Loading...
11/27/1972 - 00017000�i !' " / � e � THE MINUTES OF THE SPECIAL COUNCIL MEETING OF NOVEMB�R 27, 1972 Mayor Lieb1 called the Special Council Meeting of November 27, 1972 to order at 7;35 P.M., and said that this wL11 be an informal discussion on the funding proposal for the Po1�ce Pension Association, specificaLLy an explanation of the Hewitt plan for funding as opposed to the Guidelines Act of 1969. ROLL CALL� MEMBERS PRESENT• Mittelstadt, Breider, Starwalt, Liebl, Utter MEMBER5 ABSENT: None FRIDLEY POLICE PENSION fiSSOCIATION FUNDING� (HEWITT PLAN) The City Manager said that he would Like to bring Councilman Starwalt up to date, as he is the new member of tte Council. The City Staff has been meeting with the Police Pension Association for some time over the problem of financing the program. The real bind came in 1969 when the State LegisLature passed the Guidelines Act which required funding of the normal cost plus interest on Che deficiC within 10 years, Fridley is not funding the deficlt nor paying all of the normal cost at the present time. There had been a considerable amount of discussion between tlZe Police Pension � Association and Marvin Brunsell before he came on the scene. He said in January of this year he started meeting with the Police PensLOn Association to try to negotiate, or work out some solution The Council has been paying 21% of the police payroll as the City share toward the Police Pension fund. This is not adequate to meet the Guidelines Act. There has been some thought givea a reduction an benefits or some changes to get the City and the Police Pension Association closer in regard to benefits versus money going into the fund. After several months, the City received a letter from the police Pension Association indicating they would wark with the City in trying to geY the local employer share down to 21%. The Police Pension Association has asked their firm of actuaries to come to the Ccuncil meeting to explain a proposal called the Hewitt Plan. He then turned the Meeting over to Ken Wilkinson. Mr. Kenneth Wilkinson� President of the Fridley Police Pension Association, said that �n 1969 the Guidelines Act overtaxed the privaCe pension plans throughout the State of Minnesota, and it has bee❑ a battle since Chen. It seems to them that one alternate rather tha❑ reduce the benefits would be to go the route of the Hewitt plan or something similar. This plan would change the requirements of the Guidellnes Act, and would not mea❑ a reduction in benefits. Mr. Wilkinson then introduced Mr. Ed Delahanty of Aewitt Associates, and said that the Police Pension Association hopes that after hearing the presentation, they wi11 have a favorable response and pass a resolution endorsing the HewiCt plan, as was done by the Minneapolis City Council. � Mr. Ed Delahanty referred to the memorandum w6uch outlines the Hewitt Plaa put out by Hewitt Associates dated 11-20-72 (M-837-30). The first point is that before the Guidelines Act there was a law which restricted pension plans to certain asset accumulations. Th.ts means that a11 pension plans had to function on a"pay as you go" basis, and there were no reserve funds SPECIAL COUNCIL MEETING OP NOVEMBER 27, 1972 PAGE 2 As a result of the requirement for advance funding, there is a substantial , increase zn costs. In the City of FridLey there is no one receiving benefits at this time. Mr, Delahanty continued that the second page of the outline gives some of the terminology used in talking about pension funding. Normal cost is that percentage of pay required as a contribution from starting age to retirement age to fully fund a11 expected benefits. This is based on asumptions from experiences with past history being pro�ected into the future. When the plan is looked at on sn actuarial basis, if it was paid for every year the pen�ion plan was in existence, it would be fully funded, however, in most cases, there would be a deficit 6rought about because the fu11 amount was not paid, or because for instance, if a man were to start when he was 25 and the pension plan go Lnto force when he was 35, this would be a 10 year deficit to be made up, private pension plans pay the normal cost plus a percentage of the deficit to amortize the deficit over a period of so many years Mr Delahanty said that page �'k3 shows a graph illustrating this point. On Page �k4 &��5 are the differences between a private corporation pension and that funded with tax dollars. The basic d�.fference between these two is the question of stability The question must be asked how stable is the private corporation versus the stability of a governmental agency? The amount of stabLlity would determine the amount of needed reserves. A private cotporation is sub�ect to the many whims of private enterprise and there is a much greater chance that it would fail and go out of business. That same chance of going out of business , does not exist for the City of Fridley The Federal, State and Loca1 Governments do not need as much reserves or collateral, because that would only Ue used Lf the business were to fail, and there is not much chance of that Mayor Liebl commented that the Guidelines Act seems �ust reversed of that premise, the deficit Ls tremendous. Mr. Delahanty said yes, and as a taxpayer in the State of Mtnnesota, he felt it was an outrage. He continued that the Social Security program is an example - there is almost zero reserves and if they were to stop collecting money, there wouLd only be enough on hand to pay those people already receiving payments for 6- 9 months, and there would be ao provision for those still worlcing. This Ls to be compared with a private company, if they were to go out of business, there would be enough money to pay for everyone already retired plus those sti11 working Local governments would certainly lean more towards a Social Security plan than towards a private corporation plan The City Manager said that he would have to disagree--a local government does not have an unlimited ability to generate income There has been a big taxpayers revol,f across the country and the State Legislature has put a levy limitation of 6% on the 1oca1 governments. There is an ultimate 1�mit to what the taxpayers can, or wL11, bear. Most pension plans are based on the fact that reserves earn money and help defray the cost, the Hewitt Plan loses that. Mr. Delahanty said yes, but the reserves will not be touched unless you go out of busLaess The City Manager commented that he had done a thes:s paper on this question, and he had found that most , public pension plans are conceived on the basis of the private plans. He asked if there is any swing away from this and toward the Hewitt proposal, or something like it7 Mr Delahanty replied yes, the concept to fund private pension funds is not appropriate for public plans. You must look at the amount of money needed and compare it to the reserves needed � SPECIAL COUfdCIL MEETING OF NOVEMBER 27, 1972 PAGE 3 Under the Hewitt PLan, the reserves are built up to a point 10 times greater than the ultimate benefit rate, tlien held at that level forever, with enough put in to pay the benefits. Under the GuidelLnes Act, thLs continues to grow. Mayor Lieb1 asked Lf there was any citp in the State of Minnesota that meets the Guidel�nes Act. Mr Delahanty said that everybody has 10 years to reach the maximum contribution, but as far as he knows they are meeting the payments currently required. MZnneapolis has met their goa] for tlze last two years, next year they are in trouble The City Manager asked if someone on the Pol�ce force in Minneapolis were to bring a lawsuit xe- quLring them to fund along the Guidelines Act, would that lawsuLt be suc- cessful� Mr Delahanty said he believed it would 6e MinneapolLS has looked at the Hewrtt Plan and agrees with tlze pxinc�ple. Mayor Liebl said that it seemed that the Guidelines Act was written so there would be money in case the whole Police Depaxtment was wiped out Mr Delahanty saLd no, it was written more on the basis oI if the City were to go out of operation, they would eti11 have to pay a11 the reCired men plus a pension to those men still working when they retixed. He added that there are some death benefits provided for in the plan also Mayor Liebl said there are 23 men on the force now, and it will go to 27 in 1973. Does the accrued liability increase or decrease7 Mr. Delahanty ' said rt would stay the same To arrLVe at the percentage of payroll needed, some basic assumptions are made, such as the ultimate pro�ection of qu�ts, new hires, mortalLty, etc, and are all calcuLated to arrive at what the benefit cost would be. In the case of Fridley the cost level would be 48% of payroll. The maximum benefit payout is about 40% plus an 8% in excess of benefit payouts paid for 50 years, which would develop a reserve of 10 times the benefit payouts. Mayox Lieb1 asked if these percentages in- cluded the escalator clause and the currenL age of retirement and Mr Delahanty replied yes, but the percentage caould not reach that level until the lOth year He added that the City of EridLeq wi11 buiLd up more in security than Minneapolis wil1, the total reserve will build up very fast. The FrLdley force is rather a young force. Mayor Lieb1 said that it seems that 21% (FrLdley's current payment) would be sound and would amount to a considerable amount of money, but accarding to the GuidelLnes Act, it is not Councilman Breider asked for a hypo- thetical exampLe of how the accrued 1Lability is arrived at Mr, Dela- hanty said �f, for instance, a man worked from the time he was 35 until he was 65 for $1000 per year After he is 65, if he would live for another 15 years, and if he were to get a pension oL $1000 a year, there would have to be on hand 15 X$1000 =$75,000. This would mean that $500 per year would have to be set aside for him in order for him to have the $15,000. The problem in looking at these plans in 1970 is that some of the men have alxeady been working for a company for some 10 - 15 years so this is a ready-made deficit He added that �n theLr computations, the inter�st rate is already buL1t in Councilman BreLder asked how much is in the fund now. Mr Sohn Anderson replied about $280,000 Mayor Lieb1 asked if Lt was agreed to change the setirement age from 50 to 55 or if the escalator clause was dropped, wouldn't that affect the Guidelines Act? Mr Delahanty replied yes, the �a �! ,�1 � , , _, SPECIAL COUNCIL MEETING OF NOVEMBER 27, 1972 PAGE 4 cost requirements for tne pension plan would drop each year. He ex- � plained that the escalator clause means that if a man is retired at so much money, with every raise the rest of the active force gets, he would get that same percentage of raise in his retirement pay. The City Attorney raised the issue of the 6% that was recezved Ln the form of State Aid. He said thLS was the first he was aware of that form of contribution into the fund. Mr. Delahanty said that a portLOn of the automobLle insurance is turned back to the municipalities in the State, based on a uniform formuLa. The Finance Director said this is something new, and Fridley received the first check last week. It is about 6% & amounts to about $21,000. Councilman Breider asked if that amount is included in the 21% employer share The Finance Director replied yes, this zs how the budget had been prepared The budget has been approved by the Council for 1973 on thLS basis Councilman Breider said that Fridley has commit,ted 21% of the payroll. If an ofEicer earns $10,000 a year, 21% of that is $2100 plus the employee share of 6% would amount to $2700, this amount over a 20 year period would moun.t up to quite a big chuck of money and would be earning interest besides. Mr. Delahanty said that would not be true, principally because that mans' salary would probably double over that 20 years. Councilman Breider said that there wouLd also be those that terminate before they are eligible to draw any benefits Mr. Delahaaty then drew a graph on the blackboard illustrating the benefLts of each plan and why Fridlep � would fa11 behind contrLbuting only 21% of payroll The City Manager asked what would Fridley's obligation be under the Hewitt P1an when built up to the final step. Mr. Delahanty replied at the 10th year it would be 48%, under the Guidelines Act it would 'oe 64%. The question was raised what was the police payroll now, and OfficEr W'tlkinson said it was $269,500. Councilman Mittelstadt added that at a 5% raise�every year� by 1980 it would amount to $398,000. 16% (the difference between Hewitt - 48% and 64% - Guidelines} of that amount is over $40,d00 that would 6e saved Mayor Lieb1 asked xf the Hewitt formula is followed, would it meet tkte GuidelLnes Act. Mr, DeLahanty replied no, if the Hewitt act is passed the Guidelines Act wouLd be out The City Manager said that the City share would actually be 36%, not 48% because 6% is an employee share and about 6% is received itom State Aid, Officer Wilkinson said that thaC check for $21,D00 he thought should have gone direct7y to the Police Pension fund rather than the City of Fridley. He asked if that amount was deducted from the City's share of the percentage. The City Manager said that up until the check was received, it was somewhat of a mystery what the amount of the check would be The City Council has not established a policy on how they wish to utilize this money. Officer Wilkinson said that he did not believe the purpose of the money was to be given to the City, but was to be used in funding for cities of the first & second class, and was to be used by the policF agency and paid directly to the Police Pension fund, and should not have gone into the city funds It was pointed out that al1 monies received by the City must be recorded on the City books SPECIAL COUNCIL MEETING OF NOV�MBER 27, 1972 PAG� 5 � Mayor Liebl asked if there would have to be additional tax money to im- plement the Hewitt plan. Mr Delahanty said yes, and added Yhet Minnea- polis and St. Pau1 have passed resolutions endorsing the p1an, he did not know what other cities have. He said that under the GuLdelines Act, todays taxpayer is further burdened by heavier payments in the future The Hewitt Plan stays the same at 48% He said that it seems to make sense to him for the taxpayers to pay the same today as in future years The payment in 1980 would be the same as in the y�ar 2D00 Under the Guidelines Act the 1980 payment would be higher thaa in the year 2000. Councilman Breider asked how they arrived at the 48% and what would happen if there were more men on retirement than working. Mr Delahanty said that would never happen following the mortality rates as we know them Council- man BreLder asked how many there would be in the next 10 years Officer Wilkinson replied 4 or 5 He added that even if a man puts in for 20 years, he cannot get any benefits until age 50. The CLty Attorney saLd that ]0 years from now experxence may show that the 48J may be liigher os lowex than necessary so thai amounC could vary, based on actual experience Mr. De1a- hanty said yes, the same is true of the Guidelines Act The best estimate they have now is 48%, that could change in the event a cure is found for �cancer & heart-dssease> If their basic assumptions are true, then you wi11 never pay out more than 4S( so the reserves wouLd never be touched The City Manager asked i£ Mr Delahanty felt that this plan would get � through the Legislature. Mr. Delahanty said yes, this, or a similar plan The Legislature is taking the Hewitt plan serLOUS1y Yt has been studiec _ to see if it is Cechnically correct and a memo has bee❑ written back stating that they found it valid. The basic question that must be answered is whether you feel the resexves are needed ac the level provided for under the Guidelines Act They, at Hewitt, feel they are not CouncLlman Utter asked how the Police agencies in the State of Minnesota feel about the Hewitt plan. Mr. Delahanty said that even though the plan would destroy some funding and there would not be as much in reserve, he has not found any police officer that has said they did not like the approach Mayor Lieb1 said that the City of Fridley would ❑ot be in a position to finance the 1969 Guideliaes Act and he thouglrt it was Lrresponsib]e of the LegLSlature to put in force such a p1an, then put a limit on the ]ocal tax structure This would seem to be a conflict Councilman Starwalt said that in �k4 of the memo Prom the League �f Minnesota Municipalities, they point out that the whole intention of the Hewitt Plan 1s that the -deficit need not be paid off, and as long as Fri�ley stays zn existance no one need worry The City Manager said that the basic theory of private pension funding is that whea a man works for you, you put so much Ln Che bank for him and when he retires, that money will be waitLng for him. He said he is not as sure of the government's ability to come up with the necessary funds as Hewitt Associates is � Councilmaa StarwaLt asked what was his guess that the Hewitt P1an would be legislated Lnto law. Mr Delahanty said that was difficult to predict, however, between this session and the next session there will 6e a lot of pressure to change the Guidelines Act both from the Police Pension Associations and also other states as they realize that they do not need that kind of reserves sa�� SPECIAL COUNCIL MEETING OF NOVEMBER 27, 1972 PAGE 6 Councilman Starwalt asked for an explanation of what happened in Mankato � and Councilman Breider asked why the combined PERA and o1d plan wouLd be more expensive than the Hewitt P1an. Mr Delahanty explained that Lnstead of paying interest on the deficit, the entire deficit has to be paid off in about 25 years because those people will actually be going out of existence. They would be under the present plan and not PERA so the whole defzcit would have to be paid. Mayor Liebl added that there would be a morale pro6lem between the men beyond control i[ some of the men have the present plan and some were under PERA. The City Attorney said that Mr, Delahanty said that if there was a conversion and the new memhers went under PERA the defLCit would have to be retired, yet in the rest of the prese�tation he has said that the de.Eicit can be ignored, why? Mr. Delahanty said because the payroll for active people supports the group retired, so if 20 people retired there wouldn't be anybody paying into it. Mayor LLeb1 said that his plan would make it fiscally possible £or this community to make a pens�on fund work. It would make the fund sound so the people bargaining would get their pension. The City Manager said that there is still a problem with the Council's present policy Under the Hewrtt Plan, with 6% contribution from the employee and 6% from the State Aid, then there is sti11 36% left for the City to fund. This Council has said to date they will put in 21%, so there will have to be more put �n, or a reduction in benefits Mayor Liebl said that a pension fund should not be negotiated annually ' Officer Wilkinson said no, it hasn't been. May� Liebl said that it should be on a 3- 4 year basLS to give the Administration a chance to fund rt without overburdening the taxpayers. If it �s done on an annual bas_s, there would be constant turmoil. He asked if the age of retirement was changed and the escalator clause dropped, would the plan fit the Guidelines Act� The Finance Director said yes, it would then be about 16% ]ower. Officer Wilkinson saLd that he was afraid that if a person retires at, for 1nstance, $500 a month, 10 years from now it would not be worth as much as it is now. Mayur Lieb1 said that in about 1966 the City Cuuncil gave the Policemen theLr pension p1an, and he did not think there was as good a plan in the country. This is money the Policemen properly earned and they expect to get it when they retire, He did not think the plan should be negotiated every year,but the formula would have to be changed if everything else goes up. He said he has been in thLS country for 18 years, and his wages have not doubled The City Manager saLd that when he looks at negotiating, he thinks of it slightLy differently He said he looks at a certain service, be it police, parks, fire etc , and finds the total cost. He would take into account a man's saLary, social security, sick Leave, vacation and pension plan These thLngs are constantly being compared wLth other municipalities. There is nothing sacred about a pension p1an, it is a fact and has to be analyzed , by makLng comparisons A11 these factors make up a total cost package for an employee. If this discussion were with a private company and a un�.on, the peasion plan would be a factor in a total cost package � � ' SPECIAL COiTNCIL MEETING OP NOVEMBER 27, 1972 PAGE 7 Mr. Sim Hill, Assistant City Manager/Public Safety Director, said that Mr Delahanty had spoken of Police and pire PERA as onLy about z as beneficial He said he dLd not think so and pointed out that there are many ma�or Police Departments wLth 3- 4 pensLOn plans in operation with pERA being one of them PERA does have certain advantages. Mr. Delahanty said that the PERA con- tribution is 19%, the HewitC plan Ls 48% and the Guidelines Act wouJd be 6�;�%. PERA pays 50% of average career salary, Hewitt would pay 46% of the final average_saLary�escalated. Mr. Delahanty said that the assets under PERA would cover 96% of the liability, and under the present plan the deficit ,is about 85% of the plan, or about 15% funded He then offered the following table on the blackboard, Benefit after 20 years Vesting Employee Contribution Tota1 Cost percentage Retirement Age FRIDLEY 46% of final pay esca- Lated. 20 yrs =100% 6% 48% or 64% 50 PERA 50% of career average pay. 10 yrs =100% 7% 19% 55 The Police & F ue PERA fund has $26 Million rn assets for 2800 peop]e and is 96l funded The Fridley plan has $280,000 in assets to cover 21 people aad is 15% funded. Mr Hi11 said that there seems to be some confuszon in the minds of the Policemen, they think that money should have beeu sent directly to their treasurer The Finance Director said it wL11 be, but it sti11 has to be shown on the Crty books, so there wlll be a record that the money was received Mr. Hi11 said that it seemed that the 6% from the State has been figured into the 21% of employer contribution There will be another check for about $21,000 for 1973 and he wondered how that was going to Ue figured The Finance DLrector said that iC is the City's obligation to turn the money over to the Treasurer of the Police pension Association, but whether it will be fLgured as part of the City's 21% has not been answered as yet, so regardless the pension Association is assured of the employer's share of 21% The City Manager added that he had received no direction to the con- trary Officer Wilkinson said that when the 21% was settled upon, Lt was assumed that anything over and above 21% would not be included in that 21% Mayor Lieb1 sa�d yes, this was so that the Counci] would know �ust how much they would have to budget to pay in the future Councilman Mittelstadt .added that anythLng additional goes into their treasury Officer WilkLnso❑ said, as to negotLating the pension plan every four years as the Mayor mentLOned, they would 1Lke to set up a long range plan to bring �.t down to the 21% 1eve1, and that at some point in time there should not be a need for further negotiations The City Manager said that on behalf of the pension AssociatLOn, they have been dealing Ln good faith in trying to reach a solution, they feel Yhe £unding is unrealistic also Officer Wilkin- son saLd that if the Hewitt plan or one 1Lke Lt was passed in the next session of the Legislatuxe, that would be a step in the right direct�on p4ayor Liebl asked the PensLOn Association if they are asking the City Council to pass a resolution endorsiag the Hewitt plan and Officex Wilkinson replied yes ,� �:ti � _� }�i ��I i SPECIAL COIINCIL MEETING OF NOVEMBER 27, 1972 PAGE 8 The City Manager suggested that before the Couacil takes any action, perhaps they should hear from the Legislative Retirement Commission or Dr Franklin Smith of Stennes & Associates. They could make a presentation to both groups. Dr. Smith was unable to come [o the Meeting tonight. The Mayor and Council thanked the Members of the Police Pension Association and Mr. Ed Delahanty of Hewitt Associates, for coming to the Council Mceting this evening to explain the $ewitt Plan to the Council and for this informal discussion. ADJOURNMENT: MOTION 6y Councilmatt Mittelstadt to ad�ourn the Meeting. Seconded by Council- man Utter. Upon a voice vote, all ayes, Mayor Lieb1 declared the Special Council Meeting of November 27, 1972 ad�ourned at 10:D0 P.M. Respectfully submitted, '�c��'r � �✓L�`/'�-eG?�-' ,Tuel A Mercer Secretary to the City Council ►! ''r+Q4�I� �+V ► ' Frank G. Liebl Mayor ' 1 '