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HomeMy WebLinkAboutMINUTES-2007-04-16-2007-3U2L 1 1 1 CITY COUNCIL ROLL CALL — PRESENT: A Quorum was present. NOT PRESENT AT ROLL CALL: ABSENT: PRESIDING: Alderman Tisdahl Alderman Rainey Alderman Hansen Alderman Wollin Alderman Wynne None Mayor Lorraine H. Morton April 16, 2007 Alderman Jean -Baptiste Alderman Bernstein Alderman Holmes Alderman Moran A SPECIAL MEETING of the City Council was held for the purpose of a presentation on Public Safety Pension Obligations and a policy discussion starting at 6:08 p.m. on Tuesday, April 16, 2007 in the Council Chamber. City Manager Julia Carroll welcomed Police and Fire Pension Board trustees. She stated this was a historic meeting and hoped to develop a partnership among City of Evanston leaders, taxpayers, pension trustees and beneficiaries to address pension funding obligations for public safety employees. She knew there was some litigation between one of the pension funds in the past, and even though the City prevailed, she hoped to change the tone of the interaction between all parties by having a frank discussion about the state of Evanston's pension funds and pension funding in general. Their data is from published studies done by outside independent bodies including the IML Study given to Council members. She introduced the City's new financial advisor Scott Balice. Phoebe Selden, former Comptroller for the City of Chicago and an analyst with Moody's Investor Service and Claire Goodman, an economist previously with the University of Georgia. In addition, Ms. Carroll reported that she and Finance Director Matt Grady have worked with Scott Balice on a strategy to address pension funding; have been in touch with Gabriel Roeder, an actuary, and Katten Muchin Rosenman LLP, the City's bond counsel. They don't have a complete solution, but are closer to understanding the opportunities and risks associated with funding this liability. The Evanston Fire and Police Pension plans are defined benefits plans with three sources of assets: employer and employee contributions and investment returns. Liabilities are future benefit payments to retirees (controlled by state legislature) The difference between assets and liabilities is the unfunded liability or UAAL, which by law has to be funded through property taxes or some other revenue over a 26-year period. The per capita funded ratio for active employees in 2004 for downstate police was 62.40% and in Evanston at 53.49%. Downstate fire was at 65.90% and Evanston at 49.6% in 2004. The national average funding ratio for municipalities and counties was 87% in 2005. The distribution of a number of these pension systems showed that most were funded at 80- 900/o and 90-100% which is important to remember when the City decides on goals for pension funding. Unfunded actuarial accrued liabilities (UAAL). Where is Evanston now? The history from 1993 through 2006 of pension funding for police and fire was shown on a graph. The funded ratio is based upon numerous actuarial assumptions, including retirement age, life span, level of benefits and investment returns. Anytime an assumption is changed, the landed ratio is affected. The UAAL for police and fire is $98 million (Police $54 million, Fire $44 million). In response to Alderman Tisdahl, Mr. Grady stated the City has a new actuary, Gabriel, Roeder, Smith & Company. The City deals with Alex Rivera at the Chicago office. She asked if they have the information about when police and fire personnel are retiring. Yes. He met with Tim Schoolmaster, Police Pension, and Pat Dillon, Fire Pension and both met the new actuary. Alderman Tisdahl also confirmed that this firm has all the necessary credentials. The company is working on the next actuarial report. NNj, 2 April 16, 2007 Alderman Rainey recalled the City Manager had said they would get rid of the actuary, but there was no follow-up. Why was Council not involved? Mr. Grady said it was below the expenditure threshold. Alderman Rainey had asked to be informed every step of the way and stated that was no excuse not to keep Council informed. General Factors that have affected Defined Benefit Plans. Reduction in Funding Evanston has consistently fully funded the actuarial required contribution (ARC) Increased life expectancy Poor investment performance (2000, 2001, 2002) Changes in any actuarial assumption can impact the funded ratio Benefit increases Benefit Increases — Police Public Act 91-0466 Effective 2000 Increased minimum pension for survivors from $600 to $1,000 over three years. Public Act 91-0939 Effective 2001 Flat 2.5% per year formula allows reaching maximum pension of 75% of salary at 30 years instead of 35 years. Permits receipt of three years of creditable service while on disability. Base initial automatic annual increase on months instead of years Duty or occupational disease disability greater of 65% salary or pension. Stroke added as an occupational disability Annuity of 100% of salary for duty death to the surviving spouse Annually benefit proposals are made in the Illinois legislature. Some pass and some don't, but they affect the fund ratio. Benefit Increases - Fire Public Act 91-0466 Effective 2000 Flat 2.5% per year formula allows reaching maximum pension of 75% of salary at 30 years instead of 35 years. Permits receipt of three years of creditable service while on disability Base initial automatic annual increase on months instead of years Duty or occupational disease disability greater of 65% salary or pension Stroke added as an occupational disability Annuity of 100% of salary for duty death to the surviving spouse Increased minimum pension for survivors from $600 to $1,000 over three years Public Act 93-0689 Effective 2005 Surviving spouse annuity of 100% of pension earned by decedent, retroactive to January 1, 2004 Increased minimum pension for survivors from $1,030 in 2004 to $1,159 by 2008 Retroactively and prospectively increased children's annuity by 3% annually through 2008 Reciprocity between downstate fire funds and the ability to transfer IMRF service to a downstate fire fund An actuary will go through these changes and determine the actuarial impact on the pension funds. Illinois offers generous benefits compared to other states Illinois offers the seventh most generous 30-year pension payout compared among 50 different statewide municipal public safety defined benefits plans — offers approximately $533 more per month at 30 years of service. In the Midwest, Illinois is the thud most generous in pension payouts. Benefits increases have contributed to Declining Funding Ratio / Mr. Grady reviewed downstate police plans; noted that between 1987 and 2004 the total accrued liability of downstate police funds quadrupled from $1.5 billion to $6.0 billion. That was compared to the Illinois Municipal Retirement Fund (IMRF) (for all other funds other than police and tire) total accrued liability rose from $5.4 billion in 1989 to $19.4 billion in 2004. All pension funds are experiencing increased liabilities. 38y 3 April 16, 2007 The total UAAL of the aggregate police funds grew from $400 mullion in 1987 to $2.3 billion in 2004, an increase of 500%. (That means the assets were not able to keep up with the liabilities.) In comparison, the Illinois Municipal Retirement Fund's total UAAL fell from $1.8 billion in 1989 to $1.1 billion in 2004. In the same time frame IMRF was able to accumulate more assets than downstate police. He noted that IMRF has different rate levels than downstate police. The Evanston funding ratio is much lower than downstate police. Mr. Grady reviewed the downstate fire plan, noting that between 1987 and 2004, the total accrued liability of the downstate fire funds more than tripled from $1.2 billion to $4.1 billion. In comparison, the IMRF's total accrued liability rose from $5.4 billion in 1989 to $19.4 billion in 2004. Both funds experienced increased liabilities. The total UAAL of the aggregate fire funds grew from $310 million in 1987 to $1.4 billion in 2004, an increase of 352%. By comparison, the IMRF's total UAAL fell from $1.8 billion in 1989 to $1.1 billion in 2004. Mr. Grady stated they need to look at what IMRF does and come up with a strategy for Evanston. Evanston's funded ratio is significantly lower than peers Other municipalities, like Evanston have faced obstacles in achieving the 90% funding level which is considered good public policy. The challenges are: Legislation that increased benefits Market downturns in 2000, 2001 and 2002 Changes in actuarial assumptions (as a result of changes in state legislation) that increased liability. Alternative Portfolio compared to other funds Mr. Grady noted that Wilshire Consulting examined the investment strategies employed by city and county retirement systems. They found the average asset allocation for 2005 was: fixed income 30.5%, equities 66.9% and cash 2.7%. Evanston's most current portfolio is distributed as follows: Police 2006 allocation, fixed income 53%, equities 45%, and 2% cash; Fire 2006 allocation is fixed income 59% and equities 41%. He stated the fixed income portion is set by state law and investments are made by the pension boards whose memberships are determined by state statute. Mr. Grady serves on the Fire Pension Board and sits in on the Police Pension Board. There are a number of active members and a certain number of retirees on each board. The Chief of Police and Fire Chief sit on their respective boards. No judgments were intended regarding investments made, but the maximum amount allowed by law that is put into equities generally gives a higher rate of return. Ms. Carroll encouraged the Fire Pension Fund to increase its equities from 41% to 45% and decrease its fixed income from 59% to 55% to increase returns. Mr. Grady stated one recommendation is for each pension board to make a quarterly or annual presentation to City Council. Both funds have a financial advisor and a fund manager. Portfolio Allocation and Investment Returns Both funds have moved away from fixed income securities and into equities. The Police Fund has reduced its debt allocation from 66% in 2003 to 53% in 2006 and the Fire Fund has reduced its debt allocation from 68% in 2003 to 59% in 2006. Strategies to Manage Pension Liabilities Mr. Grady reported that they are working on several options to manage pension liabilities and currently working with bond counsel and financial advisor to pull all this together to present a total solution for unfunded liabilities. Staff has also worked with the rating agencies; talked with them about the plusses of Evanston and invited them to visit. Strateav Pros Cons Continue to make annual required payment No immediate budget impact Liability growth Potential for negative credit impact Lobby to prevent future benefit increases Prevent benefit cost increases May be difficult to convince state Legislature Exceed annual pay as -you -go Higher investment earnings; Budget impact if payments equal ARC, Higher property taxes no additional liability will accrue 3�5 4 April 16, 2007 Strateev Pros Cons Pension Obligation Bonds Lowers pension cost Becomes "hard" obligation (POBs) Budget certainty Market returns higher than cost of borrowing not guaranteed How Pension Obligation Bonds Work Ms. Selden stated there are some "next steps" to be taken before going to Pension Obligation Bonds. First is to analyze what is involved in other options and what kind of contribution levels the City needs to be at; the impact on tax rates if the City does nothing and to compare and contrast with other solutions. If the City issued bonds and put the proceeds into a pension fund, paying debt service over 26 years, the assumption is the funds would make the actuarial assumed rate of return 7.5% and lock in bond financing of about 5.75% with the difference a savings to the taxpayers and City. These bonds would be issued by the City on a taxable basis. Most of the City's debt is tax-exempt bonds. It bears careful analysis because they would want to be sure they make the actuarial assumed rate of return. What are the risks to issuing Pension Obligation Bonds? Ms. Selden thought investment risk was the predominant one. Can the pension funds make the actuarially assumed rate of return? If they don't make it, they pay more in debt service than they earn in the fund. Credit risk in reference to the rating agencies is something the City needs to consider carefully, in a balanced and measured way. She urged to them to make sure whatever strategy they take that they are aware of the credit risks to the City. Debt capacity is that the issuer may not have the capacity to pay the debt, which is not such a concern in Evanston. What has been the level of Pension Obligation Bond funding? Ms. Selden showed a chart with pension bond issuance from 1990-2006. In June 2003 the State of Illinois issued $10 billion in POBs, the largest issuance in history, and reduced the cost of funding pensions from 8.5% to 5.05%. Current Market Characteristics Ms. Goodman spoke about the attributes of the current market that have relatively low interest rates that helps increase the potential benefit of pension obligation bonds. Given the relatively low -yield environment, the spread between taxable and non-taxable bonds is at a minimum. The third attribute is the yield curve, which means a minimum payment is paid for long-term debt. Alternative Pension Obligation Structures Ms. Selden said that assets could be set aside into a trust fund. The City can decide when it wants to make a payment into retirement funds. Payments can be made annually or some other way and puts the City into the driver's seat. Rating Implications Ms. Selden stated that Moody's and Fitch both were concerned about Evanston's unfunded fire and police pension obligations as a long-term challenge and have cited the City for this for several years. Both have highlighted the City's relatively high debt burden. It is important to the rating agencies how the City will manage these assets and risks, and to understand how the program will work for the City and taxpayers. There may be an opportunity to provide an alternative pledge that is not a General Obligation (GO) bond that the City may want to look at. They will need to make sure funding is in place that bondholders can have confidence in. Alderman Rainey asked for clarification on bonds. General Obligation bonds are the property tax pledge and considered the highest level of credit assurance one can get. Another pledge is a weakened GO bond subject to an appropriation risk that comes up annually with the budget that the City is required to fund. An alternate pledge is to levy a sales tax just to fund. The sky is the limit and they see many different things across the nation. New structures are coming in all the time. Guiding Principles Match any debt service with the amortization period of 26 years. Generally, they have a bias toward level debt service with the opportunity for budget relief, a prudent option. S April 16, 2007 Preserve call features for future flexibility. Consider variable rate structures out in the taxable market and swap back to fixed rate. They have worked on transactions where that has provided the lowest cost of funds with a reasonable risk profile. The Process Ensure legal and regulatory compliance Meet with appropriate stakeholders, such as union leaders, pension fund managers and elected officials. Work through potential solutions with rating agencies. They are working to keep the City's Aaa credit rating, which is important. Try to minimize impact with rating agencies. Ms. Carroll noted that Evanston has one of the state's lowest funded police/fire pension funds. There are 26 years left on the 40-year amortization period that was set in 1993 and goes until 2033. The amortization period was reset by the state and she hoped they would not do it again, because it will only make the problem worse. The state recommends 90% funding as good policy. The average downstate fire fund was at 66% and the average downstate police fund at 62% in 2004. Evanston was at about 50% in 2006. To determine an appropriate level of funding, Ms. Carroll looked at six Aaa peers in Illinois. All were about 75% funded for both police and fire. That was a year ago. If that were to be the goal and, she was not sure it should be, that is one benchmark. What is the timeframe to get to that level? Should they try to reach the state average in the near term— three to five years? Or if 80% is the goal, should they try for 10 years; which would leave 16 years remaining to get to the 100% level. Should they use cash, bonds or property taxes? There is a debt capacity issue and the tax capacity of taxpayers. Everybody has an interest in solving this. She explained they changed actuaries because the one they had was a one-man shop and they needed more depth. Because the issue is so complex, they wanted a firm with stronger qualifications and the City wanted a more updated valuation. In the past the valuations have lagged about two years from the time of the valuation to the date of the tax levy. She thought it important to get the most up-to-date information. They have given the actuary the 2/28/07 data on the unfunded liability because it will change from last year. Usually they give an amount that the City needs to levy for property taxes. They will ask for something different this year. The City wants to know what will be the annual required contribution over the next 26 years and the tax impact to see the scale, which is needed to make a rational decision. Ms. Carroll reported that staff will prepare a five-year financial plan so they can see how this pension obligation and the potential debt or tax levy fits into the plan going forward. They will outline three options: pay the annual required contribution; fund to the Illinois average or fund to the Aaa median. They will perform detailed cash flow modeling to analyze the financial efficiency of options; perform risk analysis of the impact of asset underperformance and assess the potential range of property tax impacts of the current funding strategy versus bond financing options. Last, they will analyze results and outline possible ways to manage investment risk, the effect on the budget and meet again with the rating agencies and, if there are any opportunities for alternative structures or pledges on the bonds, how they would get that. Sales taxes are the most typical pledge on GO bonds but the City doesn't have any sales tax to give. The sales tax is used 100% in the General Fund. The next is to continue the dialogue with the City Council, staff and the pension funds. She looks upon this as a partnership that balances the needs of the taxpayers while funding the obligation to employees who have put in a long period of service. Finally, come up with an option and execute that option. Timeline Actuarial analysis should be done by June 2007. They intend to have the five-year plan done in 90 days. A financial analysis of options would be done by staff and experts by August. They will come back to the City Council the first week in September so staff has a decision from Council before going into the next budget cycle. Council discussion Alderman Rainey appreciated the presentation but was concerned about going forward without an understanding of the past. Council was always told the funding level was based upon an actuarial analysis and that they were in compliance with state statutes. She asked for an analysis of how they got to this point. Ms. Carroll stated it is a combination of factors and did not think anything wrong had been done. When the benefit changes were approved, Evanston was funded at 60- 65% for fire and a little less for police. Alderman Rainey recalled being told about the benefit increases. Ms. Carroll said 3 V 6 April 16, 2007 the other component is investments. Pension boards that switched their asset allocations to more equities, when the law changed (1998), had an impact. Alderman Rainey said when they are shown the difference between Evanston and other communities, they need to know why the things that hit Evanston did not hit them. What did others do to avoid it? Alderman Jean -Baptiste wanted to know what other communities are doing and why has Evanston not kept up. Ms. Carroll said when she first came to Illinois in 1991, she recalled attending a pension meeting and hearing that Evanston was funded low. She said they could go back, look and produce some data. Alderman Tisdahl suggested that they work closely with the actuary to make sure that what is actually happening in police and fire is taken into consideration. Ms. Carroll stated one of the biggest changes was when the state lowered the years worked from 35 to 30 produced an immediate bump -up in the City's liability. She was not saying it was undeserved. Chopping off five years and paying five years longer will have a big impact regardless of investments. Ms. Carroll noted the IML report shows that the funding levels went from the 70% range to the 60% range as the result of benefits increases, so everybody was in the same boat, except Evanston started out in a little worse position. Ms. Carroll stated this is something that the City owes to employees and needs to address. It will be costly. They have to stop the cost from increasing by addressing this problem. Mayor Morton suggested they contact Bob Shonk, former Finance Director, to determine what happened in the past. Citizen Comment: Tim Schoolmaster. 2747 Garrison St., appreciated the attempt to rectify the problem. When first elected as a Police Pension Fund trustee, it was 37% funded. They have fought their way up to 50%. The most significant thing that affected funding was in 1993, when the Municipal League spearheaded a drive to change the funding method. They went from a level dollar method to a percentage of payroll method. Actuaries believed that to be less safe and many pension funds sued. In Illinois they did not prevail. The projection was that the debt up to 2004 would triple. For eight or ten years, municipalities wanted relief so they took eight or ten years of lower payments, then the payments were to climb precipitously for 40 years. He said the attention span in municipal government is only five to seven years. Aldermen come and go. The eighth year hit in 2001 when the stock market was down. He found it interesting they used IML figures and their report made no mention of that. Alderman Bernstein moved that City Council convene into Executive Session to discuss the matter of policing activities pursuant to 5 IL CS 120/2 ( c) (14) as follows: 2. All meetings of public bodies shall be public meetings except for the following: (14) Informant sources, the hiring or assignment of undercover personnel or equipment or ongoing, prior or future criminal investigations, when discussed by a public body with criminal investigatory responsibilities. Roll call. Voting aye — Tisdahl, Rainey, Hansen, Wollin, Jean -Baptiste, Wynne, Bernstein, Holmes, Moran. Voting nay — none. Motion carried. (9-0) There being no further business to come before the Council, Mayor Morton asked for a motion to adjourn and the Council so moved at 7:44 p.m. Mary P. Morris, City Clerk 1