINIANIC LIBRARY Members Present: Gregory M. Beard, Gerald M. Gordon, Aleksandr Granchalck, Mark Metz, Peter D. Morris, William Testa, Jim Young Members Absent: Sandra Waller Shelton Staff Present: Steven Drazncr, Interim Finance Director Others Present: Presiding: Mark Metz I. Mark Metz called the Blue Ribbon Committee (BRC) meeting to order at 7:00 p.m. II. The minutes of June 18'h. June 25's and July 2, 2008 were unanimously approved. II1. Discussion of Outline and Review of First Draft of Final Report. M. Metz thanked J. Young on behalf of himself and the whole committee for the work he did developing a framework for the committee to use, polish, change and build upon. He noted the multiple Sections, an introduction, an executive summary and a sort of primer on Police/Fire pension funds and how they work. M. Metz remarked on the various items of Part III: "B", understanding how the City got to the unfunded liability of 145M, "C", solutions to consider and "D" longer term issues and best practices to be put in place to prevent the City from ever getting to a place like this again. He felt the intent was clear to write without too many facts and figures while maintaining some depth. The appendices will be for details. J. Young said that clearly members have done a lot of work; it slrotald be meaningful to the average resident. He stated that he tried to avoid being overly simple by employing appendices. It is important he said to understand how the City got to this point and to provide thoughts so as to avoid repeating themselves. This report can be used as a tool by the City of Evanston and other municipalities. He said that he also wants to include a bibliography. G. Gordon said there is a good record of pension benefit improvements in the GRS. lie offered to bring it to the next meeting. 31. Metz said it was a good idea to include the list as items like benefit increases increased the unfunded liability. \N'. Testa thought it was a good start structurally. He liked the long term, best practices and that all players, internal and external forces, were included. He suggested that the use every three years of a consulting actuary was the kind of item to list in the appendix. GFOA has a list of suggestions that could be incorporated into the best practices. Also list what the City staff should be doing with external items that can be influenced. He also said that the committee might want to add the fact that other States, such as Iowa and Minnesota, are moving to combine the two boards for better investment chances. P. Morris mentioned that the committee talked at the last meeting about co -mingling funds but noted that permitted investments are regulated by the State Legislature. M. Metz said such legislation is not for cities like Evanston who have two good boards with advisors. Little towns may not have the talent and external influences and this legislation is to protect them from themselves. in reality, two saves a lot of money. P. Morris thought that was right but noted that one is from legislation and one the City has no direct control over. lie wondered if the two could be combined. A. Granchalek said the funds could be combined under one investment manager noting that with a bigger amount to invest. you get closer to actuarial expectations. J. Young looked to long term solutions. He stated that there arc issues under the City's control. This committee could get the community at large to see what are these issues out there that exercises control such as legislation that the tax payers pay for. W. Testa suggested keeping that section but transparent items that could be accomplished right away should be shown. G. Gordon noted the two pages in the back of the budget showing what is to be allocated to the two pension funds. W. Tcstu said those are just amounts of undesignated money used to be transparent. W. Testa noted that some items like PolicefFire levels of service budgets were not looked at by the committee. G. Gordon said it is a budget line item, it should show IMRF cost per department. W. Testa said it was previously known, G. Gordon said that going forward it does not appear in the Police or Fires budget lines. S. Drazner related that INIRF is for employees working over 1000 hours in a year. The Police and Fire pension funds come from property taxes and budget allocations. IMRF is a general fund account, paid into the fund monthly. M. Metz asked if that means money cannot go to the General Fund for distribution. S. Drainer said that it use to be like that but that now the money goes directly into the pensions. A. Granchalek suggested that it could be shown in the General Fund as a best practice item. S. Drazner said it is in the actuary report. J. Young said the City costs 15M for the Police and Fire. He asked is it all of it or is the pension funds another amount of 15% or so. P. Morris noted that the question is how to analyze the police and fire per person costs with the State or national figures. J. Young said that if the City hires five more Police Officers it is not just the cost of salary but five times the salary and five times the pension benefit. A. Granchalek noted that the budget does not include the whole figure. G. Gordon said that at the last budget hearings it was asked if two Police Officers could be added to the budget. The discussion did not include the indirect costs that would be incurred. J. Young thought that would be a bad decision making process. P. Morris stated the question, does the City need two more policemen and how much does the City pay. Point five in the report on long term issues addresses this very point. W. Testa thought that though some items can be addressed by this committee, others arc outside of its control and the committee can only hope to be an influence. A. Granchalek stated that there could be an influence when an item comes up before the Legislature. The effect of a policy can be shown. J. Young referred to section three, pension reports. He said the GRS report shows a net addition. If more staff' is needed, all real costs need to be incorporated. P. Morris said his first question is what is the cost'! The number of grants the City to not -for -profit organizations makes is substantial. Sonic are for services the City does not provide and some aren't. Ilow can they be financed those not -for - profits? M. Betz mentioned that that goes in the section "lfow Does the City Pay for This?" This is where that discussion should go. He asked how does the committee proceed from this point stating that the committee must control the discussion, put their ideas on paper, fill it up and then refine it. P. Morris referring; to Jim Young's last sentence before the solution said we need to make it clear to Council that the City owes the money. J. Young said that is a key point of the executive summary. M. Metz commented that "they ran up the bill, now we must pay it". W. Testa Said to point out that the unfunded liability is now in the danger zone. It could really hurt the City's figures/balance. This unfunded liability does not resonate with people so the standard measure becomes how many years until you are bankrupt. G. Gordon wondered about the budget allocation of 16M to the two pension funds and QVI from the fund balance when the GRS report shows that for this year Police need 7M and Fire needs 5.8M which is 131M which is less than what was budgeted. M. Metz wondered if the figure in the budget that Gerry Gordon referred to was an estimate. S. Drazner stated that it is a projected amount, The City he said may be doing something for next year by using the valuation from March 2008. It would be FY 09 amount for the current year plus 3M tmnsfcrred from the fund balance to cover last year. This is a way of trying to catch up. The figures may have to be updated for FY 10 but I do not know at this time lie said how much it may increase. There is that time lag between what the City estimates and when the money is received. W. Testa said what you are saying is the actuary estimated a little less than what was budgeted. M- Metz asked where that left the City. it sounds like a one time thing. S. Drazner stated that the City does not have enough of a fund balance to do this every year. The Actuary provided three years of projected figures and the State allows the City to use those figures in the report. P. Morris noted that it if the figures are not followed, we know it will cost the City a million dollars a year. S. Drazner noted because of the timing issue a certain amount of interest is lost, The valuation date versus the levy date and then a year later costs are done. P. ,Morris "That's the one million dollar question." J. Young said 6.6% was earned last year. G. Gordon said that if the City can spare cash from the General Fund it should be transferred to the pension funds for better investment. But he continued, why transfer the funds when they are both potentially earning the same interest. P. Morris asked Steven Drazner why he thought the City needed a General Fund reserve of 16 to 20 million. S. Drazner said that he felt an unrestricted amount of 25% should be available. A 90M General Fund budget equals 22M in reserves. After this year he continued, the fund will be at 15% since the City is using 4M this year. Most municipalities are at 10 to 25%, G. Gordon said the specific general fund balance from the Council was 8.33% above expenditures budgeted for the year, A. Granchalek noted that that was only for one month. J. Young suggested the 25% is great but even with liquidity are there other ways to fund short term needs? S. Drazner noted that at the end of this year it will be only 15 or 16% S. Drazner gave the example of in our General Fund there is a hundred million dollars in expenses and the only revenue is property taxes. So. 100 million dollars is budgeted front property taxes and it is balanced. Thought the 100M is collected this year it will not be received until next year. This year will receive monies from the previous year and maybe only 95M was levied. So, the City is short 5M dollars. So, this can come from the reserves but dropping below 151"o is going into a danger zone. G. Gordon said that maybe in the best practice section the committee should recommend a way to handle the reserves. M. Metz thought that this had been talked about enough. He thought the solutions area need more area to be considered. P. Morris "1 would add asset sales and securitize the cash sales rather than sell." J. Young "There is a stream of cash sales and the City could securitize them but it would be one time but it would reduce the unfunded liability." G. Gordon asked Steven Drazner about the parking garages. Were they paying for themselves, S. Drazner said they were subsidized for paying the debt, P. Morris "1 ant just saying look at both choices, sell them or look at securitization " A. Granchalek thou`lit that if the TIFs were ending why not pay them off. What is the difference he asked to selling income to keeping the control of the asset Selling assets will only allow short term cash. W. Testa said there arc three options; securitize a property so you do not have to out- right sell it, lease it or sell it out -right. P. Morris mentioned another major category, create new taxing districts. The City operates three libraries. Many municipalities have a separate library taxing district as well as park districts. Though separate, the taxes may 3 not be lower. A. Granchalek said that those kinds of districts would be restricted on raising taxes and adds to the confusion of who is accountable. P. Morris said that may be true but maybe they would be better managed. M. Metz said that he was on the Playground Board and knows there are pros and cons to segregating parks for a City. It does take the management out of the political give and take that goes on in any given municipality he said. W. Testa said that it is not transparent to the residents; it adds a layer of complexity. P. Morris noted that it allows a particular area to focus on. you would know where to go with a question. M. Metz requested that these ideas be penciled in the draft report. G. Gordon felt that they would not survive on their own. The City would have to subsidize them from the General Fund. P. Morris suggested that then maybe they are not as well managed as in other cities. G. Gordon asked who would look into it. A. Granchalek said that all those areas have boards or commissions. P. Morris "All we know is what the pension owes. A P013 won't work today so cut the budget, find additional revenue, and raise taxes. Of course according to Alderman Rainey there seems to be no way to raise taxes." J. Young thought the City needed to look at a structural change. P. Morns said make it controllable, influential change to these structures. G. Gordon thought the committee should explain how the pension came to be unfunded by 140M since we know how it happened. NJ. N letz suggested that the rate of return was a big cause of the change. G. Gordon said yes, from 1996 to 2007 the unfunded liability went from 47M to 97M. How did that happen he asked? The staff knew and what did they do about it? It is critical to know. P. Morris asked why. G. Gordon said you do not want history to repeat itself. The residents have a need to know. J. Young noted that the last paragraph after the last graph shows how the figure grew. 111. Metz said the table shows what the cost was, what the City paid and what die unfunded amount was. He further said the City did as Ted Windsor recommended and the unfunded actuarial was consistently growing. But we do not know what the Council was thinking. The Mayor stated that they all thought they were doing the right thing. G. Gordon wondered if anyone looked at it. if. Metz thought it was apparent that they looked, saw it growing and on the advice of the actuary who said it will turn around in time they did nothing. P. Morris noted that Gerry Gordon has pointed out that it did not go from zero to 140NI in one year. J. Young asked if this part of the report should be worded more strongly. P. Morns said yes. AV. Testa thought they felt that funds are self-correcting. He wondered what the experience was at other municipalities. P. Morris noted that T. Schoolmaster was more critical. A. Granchalek said that adjustments are made every three years. The pension boards did speak up but the City failed to act. M. ;Metz said the IMRF went up, it is well managed. The Township also went up greatly. He continued by asking Gerry Gordon what is the intent of including a piece on laying the blame and accountability on staff and elected officials, is it just to say they did not do their jobs`? G. Gordon simply said yes. P. Morris said considering where the City is now, they cannot allow it to go on. G. Beard wondered if it was true they did not do their job or it appears that they did not. W. Testa said that he had doubts; other cities have the saute problem. G. Beard cautioned that the Committee needs to be careful. A. Granchalek "Mayor .Morton was correct, they followed what they were told. To add a paragraph of inadequacies is not good." P. \iorris reiterated what Gerry Gordon suggested; be firm, be strong. W. Testa noted that the market was great as if it would only continue to go up and pension benefits were changed by the State. P. Morris agreed that the second point was correct but thought the City should have expected the market to change. Ai. Metz noted that the Actuary stayed at 7.5% which was not unreasonable. G. Gordon said that IDOI said 7.0% is an historic long term figure and not to worry about these past three years. M. Metz noted that all three sources have said "Don't worry". There are three areas a change in how to calculate the dollars from flat dollar to a 4 percentage of dollars to pay. a period of depressed earnings, a bad time, and benefit problems such as mortality issues and retirement at ages earlier than assumed. All those items went against the City for a number of years and ballooned. P. Nforris said yes but no pro -active work was done to counter these happenings, it was left to right itself: M. Metz thought in best practices it should be mentioned that there be increased close and constant peer review which is not the job of the City Council. There is a need for regular scrutiny of the actuary by an outside source. Trend lines need to be observed and the City asked if they should change. G. Beard said the Board only votes the way the advisors and the lawyers tell them. These people would not second guess the advisors, P. Morris said that at 30K he would be fine doing as he was told but when it is in the millions he would have to question it. W. Testa "But you have staff in addition to the consultants," G. Beard noted that on the practical side, the staff doesn't do it. Going forward hopefully it will not continue, there will be sweeping changes. However, it is true across the country. P. ,Morris said even with solutions the question is who is going to pay for it. When the Council asks that question what does the committee say. J. Young asked at what point in time, if this liability is over 5% of current budget or 10% of assets, is it a red flag. There needs to be a trigs:er point. One million may not seems like a lot, but a percentage point would be a trigger. Someone should have known the City had a growing liability. M. Metz said they did it this year. W. Testa noted that independent pension boards are independent. P. Morris mentioned that in Jim Young's report it shows that regardless of the performance report, the City gets left holding the bag. Pension Board Trustees should hay.., fiduciary responsibility, The Boards arc good. W. Tests said there may not be many l im Schoolmasters in the State of Illinois Tim Schoolmasters did not think the City appointees were as active as they could have been. But Hoards do meet and share ideas and work at their problems. W. Testa said that some boards hire there own actuaries. P. Morris said this happens in corporate America. M. Metz said that this had been a good discussion tonight. Goals should be added in the introduction item and recommended processes and procedures to avoid this problem again need to be incorporated. A. Granchalek thought the solution part should address long term issues, a laundry list of approaches to edit. 31. Metz asked all committee members to feed ideas to Jim Young. P. Morris asked that in the next drat, that changes be shown not just incorporated. M. Metz suggested that Jim Young go with these changes. The members can send notes separately but Should circulate them to all the members. Let us all be active, let's get the changes in by the end of the week. We can get the big parts in and done and then discuss the nuances. IV. M. Metz adjourned the meeting at 8:35 p. m. Respectfully submitted Phillip Baugher Administrative Assistant. Finance Department The next Blue Ribbon Committee meeting Is scheduled for Thursday, July 31, 2008 at 6:30 p.m. in the Aldermanic library 5 � 1 Approved BLUE RIBBON COMMITTEE Police and Fire Pension Plans MINUTES Wednesday, July 31, 2008 CIVIC CENTER, 2100 RIDGE AVENUE, ALDER\1ANIC LIBRARY Members Present: Gerald M. Gordon, Aleksandr Granchalek, dark Metz, Peter D. Morris, Sandra Waller Shelton, Jim Young Members Absent: GregoryM. Beard, William Testa Staff Present: Steven Drazncr, Interim Finance Director Others Present: Jennifer LoBianco — COE Fire Department Rob Byrne — COE Fire Department Tim Schoolmaster — Police Pension Board Presiding: Mark Metz I. Marie Metz called the Blue Ribbon Committee (BRC) meeting to order at 6:36 p.m. II. Discussion of Outline and Review of Draft Report. b1. Metz referred to the many comments that had been sent to Jim Young. He felt that the committee is in a good spot moving towards completion. There are still areas to be covered and discussed but most of the work will be in the writing not in the tacking. J. Young apologized for the lateness in distributing the latest draft. This copy he said now incorporates notes from all the members though W. Testa' are on a separate page. P. Morris complimented William Testa' writing style. fie continued that in the body of the report a flag needs to be wuved to show the magnitude of the annual future contributions owed. Currently there are tables in several places that emphasize the magnitude of the problem. J. Young thought that the graph on page 8 showed exactly what Peter Morris was talking about. P. Morris thought a comment should be included that if the City does not make ARC payments, there is a substantial risk of increasing the unfunded liability substantially. J. Young asked where such an item should go. P. Morris thought it should go in the first part to get the Council's attention about the problem. He also felt that part of the reports indices will get overlooked. M. Metz referred to section three where the unfunded liability is discussed and what it means to families and what it means to the budget. J. Young mentioned a spreadsheet he got from Peter Morris and noted that the numbers on it will change. M. Metz said it was probably the GRS 2006 figures. S. Drazaer agreed saying it was the higher figures. P. Morris noted there was no mention of the concept of decoupling the pension contribution date from the City's fiscal year. Jim Young passed out copies of Peter Morris's comments. P. Morris said the Julia Carroll said the Cie.- did it last year. S. Drazner said that the City applied 3.5 million to go into pensions to snake up the timing difference but it was only to cover one year. P. Morris declared that the City needs to do that every year. J. Young asked if the City can better match the time. S. Drazner said Julia Carroll did it for FY 09 for the difference between the two actuaries. He said that lie believed that it would increase every year by a half million because the ARC is going up. P. Morris asked if the City was decoupling. M. Metz said that it is all lined up, dollars are in the budget. J. Young asked Tim Schoolmaster when he got the cash for FY 09. T. Schoolmaster said it is received two years later. S. Drazner said the 09 dollars are from the March 07 valuation levied in December 09 and received in 2010. J. Young asked if there was anyway to shorten the time lag. S. Drazner noted that using projected figures made it easier. G. Gordon asked if the sum used this year relieves the problem forever. S. Drazner pointed out that the sum was only to bridge the gap between Ted Windsor and Gabriel Roeder assumptions. He also noted that because of timing, pensions are losing dollars. T. Schoolmaster remembered Julia Carroll saying she would pay the GRS figure but for that year only. He went on to suggest that this idea might be incorporated in the long term issues on page 11. They could be longer term issues, external influences and internal action such its finding a better match of rendering services to the receipt of revenue. G. Gordon thought point five on page 11 was good. lie continued according to GRS the City added five firemen and one policeman year to year. But the current budget only shows two policemen being added. It is critical he suggested for the City Council to review with the two chiefs to find a way to save the two positions. The City can rely on surrounding communities for a big lire. 4i. Metz voiced that he was not sure if the committee was qualified to recommend staffing levels. P. Nlorrls said that is getting to a specificity of an issue. G. Gordon suggested that the committee needed to point out the number added in the last two years. P. Morris mentioned that Julia Carroll said that they would be doing zero based budgeting. T. Schoolmaster said that the number is five not fifteen. J. Young said that Gerry Gordon was referring to additional overstaffing levels. M. Metz stated that the question is should the committee make such a recommendation and how. J. Young said the point is there are finite resources to manage. When adding people one has to think about the total cost of salaries and fully loaded benefits. G. Gordon suggested using the numbers from GRS. M. Metz noted that the committee needed to follow-up on this. P. Morris expressed that it could be GRS reported approved positions as opposed to unfilled. G. Gordon said that GRS called it the number of filled positions. Can we find out where GRS got the information. ht. Metz suggested calling the Chief to get a three year count. S. Drazner said the information given to GRS was from the Illinois Department of Insurance. M. Betz said, Gerry Gordon's report says it is an increase but residents say differently. S. Drazner offered to have the department do a review of the IDOI report. 51. Metz said great and went on to page five, section three, first paragraph and suggested that the total information concerning defined contributions should not include information concerning planned contributions as that is the first time it is mentioned and it confuses the issue. It is superfluous information since there is no further mention of either plan style. P. Morris said that the committee knew what it meant but others do not. hi. Metz wondered if this would add clarity or confusion. P. Morris thought William Testa' comments explained the risk of each method. G. Gordon asked if there was any risk for the pensioner. P. Morris said there is a risk to the employer contribution of ten percent of their salary. M. Metz said but the benefit is defined so they do not bare investment risk. G. Gordon noted the only risk is if the plan goes broke.. J. Young agreed that in an extreme case, a city/fund could go broke. M. Metz agreed and said to leave the paragraph in. P. Morris suggested taking out what Mark Nletz suggested and putting in what William Testa said. A. Granchalek agreed that William Testa' thoughts were good. J. Young noted that he would incorporate those comments in Section Three. Part A. M. Metz suggested that they begin at the beginning and go down to two suggested copies of the report side by side. P. Morris said use Williams Testa', his words are good. 11. Metz said that he was looking for substance.. He felt the introduction says much. fie continued that the four goals were good. He noted that the Executive Summary still needs to be written. He agreed that William Testa' recommendations should be incorporated. Bringing up Section Three, he reiterated that William Testa' comments concerning defined benefits and defined contributions would be included. I Ic asked the others if there were any areas to be enlarged upon. P. ,Morris suggested that the two pension contributions, Police and Fire, be put together in one total including Mark Metz' comments. The total unfunded liability is for both pension funds. He went on to say he does not know how the unfunded 2 liability came to be 145M as noted in Pan B of Section Three. He admitted that he loves graphs and a good chart, but knows many residents in the City would not use them. Ile asked if the committee wanted pictures or verbal descriptions, refined simplistic words. J. Young said he used the charts to augment the words and Alcksandr Granchalek agreed. M. Metz suggested that the graphs be kept. G. Gordon asked if "dollars" could be added to the graph on page six and Jim Young said he was right. J. Young went on to say that table one on page nine, the table of the evolution of the unfunded liability. maybe should be on page eight, maybe even two tables, should be added. 31. %Ictz continued on to page ten. Solutions to Consider, noting there are five solutions listed. J. Young said that in his draft he had added Peter Morris' comments on secure assets. A. Granchalek said that it depends on how long you are going to do it and the rate that drives it. S. Drazner noted that the Sherman Garage Bond is being subsidized by TIF. P. Morris asked "Maple"" S. Drazncr answered that the Maple Garage is nearly paid off. P. Morris said then securitize the Maple Bond. A. Granchalek asked if there had been any discussion of a fire service fee. His assumption would be to go above taxes to other fees. As an example, create a fire service fee. P. Morris asked if Northwestern didn't pay now and Aleksandr Granchalek said they do not and Peter Morris said then to put the suggestion in the report. Ili, INaetz liked the comments from William Testa and Peter Morris on securitization and thought they should be on page nine. He wondered if it was a State law that would keep non -profits from paying for fire services. A. Granchalek pointed out that it is function of not paying property taxes. P. Morals asked if they were exempt from paying service fees. How many calls are we talking about was the second questions. S. Drazner said the Fire Department has a record of all calls. P. Morris suggested putting fire and police service calls in the recommendations. T. Schoolmaster replied that the City Council would not go for it. They are aware of 1.8 million in false alarms and they did not push for payment. G. Gordon said to call it educational institutions and leave out the name of Northwestern from the document. A. Granchalek suggested calling it not -far -profit institutions. J. Young understands that Three Crowns pay a sum in lieu of taxes but only after their expansion. He wondered if the amount compensates for the services rendered, P. Morris said that today it is If you want it, you have to pay for it." hI. ,Metz agreed that the City cannot afford it, the mission is to support these organizations but the tax payers can no longer support them. The City needs to open negotiations. get real figures together and be blunt and unequivocal. G. Gordon wondered how the City can put teeth into the negotiations since the City cannot deny fire service. M. Metz states that as a tax payer, he does not have to make a contribution to a charity if he so chooses. G. Gordon said to include the First Methodist Church, they use the services. llt. Metz suggested that a rational usage service fee be created. P. Morris said a variable cost might be used. A. Granchalek said that the City can impose a fee but not one based on property value. J. Young thought one way to think about it is, in nine years a not -far -profit may never use a service but they will be paying for the future. However, if someone pays two thousand a year but only uses twenty percent of the services that is a poor match. G. Gordon asked how all the calls are kept track of. Jennifer LoBianco, of the COE Fire Department, said the Fire Department has all the calls recorded. M. Nletz pointed out that the Department could figure out the cost per visit and create a model to set up a fee structure. He encourages the City to pursue this matter. Non -profits are a pan of the fabric of this town but the City cannot afford to provide for it anymore. G. Gordon said to figure in fire truck depreciation in the chart. J. Young noted they could use allocation of fixed costs or %ariable costs. M. Metz said non -profits can setup their own services if they wish. J. young suggested that analysis must be done. M. Metz thought the committee should recommend that the Council be serious in pursuing this. P. Morris asked if there was a difference between large non -profits and a church. M. Metz thought the committee can't get into that level of discussion, that would be up to the City Council. P. Morris thought that perhaps on page ten it would be appropriate to mention zero bases budgeting and to explain what it is. Starting at zero, the question would be, can we afford it. He also suggested it be used on grants to charities. Why pay if the City can provide the service and in 3 some cases the City cannot support them anymore. A. Granchalek asked if charities had to apply every year. S. Drazner said he did not know- but thought there was a list of recipients. P. ?Morris thought some were pragmatic grants and there arc some good people out there. S. Drazoer asked if they knew the fund balance of these groups, ,ii, Betz thought that this concept should be mentioned to the Council, they need to change the way they look at a budget. G. Gordon suggested that the new Finance Director be asked to came and talk with the committee. \1. Metz said it is nothing new to review outside organization's requests, it should just be at new level of magnitude. He also wanted to include the budget cuts William Testa suggested. "1t is here that addresses how much money there is to spend. Each item needs to be cut down after recognizing fire, police, snow removal and potholes. Then other requests can be considered." G. Gordon stated "Work with what you have and then go to the taxpayers." P. tiiorris pointed out 2D of the report that states, taxes — last option to consider. J. Young referring to point four, budget cuts, said the suggestion to change the process from incremental to zero based budgeting and an explanation is there. M. Metz said to add about decoupling levies, Explain why it is a good idea. Use an example. G. Gordon asked if the four millions from the General Fund will be enough to permanently fix the problem. S. Drazoer said that was only for one year. Next year the transfer will have to be from March 09 monies. A. Granchalek asked if the City won't still be a year late. S. Drazner confirmed that they are always at least one year behind. A. Granchalek stated that it changes. P. ��iorrls suggested that the procedures be changed to a known plus above or below. A. Granchalek suggested that if the table is always two years behind, you can shorten the amortization schedule but know- your first payment will be big. But over the years it is not more expensive and you won't pass it on to future generations. G. Gordan asked where you would get the funds. P. Morris said there are alternatives, but you would continue with a built in loss. M. Metz said that asset sales had been discussed but everyone realized that it is a one time only deal towards getting caught up. A. Granchalek suggested to pay as a structural problem or to put it in the operating budget. 1M, Metz did not think you could put it in the operating budget because nothing replaces it next year but a structural problem goes away. J. Young said that as Peter Morris said, the magnitude of future contributions is great. 711is growth is based on amortization being over in 2033. 111. Conclusion for the evening. h1. Metz noted that the rest of the document was the appendices. A compilation of the two version needs to be done. P. Morris requested that when the two are melded together that the changes are shown and then one additional copy be done that is the latest version. M.11ietz requested that the committee do a fresh reading in preparation for the next round of changes. He said he would take a crack at the executive summary. 1V. M. Metz adjourned the meeting at 3:30 p. m. Respectfully submitted Phillip Baugher Administrative Assistant, Finance Department The next Blue Ribbon Committee meeting is scheduled for Wednesday, August 27, 2008 at 6:30 p.m. in the Aidermanic Library 0 ,.,.!'Y` :�-. . - . , � .. _.. u, � - _ :_{'� :•}t';•. ;:ria4'r.�'�,!Jf':;+f:.'.�' � is : J Ji Approved BLUE RIBBON COMMITTEE Police and Fire Pension Plans MINUTES Wednesday, August 27, 2008 CIVIC CENTER, 2100 RIDGE AVENUE, ALDER.iiANIC LIBRARY htembers Present: Gerald M. Gordon, Aleksandr Granchalek. Mark 141etz, Peter D, Morris, Sandra Waller Shelton. William Testa, Jim Young Members Absent: Gregory M. Beard Staff Present: Martin Lyons, COE Finance Director Steven Dra.zner, COE Assistant Finance Director Others Present: Tim Schoolmaster — Police Pension Board Presiding: Mark Metz Mark Metz tailed the Blue Ribbon Committee (BRC) meeting to order at 6:35 p.m. 11, The minutes of July 16th were unanimously approved. Ill. Discussion and Review of Draft Report 3.0 M. Sfetz said that he only had minor suggestions, certain words and phrases. He noted that the substance was good. He pointed out the need to rill in the spaces in the Introduction. He thought the Executive Summary should be written at the end of the process. It might even be feasible to combine the introduction and the executive summary. He said he would take a crack at the executive summary. Referring to the Pension Fund Report, G. Gordon questioned the placement, this early on may put some people to sleep. This would be a good place for "bullet points". The "primer' could be placed on page ten perhaps before "solutions". W. Testa agreed with Peter Morris that the executive summary should be punched up but really beef up the front part that is as far as some will get, P. Morris suggested renaming the title on page 5 to "Where are we, how did we bet here?" ;%l. Metz said it might get people to read it. G. Gordon referencing Table 1 on page 9 suggested the years be reversed so that it is obvious how the unfunded liability built up. P. Morris agreed and suggested inserting a Table 2 just above the last paragraph on the page, looking forward. showing where the City is going. G. Gordon also recommended editing the second to last paragraph by removing "While hindsight is 20/20 ...... as being to soft and staning the paragraph with "A number..." W. Testa thought the graphs on pages 7 and 8 were hard to interrupt. J. Young stated that he wanted to convey the thought that in a perfect world, everything is forecast. P. Morris wondered if the word "conservative" was the question. W. Testa said yes. Al. Metz suggested omitting graph one. Graph two would be overly conservative and graph three would be overly aggressive and renumbered. A. Granchalek thought that explaining over and under funding would make the explanation clearer. J. Young expressed concern that most people may not understand how assumptions are done. W. Testa noted that the text was excellent. G. Gordon asked if the graph was attempting to be accurate assumptions. W. Test* said it cannot, salaries grow, figures change. M. .Metz said the question is, if they were accurate, would the annual funding go up? P. Morris thought Table 2 showed the unfunded growth but that you would need more money on an annual basis to amortize to 2033. M. Metz thought that perhaps they were talking about two different things. J. Young said the graph was meant to be an abstraction. In a perfect world a lot is based on projections and forecasts. Everything; would be as anticipated. therefore, a straight line. NI. Metz asked if anyone had found the percent of corporate plans that have a Defined Benefit. A. Granehalek said he would look it up and get the figures to J. Young. S. Waller Shelton asked if the report would include Defined Contribution Benefits as well as Defined Benefits. She thought a statistical comparison would be good. M. Metz suggested that another category could be municipalities that elect what they choose. W. Testa mentioned that West Virginia and Nebraska had both switched to Dcfincd Contribution and back to Defined Benefit. S. Waller Shelton thought that in the interest of full disclosure it would be very interesting to show both sides. She went on to say that point four on page 9 needs more detail. The change in actuaries was not the only cause in the increase in the unfunded liability. h1. Metz agreed. the change in methodology was one of the causes. They went from entry level entry to entry level age. S. Waller Shelton suggested working on that and adding the information to Appendix B, Summary of Actuarial Methodology & Assumptions. It could be stated that the change is assumptions resulted in the increase in unfunded liability. P. Morris wondered if the committee should have an opinion on the change from 140M to 145M. This document will be read by those who know what has transpired but did the previous actuary do it wrong and because of that, the new actuary assumptions automatically added 40M. M. Metz stressed that the method was not wrong, it is just another method changed the assumptions. Giving credit to Aleksandr Granchalck and GRS the easiest way to explain it is: when you buy whole life insurance you pay more now and less later. When you buy term life insurance you pay more each year as your mortality goes up. P. Morris said entry level age is normally conservative for the employees. M. Metz stated that there were many examples of variances, some as much as thirty percent. It is very complex and the computer is trying; to make it simple. We need to make this simple but not to distort the situation. M. Lyons said it is best if everything grows and even if the unfunded liability stays the same, it should stow smaller or at best stay static and it becomes a lesser and lesser percentage. G. Gordon stated that the committee has a report from IDOL and GRS admitted their numbers were thirty percent higher then IDOI's. Why is the City using those supplied by GRS." h1. Lyons said that the State does a figure for all the municipalities in the state. All monies were earning at a low rate. Then the rates went higher. The Actuary works for the City and will change within the guidelines appropriately. IDOL has a very small staff trying to sm-e everyone. The City hires an Actuary and has to go with their recommendations. The City's own actuary can redo it, the State cannot. NY. Testa asked if this could be used as a best practice, the City should go with the study of an independent actuary, look at others and do comparisons. GRS did look at several sources. M. tiletz said that the committee recommended not changing actuaries but every three years bringing in an observer to review the work, comment on short comings, recommend changes and to provide oversight. The people responsible, the City Council, have no choice but to rely on the advise of the actuary. They should check on the opinions given. Ted Windsor believed he was right and in thirty years everything; would work out. Sounds to me as if he was blinded by his own convictions. T. Schoolmaster said the Police Pension Board did hire an actuary to review the assumptions of GRS and the Board assumptions and found they agreed with the GRS assumptions. P. Morris felt the City wanted to get it done but also wanted to avoid bad news. M. Metz thought that time to time they should look over their shoulders. N1. Lyons felt the "time to time" right now is every your for at least the next four years. P. Morris suggested that on page I I part I), second line, the word "taxing" be inserted between special and service. W.'Tesla thought it should read, ..."a special service district with taxing authority". M. Mctz mentioned that talk about special taxing districts gives the Council budget shock, they need their own tax levy. P. Morris asked if Evanston would have to lower its levy just because they got rid of some districts. Granted they have to tell the residents. Can't they produce benefits without raising taxes? M. Lyons mentioned that you have to explain getting rid of two million dollars of expenses but not three million dollars of levies. P. Morris said that these are the things to be looked at in an analytical manner. Do they make sense, are they a benefit before you raise taxes. N1. Lyons asked about page 9. item 2, pension benefits (get specifics). is anyone supporting the committee on this? Illinois Municipal League will be different from the Board, and from the actuaries. Fie suggested that all parties be heard on this issue. Benefits can be drastically different between interested bodies and that is what is always being hashed out in Springfield. The only true measure after you do your actuary is if the ARC goes up and the unfunded liability goes up, something has changed. As benefits go up so does the unfunded liability. I am mentioning this he said because "specifics" could be a report bigger than this document. IN1. Metz said I do not think the committee wants to get too specific. W. Testa thought the committee did not need to go there, just note that when the benefits go up there is an increase in the unfunded liability. P. Morris pointed out that there has been n history of the State passing benefit increases that have not be funded. T. Schoolmaster said during that Iast two benefit increases the contribution from the employee has also increased. M. Metz believes that residents are confused about how benefits are increased and have been contributing to under -funded liabilities for years. G. Gordon noted that a different aspect is benefits based on salaries which keep going up. S. Waller Shelton asked if there was any way to give percentages to which P. Morris said there is a sheet from GRS addressing this point. S. Waller Shelton questioned if it would help explain the effects on benefits. T. Schoolmaster asked it the GRS page showed the change in funding law of 1993. In 1997 a failure to contribute and a funding change said there was nothing to contribute. In 2003 the contribution was zero. But even though payroll went up the levy did not. M. Metz mentioned that there is a chart from the City showing ARC contributions. T. Schoolmaster stated that the increase in payroll and levy did not match one year. M. Lyons said an actuary might not recommend a salary and levy match. P. Morris said to look at 1993 to 1997. J. Young declared the point is, the ARC was understated. M. Lyons said to also tack on inflation. If 5810 was funded and you could be at 78% there is a cause for the unfunded liability to grow. P. Morris asked M. Lyons if he was saying that as things go up and down, do not stop funding. N1. Lyons stated that there are statuary reasons to not stop funding. The ARC can go up and down caused by wages and benefits, but the City needs to keep funding, the unfunded liability will not go away. P. Morris brought up the question of what is down the road. M. Lyons said the ARC was projected to go down to zero and if the fund was at 100 percent, why give any more. However the employees continue to contribute and the City needs w keep funding. G. Gordon suggested changing the title oil page 9. juSt under Fable i to start with the "Some of the [actors causing this liability to grin; ... dropping "From the cosntnillec's perspective, thce are a number..." 11. Nlorrl% mentioned that the committee had talked about decoupling the levy from the end of the year. G. Cordon suggested that requires a big injection of funds, 11. Ntorrl► reiterated they did, la%l year they transferred four tttflllon dollars. G. Gordon replied that they did not decuuple. 11. Nlorrle respondcd that the City used disctctionary lltnds. C. taordon said that tf you use the fund balance you have to raise tuxes. T. Schuoltnwer said it A -a% done by using Ted WinAtir's figurers; ��;� �71',✓s Kz << t, ._ . _t, .- ,. t ,%"• _ •rase. • ..�:�••- 't' ." • .... .- _. ., ... - 0 M the four million brought the City tip it) the GRS numbers. S. Drazrier %aid it %vas danc to narrow the timing gap between vuluation Mate and the Ic%•y alma. 'I'licre was about 3,2 million between the two pensions, T. Schoolmaster bclicved that Julia Carro ll's letter stated difi'erently. She did not suggest that it was an actuarial rceogniled t+umber. J. Young asked P. Morris if he hadn't said that for services rendered for R+cal year ending February 2009 there is a big lag between what is rctluircd and ilia cash is received. P. Morris said that on page 10. number 2 says it correctly but perhaps says it trio nicely. W. Testa thought this was sticky. 'I'hc original laws were to fund these non•proRts. 'I', Schoolmaster noted that Northwestern is a %%ash on Police scn'ices but they use a lot of fire services. W. Testa said that ilia comrititicc (Council) needs to decide how Rush the City is. P. Morris declared "Just make the stalcment more %pccific." .1. Young suggested the City needs to examine this, staling that most honies arc not charitable institutions. W. Testa mentioned that ilia government is now asking hospitals to prove they are charitable organivaiions. S. Waller Shelton glicstioned the words "ongoing committee" found in the first paragraph on page 13, W. Testa said that it is just suggesting Ilia City keep going but the word "commillce" could be deleted. P. Morris thought a lot of this is gratuitous, someMsere accountability should be addressed. G. Gordon asked M. I.yons if he was changing budget documents, AI. Lyons said he was not. We just got the GFOA I)I higiilOwd Award. hiterml processing will change but not in the first six months Thal 1 ant here, M. Metz sold that in the report the rr suggests a zero based budgo replace Ihr incrrntental style currently in iip stated the Police, Fire, Snow Rcinuvul irml Streets and Sanitation cannOT others can but only witli suppoit iranw With a inission so critical for "keep going". 111. Morrit %aid "Ilia you can du zero base budge - citizens want and build up fhim dicre," M. Lyons noted that it establish a base line, bccauwe al piwat the +y%icnt is inertia. C goals and outcomes is most: rllkirtll, l'isit Toni% cannot be left own. There will be parts of ptoce%% Its i whiale the whole proyr. he believed that over time, deliamneul by depaitnirnl, file City d budgeting. It mikes sense It ninl,rs tiviiw Ihr %%ay it is provided. Ji , by service. I like the %%oid invow; 11 has liven going an for ftw mentioned that Alex Oranchalek has it good u liedrile that tic Mi - b, #.tf Ili Appendix A. G. Gordon asAr+l 1f the eimnmtwi. vinitn111tl%l say 1110141 i,l tkiritil rates, POBs are not tecoimtimiled at lhi. Mile Why prraluce u filrrli «�) the graph was just to explain %%hill it 14111 %%at I Schuuhnaxler ol1ercil to gi l i4.. ri_.is% the GFOA. G, Gordon asked %%li% Iliviv sh,+u1,1 1w q Isig eslilanalion. P. Mnrrl# •if;v, with Gerry Gordon saying too nluilt is t-1 ilia%It M. lira/ ielleratcd That Jim 1+ =i,r will supply the report% for Appendi% t (i, t;otilull suggested temoving Appcndl% I t#A all agreed. J. Young a%ked %%hill the himi,it ,%-i- list it hihlfogtaphy, W. Testa * 14 it it the Chicago ,Manual Style and lie %%ookl wwl ww io him IV. Conclusion for the e%eninli The committee choose 'Ilurrmla} the I I" so `.,'I,i, nits, r al is if) Ifir Ilse ticxl niceting. M. Metz suggested that the lin1C i+rl�+re Ihcii %%,sots! alhst% Ih%F %+umtiilter to get ideas to Jim Young for the next draft. 11, Norris asl,c,t Iir.it Ihr dtsill ulIhr 1lxccutive Summary be circulated by September 3"'. S. Waller Shellon a+iir{t %hell Illu itiporl waii Slur and Peter Morris suggested the end of September, 11, AMorrit v%piviiised that f ik droll was excellent and Gerry Gordan seconded. V. M. Metz adjourned the meeting ill 8.1f1p, ill, 4 :c Department i Committee meeting Is scheduled for '008 at 6:30 p.m. in the Aldermanic Library