2014-10-07 Work Session Minutes


Council met for a work session on Tuesday, October 7, 2014 in Council Chambers. The work session began at 6:00 p.m.

In attendance were Council President Jack Mundie, Council Vice President Jean Mope, and Council Members Keith Bast, Jeff Cusat and David Sosar.

Don Williamson, Asco Financial Group, AFG Pension Administrators, spoke about the pension process and the City’s minimum municipal obligations. He stated over a period of time, since they have been involved with the pension plan’s management, the assets of the plan have grown from $10,458,000 to $33,966,000. These are defined benefit pension plans and it takes a long period of time and a total commitment to the management and contribution processes. He said in Section B of the reference sheet, it shows the “frustration” of managing defined benefit pension plans that are sponsored by the Commonwealth of Pennsylvania under Act 205. They have to pay close attention to the cash flow out of the plans every year when setting them up. In 2013, the City’s three pension plans distributed $3,704,514 in benefits. There is a combination of benefits and post-retirement health care that make up this figure. In Section C regarding the pension contributions, the police, fire and non-uniformed all contribute 5%, unless you were a PRMS employee and you were part of the old enhanced plan, then you would be putting in 4%. This changed in 2004. In 2013, employee contributions totaled $256,148, state aid totaled $598,192, and the City’s contribution totaled $3,238,542, which brings the grant total to $4,092,882. This will help offset the funding costs and “to keep the pension plans as solvent as possible.” He said 2000, 2001, and 2002 were “negative years,” and 2008 was the great decline in the markets. Section D of the reference sheet shows that recently the Public Employees Retirement Commission (PERC) recently changed the funding level status of the City of Hazleton from a Level 3 (severely distressed) to a Level 2 (moderately distressed). The difference in this level was 1%, and the City is now 50% funded. He stated he would like to get that funding status up to 55% to 60%, and keep it steady and growing towards a minimally distressed level. The process that has been in place for the City is an “all-encompassing holistic approach.” They do all the management, complete all the administration and compliance under Act 205, operate the plans according to Act 205, and function under an IPS statement. He stated the City has a very “good process in place from a core satellite standpoint.” He asked if the City wanted to take advantage of one of processes under Act 44 the Commonwealth enacted in 2009. Under Column A on the other handout, it states the minimum municipal obligation for the pension plans for 2015, without the 25% amortization payment reduction, and with state aid in the same amount as this year, which is $608,011, is $5,196,442. This is an increase for next year. In 2009 when the state enacted Act 44, they enacted a lot of different funding provisions that granted municipalities across the Commonwealth the opportunity of various types of actuarial statuses. One status was that you could use actuarial smoothing, which is “grossing up” plan assets by 120% or 130% in order to close the funding gap and reduce the burden on the municipality. This has been used for the past five years, however, it expired on January 1, 2013. The state has changed these provisions going forward, and the actual asset value now has to be used in doing the calculations for funding the MMOs. For example, if you have $1 million, and you are able to gross it up 120%, you now have $1.2 million. You were allowed to offset your funding liability with that figure. Now, the state says you have to use the numbers you actually have in the plan, which is now $33,966,000. The 25% reduction process is still left for the next two years. Under Act 205, it may be used for six years, and the City has only used it for four years. He stated it reduces the funding obligation from $5,196,000 to $4 million, saving the City about $1.1 million for the next two years. Mundie asked if this will increase our payments after two years, and what are the advantages to doing this. Williamson responded that it will ultimately work its way out, or it will catch up with you. If this reduction is not used, the pension plans will have to be fully funded. If this reduction is used, the money saved can go under the current actuarial rates of return, which are 7.5% and 8% for these plans. If the markets do well and the City can afford it, then the plans will be fully funded. Sosar asked if the City will have to 100% into the pension plans after the next two years, about $1.1 million, or will we need to catch up, which will be more than that. Williamson responded that in his opinion the City will not be paying more in two years, and the City will probably be paying the same amount. He stated that increases in salaries, demographics, and retirees impact funding, and increase funding costs. Sometimes they are offset because the investment strategy can add value to the overall performance. Mundie asked what percentage of pensions in Pennsylvania are underfunded. Williamson said it is a high percentage. Cusat asked if the City could fall back into a Level 3 distressed status if it continues to use the 25% reduction. Williamson said it could happen. There is a 19% change between moderately distressed and minimally distressed (70%) status. Currently, this will be funding 2015 and 2016. He stated that there is good chance that things will change for 2017. Mundie asked about Detroit City’s pension, and asked about the Pension Benefit Guaranty Association (PBGA). Williamson said the PBGA only applies to corporate plans, and not governmental entities. Mundie said he read that Detroit pledged some of its pensions for loans to keep the city going, and it got wiped out. Williamson agreed. He said that cannot happen without changes to the Investment Policy Statement (IPS). Scranton is currently in a similar situation. Williamson said the City put a percentage of the earned income tax (EIT) aside under legislation that occurred several years ago, and this is able to help fund the pension plans. Dave Fatula of the Firefighters Union said the City of Hazleton is the only municipality to actuarially accounts for its post-retirement health benefits. He asked where we would be if the City did not do this. Williamson said the post-retirement health benefits were infused into the funding process of the City’s pension plans for several years now. He said he does not believe it would impact the funding so much as to push the City up into the 60s for its funding. The post-retirement health care benefits make up about $600,000. It does impact the funding status and will continue to do so. Sosar asked if we also take out the post-retirement benefits for the employee’s spouse. Fatula responded that in 2009-2011, they used to pay it out of the general fund, but then they started to pay for it out of the pension fund, but they ran into a problem with that during the audit. Legislation was passed that you can do that if you actuarially account for it. Fatula said this is a good thing, because we are accounting for those expenses out of the pension fund. He stated that if we were paying for the pension only, we would be up to 66%. Sosar asked if there is some kind of breakdown regarding that matter, and Williamson said it is on the Reference Sheet under Section B in dollar costs. Mundie asked why non-uniform post-retirement health care is zero, and Williamson responded there are no post-retirement health care benefits for non-uniform employees out of the pension fund. If these exists, then they are being paid out of the general fund. Mundie and Mope asked why the non-uniform is different. Williamson said years ago, the plan was under Pennsylvania Municipal Retirement System (PMRS), and it converted over to the Third Class City Code. The state would have to physically approve to have the post-retirement health care benefits into the pension plan and get approval for the funding. He was not aware of how much this costs the City, and suggested that Mundie speak with the City Administrator about this. He said the non-uniform plan was established in 1996 and “it took a long time for it to get on its feet.” Fatula said the firefighters’ contribution to the pension plan is 5%. Mundie asked if 5% is an average contribution for Pennsylvania, and Marie Williamson said in third class cities, the average is 5%. Mundie asked if this amount could be negotiated higher, and Marie Williamson said yes, but 5% is the customary percentage.

Mundie adjourned the work session at 6:30 p.m.




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