COUNCIL OF THE CITY OF PHILADELPHIA2 COMMITTEE OF THE WHOLE - - - Room 400, City Hall4 Philadelphia, Pennsylvania Wednesday, April 15, 2009, 10:15 a.m.5 - - - Res. 090226 - Approval of revised Five-Year7 Financial Plan covering FY 2010 through 2014. Bill 090212 - Capital Program for six Fiscal Years 2010 to 2015, inclusive.9 Bill 090213 - FY '10 Capital Budget.10 Bill 090214 - FY '10 Operating Budget.11 COUNCILMEMBERS PRESENT: Anna C. Verna, Chair Jannie C. Blackwell14 Darrell L. Clarke Wilson W. Goode, Jr.15 Bill Green William K. Greenlee16 Curtis Jones, Jr. James F. Kenney17 Joan L. Krajewski Donna Reed Miller18 Brian J. O'Neill Blondell Reynolds-Brown19 Frank Rizzo Maria Quiñones-Sanchez20 Marian B. Tasco - - -22 V A R A L L O Incorporated23 Litigation Support Specialists 1835 Market Street, Suite 60024 Philadelphia, Pennsylvania 19103 215.561.2220 215.567.267025 2 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1
Good2 morning, everyone. This is a continued3 public hearing of the Committee of the4 Whole.5 And the first department to6 testify?7 MR. McPHERSON: Is the Board of8 Pensions and Retirement.9 (Witnesses come forward.)10
Please14 identify yourself for the record and15 proceed with your testimony.16
Okay. Good morning,19 Council President Verna and members of20 City Council. My name is Gwendolyn Bell,21 and I'm Executive Director of the Board22 of Pensions and Retirement. 25 3 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 The Board of Pension and2 Retirement has submitted a budget request3 for Fiscal 2010 for $10,604,000. This is4 a decrease of $6,000 from Fiscal Year5 2009. 18 ... 22 Our goal is to continue to reduce23 overtime and improve service to24 participants. 5 For the disability process, a6 staff member has been dedicated to be the7 liaison between the Pension, Law, Risk8 Management, and the Medical Panel to9 ensure that processing time for10 disability applications are reduced. 13 New communication procedures14 have helped to reduce overpayment15 situations that previously occurred when16 the Board was not aware of an award of a17 Worker's Compensation payment. 24 An alternate has been added to25 5 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 the Medical Panel co-chairs to ensure2 that there will not be a delay in3 processing applications. The number of4 specialists working with the Medical5 Panel has been extended to areas of6 specialties where we've seen an increase7 in the nature of the disability8 applications. 12 In regard to the retirement13 seminars, the workshops have been14 continued to be attended at a capacity of15 60 persons per session. 13 In regard to technology, the14 Board of Pensions has imaged all of the15 retired invested files as well as16 incoming mail. 23 Although the Department of24 Technology has recommended that the25 7 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 current pension payroll system be2 replaced, we are currently still3 requesting information to locate the best4 Oracle-based payroll system. 10 MR. 9 percent for the fiscal year12 ending June 30, 2008. percent. While the performance has been6 disappointing, several actions taken by7 the Board have preserved value. 13 In late 2008, the Board made a14 strategic decision to conservatively15 invest the proceeds from the City's16 annual contribution in light of the17 uncertainty in the market. 25 9 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 The Board taken actions to protect the2 Fund in these turbulent times while, at3 the same time, positioning it to4 participate in an eventual rebound in the5 markets. Analysis shows -- has shown that9 the median expected earnings rate for10 public funds is 8 percent. 25 10 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1
Thank2 you.3 At this time, the Chair4 recognizes Councilman Goode.5
Thank you,6 Madam President.7 Good morning, Ms. Bell and8 Mr. McDonough.9 One of the most challenging10 problems we have in this city, of course,11 is the health of our pension fund, and12 your job is to protect the Fund. In13 protecting the Fund, do you view your job14 as protecting the people who will benefit15 from the Fund? In other words, let me16 describe what I'm talking about.17 Let's say there were four18 classifications: Retirees being one,19 vested workers being a second,20 non-invested workers being a third, and21 the fourth being future workers. Should22 all four classifications be treated the23 same in terms of protections?24
Okay. You're asking25 11 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 if all... You're asking if all --2
Four of those3 classifications should be treated the4 same in terms of protection.5
Yeah. This is a6 defined benefit plan, so the benefit is7 calculated based on a person's years of8 service. They would have to qualify by9 age, but it's based on years of service10 and final average compensation.11 So in regard to your question,12 they are all treated the same. And when13 the actuary [indiscernible] the reports,14 he takes into account that the active15 members and the vested members will be16 receiving a benefit at some point.17
So in18 addition to actions that the Board may19 take, do you make recommendations to the20 Administration on possible legislative21 action that should be taken?22
No, we don't because23 the benefits are determined by labor24 contracts.25 12 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1
So at the end2 of the day, you're not asked for your3 advice, nor do you offer your advice.4
No, we're not asked5 for advice on how the pension benefits6 are calculated; those benefits are7 determined through labor negotiations.8
You're11 welcome.12 The Chair recognizes Councilman13 Rizzo.14
I think we're15 all concerned about the funding leveling16 of the pension right now. It's at 55; is17 that correct?18 MR. McDONOUGH: Well, that's --19
Or is it20 lower than that since the latest numbers?21 MR. McDONOUGH: The --22
The funding23 now.24 MR. McDONOUGH: -- last official25 13 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 number is 55 percent as of July 1, 2008.2 We will not have another number until3 July 1, 2009.4
So, in other5 words, there's no mathematics based on6 July? It's kind of a -- there's been a7 significant change in the market, so it8 should be -- do we anticipate that it's9 going to be obviously in worse shape,10 right?11 I mean, isn't there somebody12 that does these numbers that can13 speculate what they're going to --14 analysts where they're going to be, and15 not have to wait for an official report?16 MR. McDONOUGH: Well, I think17 it's safe to assume that it's going to be18 lower, given what's happened with the19 investments, but the actuary calculates20 the actual funding ratio.21 And I can speak to the22 investment side and the market value of23 the investments, but I can't speak for24 the liability side, which is calculated25 14 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 by the actuary.2
After the close of5 the fiscal year, June 30th, the actuary6 gets numbers probably sometime in August7 and works on it through the summer. So8 it would be early fall that he would have9 those numbers ready. I would think the10 earliest would be September.11
We're all12 concerned about what that number as going13 to be; am I correct?14
It's not16 going to be good.17 MR. McDONOUGH: Barring a18 recovery in the markets over the next,19 you know, three months of the fiscal20 year, it will be lower.21
Thank you,24 Madam Chair.25 15 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1
You're2 welcome.3 Can you tell us what the cost of4 the new payroll system is and when it5 will be completed?6
Okay. We have7 estimates. And assuming the payroll8 system would take three to four years to9 implement, we've budgeted approximately10 $2 million a year for the first four11 years and a-million-5 for the last year.12 It would include implementation13 and follow-through and purchase of the14 off-the-shelf packet, so it would be15 about 9 million over five years.16
Can17 you tell us, how does the Board of18 Pensions select its money managers?19 MR. McDONOUGH: Sure. The20 majority of the opportunities are awarded21 through the public posting of an RFP22 through the City's e-contract Philly23 website. The notices of the24 opportunities are posted there for a25 16 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 minimum of 14 days. The responses are2 evaluated by the investment staff and3 their consultants and presented to the4 Board.5 The Board will then typically6 select a subset of the responses to hear7 presentations from, and then they will8 make a selection based on the9 presentations that they hear.10 There's a small subset that do11 not go through e-contract Philly because12 there's no way to compare among different13 providers, so they are brought to the14 Board one at a time, and the Board hears15 presentations and makes a decision as to16 whether they want to invest or not.17
Can18 you tell us what the performance19 standards are that you apply to your20 money managers?21 MR. McDONOUGH: Yes. The22 majority of the money managers are23 assigned a benchmark based on their24 investment style. So, for instance, a25 17 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 large-cap manager might be benchmarked at2 the S&P 500, which is the universe of3 stocks that they're picking from. Their4 performance is evaluated against that5 benchmark on a monthly basis. On a6 quarterly basis, we provide the Board7 with an in-depth analysis of their8 performance, with explanations of why9 they either outperformed or10 underperformed the benchmark.11 If a manager underperforms their12 particular benchmark over an extended13 period, we'll provide an in-depth14 analysis to the Board, with a15 recommendation as to whether to retain or16 terminate that manager.17
Thank18 you.19 Could you give us a list of your20 managers and what they were paid in 200821 and their estimated payments for 2009?22 MR. McDONOUGH: Yes. May I23 provide that to you after the meeting?24
That25 18 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 would be fine.2 Why aren't the money managers3 paid through Appropriations?4 MR. McDONOUGH: Uh... As you5 know, they're paid out of the assets of6 the Pension Fund. That's how it's been7 handled since I've been involved with the8 Fund. I imagine it would be a strain on9 the budget to pay the manager's fees out10 of the General Fund.11
Not12 the Pension Fund? Wouldn't paying13 through Appropriations more accurately14 reflect the true costs of the pension15 system?16 MR. McDONOUGH: Well, from a17 performance perspective, we report the18 performance of the Fund on a net-of-fees19 basis, so we take into account the fees20 that are paid to the investment managers.21 So I think by doing that, we're22 accurately reporting the true cost of the23 Pension Fund from an investment24 standpoint.25 19 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1
Okay.2 The Chair recognizes Councilman3 Jones; is he here?4 MR. McPHERSON: Yes.5
First, let me10 thank you for promptly responding to my11 letter of last year, where you detailed12 all of the answers that I asked for in an13 informative way. I even understood it;14 you didn't do it in a fancy, formal15 finance language so that a layperson16 could understand it, so I want to thank17 you publicly for that.18 A couple of things that kind of19 jump out at me. If we are determined to20 be a distressed fund, in your opinion,21 what are some of the things that we are22 open to be able to do? What would it --23 would we renegotiate payment into the24 Fund, people would not get as much25 20 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 benefit coming out of it? Can you lay2 that out for us as a body here?3 (Mr. Dubow approaches witness4 table.)5
As far as the benefit6 payment goes, we don't have any input7 into what the unions and the City agreed8 to. Once it's determined, we administer9 it. So, um, you know, those are10 something that we don't have an option of11 any consideration of.12 So you're saying can we reduce13 the amount for people --14
No, I'm15 asking you: Do you consider this a16 distressed fund?17
I don't believe we18 have anything from our actuary that19 states that we are in a distressed fund.20
And so, in24 your opinion, on the record, you don't25 21 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 consider yourself a distressed fund?2
I would have to3 check, get information from the actuary,4 because I have no information that we are5 in that category.6
Excuse9 me, Councilman. I see that Mr. Dubow10 came up to the witness table. I do11 believe he may want to add something.12
I wanted to respond13 to your question about distress. The14 determination about whether the Fund is15 distressed is made by the Pennsylvania16 Employee Retirement Commission.17
No, I was18 just asking her opinion, sir. That's19 all.20
You know, I thought24 you wanted the information.25 22 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 So that the determination is2 made by them, and it's based on a3 calculation of a number of factors,4 including your funding percent, the5 status of your budget. So they're in the6 process of reviewing that to make a7 determination.8
Again, do12 you -- don't look at him. You have --13 you're at the table now. Do you consider14 it a distressed fund from your15 professional observation and management16 of this fund?17
I -- I can't answer22 that question. I have not received any23 information --24
Okay.25 23 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1
The6 Chair recognizes Councilman Kenney for a7 point of order.8
Point of9 information. Thank you, Madam Chair.10 It's a point of information.11 I have a question. Could12 someone define a distressed fund for me13 so I'll know what the term -- I kind of14 have an idea of what a distressed fund15 is. This fund isn't distressed as my16 personal fund since you're down 2017 percent and I'm down almost 40, so I may18 be more distressed than you.19 But can you identify or define20 what a distressed fund is?21 Thank you.22
Yes. There are23 actually -- according to the Pennsylvania24 Employer Retirement Commission, there are25 24 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 different levels of distress, which2 means -- and I guess the best way to say3 it is how troubled your fund is.4 And the highest level is5 severely distressed, which would be your6 fund is in severe trouble, which means7 it's poorly funded, like ours is. And8 that's what PERC is trying to determine9 now.10
As of July of 2008,14 it was 55 percent, which is the last15 official funding.16
A pension adjustment19 fund is the calculation of the20 eligibility for members to receive a21 one-time adjustment -- not a22 cost-of-living increase, but a one-time23 adjustment based on a calculation24 performed by the actuary.25 25 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 And we just made a payment in2 February, where members of the Pension3 Fund received a one-time adjustment.4 They also received one last May.5
And that6 adjustment is for retirees that have been7 retired for more than ten years?8
And there is10 a consideration before this body to11 adjust that in some way?12
And you're18 not familiar with how it would impact19 your payouts?20
There have been some21 questions about making adjustments on a22 more regular basis. Um...23
So the24 difference is, as I understand it, we25 26 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 currently use a ten-year cycle to2 determine if the market did well; and3 based on that ten-year gain or loss, we4 make that PAF distribution to members?5
Yeah. There was6 recently a change by Council that reduced7 the amount of the funded ratio, because8 based on our 55 percent, we would not9 have paid an adjustment. So that was10 eliminated. Um --11
So we went12 from a ten-year cycle, which is the13 natural cycle by which most markets are14 judged, ten years, to a five-year15 evaluation, which would put us in a kind16 of a negative situation, and our payout17 to these pensioners would not have18 happened. Is that a fair statement?19
There are two things20 that the legislation would do. One was21 actually -- the reverse would have been22 --23 (Timer bell rings.)24
It would from a25 27 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 five-year cycle to a ten-year cycle,2 which the legislation would call.3 And the second part is to4 require the Fund to hit a certain -- to5 restore the funding percent that had been6 in the legislation earlier and to require7 that the Fund be at that funding percent8 before a distribution was made.9
Based on14 information that we have about the15 market's performance, how would that16 affect pensioners if you had to make that17 payout tomorrow?18
Well, because of the19 losses that the pension -- you have to --20 the other part is, you have to exceed the21 Fund's earning assumption by at least22 percent to make the distribution.23 Since the Fund, through24 February, had lost 26 percent, it's25 28 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 unlikely that there would be any2 distribution during the smoothing period3 for five years under the current4 legislation and for longer if the5 legislation we proposed was passed.6
Just real7 quick, and I'll end.8 The payout we made to retirees,9 the last payout, was how much?10
The last payout was11 for last May and this February,12 $40,530,000.13
That was19 distributed to approximately how many20 pensioners?21
But if we24 changed this law and we had to make that25 29 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 same payout tomorrow, they would have2 gotten nothing, correct?3
Well, even if we4 don't change the law, because of what's5 happened, they would not be getting6 anything. If we do change the law, it7 would likely extend the period of time8 for which they didn't do anything until9 the Fund is at a healthier funding10 percent.11
So going into12 the future, instead of a five-year window13 of analysis, we are talking about a14 ten-year window of analysis, which would15 negatively impact the pensioners by way16 of PAF and payouts based on fund17 performance, yes?18
It would reduce the19 likelihood that payouts went out, it20 would increase the assets of the Pension21 Fund 'cause those payouts wouldn't go22 out, so the fund would be healthier.23
The Pension24 Fund would do better and perform, but the25 30 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 payouts to the intended pensioners would2 probably be less.3
Well, the payouts to4 retirees who would have gotten pension5 adjustment payments would be less. The6 Fund wouldn't be healthier, which would7 make it more likely to make payments to8 everybody over the long haul.9
You're12 welcome.13 The Chair recognizes14 Councilwoman Tasco.15
Thank you.16 In the information that you17 provide to the President relative to the18 money managers, I'd like to also know how19 many of them are women and/or African-20 American or other minorities.21 MR. McDONOUGH: Certainly.22
All right.23 Do you have a overall money manager,24 someone who's in charge of all of those25 31 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 money managers? Do you have a -- what do2 you call them?3 MR. McDONOUGH: Consultants?4
A5 consultant.6 MR. McDONOUGH: We have several7 consultants.8
You have9 several?10 MR. McDONOUGH: But we have one11 called a general consultant that oversees12 the entire plan.13
Okay. Who14 is that?15 MR. McDONOUGH: Fiduciary16 Investment Solutions Group.17
Okay. And18 are they subjected to responding to an19 RFP?20 MR. McDONOUGH: Yes.21
So they22 have to go through an RFP process to be23 selected?24 MR. McDONOUGH: Yes.25 32 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1
Oh, one6 other question since my time -- I have7 another question.8 In terms of the Fund performance9 or the level-of-funding ratio, how does10 that compare with other funds in other11 cities, large cities, the level of12 funding for these pension funds?13 MR. McDONOUGH: Our level of14 funding is low compared to the average15 for the very large public fund.16
What's the17 average?18 MR. McDONOUGH: In terms of the19 funding ratio?20
Mm-hmm.21 MR. McDONOUGH: I believe it's22 around 80 percent is the typical average23 funding ratio.24
Can you25 33 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 name any cities that have a 80 percent2 funding ratio?3 MR. McDONOUGH: I don't know any4 offhand, specific cities.5
Okay. Do6 you have that information?7 MR. McDONOUGH: I believe I have8 it for state plans. It's a little bit9 harder to get the information for10 specific cities, but I do have reports11 that show the funding levels for state12 pension funds?13
Okay.14 Well, their pension funds would be15 somewhat different from a local -- from a16 city, wouldn't they? Wouldn't they be17 larger?18 MR. McDONOUGH: They're19 typically larger, yes.20
Mm-hmm.21 Okay. Thank you very much.22 There are a lot of variables23 involved in that.24 MR. McDONOUGH: Correct.25 34 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1
You're4 welcome.5 Councilman Kenney, you're next.6
Thank you,12 Madam Chair.13 Last year, the Pension Board14 presented testimony that it was well on15 its way to becoming a paper-free office,16 imaging all of its files. How is the17 journey going towards being paper-free?18
It's going very well.19 All of our retired files are imaged, all20 of our vested files and all of our new21 mail is now imaged.22 And as new information comes23 into the office, before it's dispersed to24 staff to act upon, it's put on the25 35 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 imaging system so that the counselors are2 able to go to the system rather than to3 have the file pulled.4 So it's going very well.5
We have in this8 budget eliminated two positions, but9 it's -- what it's done is shorten the10 period of time that the counselors have11 to spend to provide information during a12 counseling session.13
And then I14 think last year, also in a certain15 category, there was testimony that you16 went from seven to two or three positions17 last year as a result of having OCRed,18 and I think it was essentially counselors19 not having to go get files; you just20 didn't fill vacant positions in '09 as21 well.22
So how much25 36 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 staff do you have?2
And as a5 result of going paperless, how many6 positions were you able to eliminate7 through attrition?8
It's hard to9 determine if it's soley that, but I would10 say two.11
Well, you12 testified last year there were three or13 four.14
That was from last15 year to this year. In the current --16 from '09 to '10, it would be another two.17
Okay. And2 how much did it cost you to OCR all of3 the documents? Were you using current4 staff to do it?5
We're using current6 staff to -- no, we're sending out the7 documents to be imaged; they're picked up8 and returned when they're imaged.9 And we have a staff person10 that's in charge of our file room, who11 indexes all of these files, prepares them12 to be picked up, and keeps a log of them,13 and they're returned to us, so...14
If you could19 provide that to the Chair, please.20 Okay. I assume people have21 asked questions about asset managers, so22 I'll just look at that. I apologize for23 being late.24 Mr. McDonough, can you explain25 38 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 to us why, after issuing a Pension2 Obligation Bond in 1999, we have -- of3 the billion dollars, we have roughly the4 same assets that we had in 1999? What's5 the reason for the sort of -- the Pension6 Obligation Fund didn't catch us up?7 MR. McDONOUGH: Well, we're8 what -- what would be considered a mature9 pension plan, so we have more retirees10 than employees, active employees. And11 because of that, we pay out more in12 benefits than we receive in each year13 from the City through the contribution14 and through employee contributions.15 So in any year, when we do not16 exceed the actuarial assumption rate, you17 know, the assets are going to decline,18 we're running in that deficit.19
Right.20 MR. McDONOUGH: If you look --21 go back to '99, when the bond was issued,22 it took the Fund from 3.5 billion to23 about 4.6 billion. I believe by 2003, we24 were back down to 3.5 billion, so that,25 39 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 you know, 1.1 billion had been completely2 gone from the Fund.3 You know, I would caution that4 it wasn't specifically the billion5 dollars from the Pension Obligation Fund;6 it was just, you know, the money is7 fungible, it all goes to the same pool.8 You know, over that period, there's9 different reasons for declines in funds.10 You have the money you're paying out, you11 have investment gains and losses.12 I believe for that -- over that13 two-year period -- or, actually,14 four-year period, 60 percent of the15 decline in value of the Fund was due to16 paying more benefits than we were17 receiving contributions.18
Right.19 MR. McDONOUGH: In fact, over20 that period, I think the Fund performance21 was basically flat. It was about -- you22 know, it was slightly positive.23
So if we hit24 our 8-and-a-quarter now, new benchmark25 40 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 return, for the next 20 years, will we2 have enough funds in the Pension Fund to3 meet all of our obligations?4 (Timer bell rings.)5 MR. McDONOUGH: I believe if we6 consistently hit the assumption rate,7 whether it's 8-and-a-quarter or it's8 8-and-three-quarters, we would become9 fully funded around 2029, so that's10 approximately 20 years from now, yes.11
Okay.14 MR. McDONOUGH: I should clarify15 that. I believe it would -- it would be16 between 90 and 100 percent funded by17 2029.18
So what is19 the effect of the different changes we're20 asking the State to allow us to make on21 the health of the Pension Fund? Are we22 digging a deeper hole? Without these23 changes, when would you estimate,24 following 8-and-a-quarter, would we be25 41 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 fully funded?2 MR. McDONOUGH: I can't say what3 impact the changes will have on the4 funding ratio, whether it's 2029 --5
So 2029 is6 based on the current way it's operated.7 MR. McDONOUGH: Yes.8
-- in State12 law if we get them.13 MR. McDONOUGH: Correct.14
Could you15 please provide those differences to the16 Chair, please.17 MR. McDONOUGH: Yes.18
Thank you,22 Madam Chair. I need Mr. Dubow.23 (Mr. Dubow returns to witness24 table.)25 42 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1
Mr. Dubow,2 if you would be so kind as to kind of3 explain again -- and I know you've done4 it in your initial testimony early on and5 in the budget process. But explain to me6 exactly what we're asking the State to do7 and why we need them to do it.8
We are asking the9 State to allow us to change the10 amortization period for an unfunded11 liability. Right now, it's an average of12 20 years. We're asking them to allow us13 to take it to 40 years.14 And the primary reason we're15 asking them to do that is, it would save16 about $330 million over the life of the17 plan. And if we don't get that change,18 we would have to make other adjustments19 to the Five-Year Plan to balance.20
Would the21 extension of the amortization number22 affect any current pensioner relative to23 their monthly payments?24
It does not affect25 43 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 benefit payments in any way.2
And if you6 had to make a negative argument against7 it, what would be the negative side to8 extending the amortization?9
The negative side10 would be that you're extending your11 liability, so you would be paying them12 longer into the future.13
We could go back to15 one of the discussions earlier. One of16 the other things that will happen is, if17 PERC declares us to be really distressed,18 we'd then have to make changes to the19 Pension Fund to reduce our costs.20
That would produce22 savings over the long haul that should at23 least help balance out some of the24 increase in liabilities from stretching25 44 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 out the amortization.2
What's your6 reaction to some of the comments made by7 apparently -- well, not apparently --8 legislative leaders not from9 Philadelphia?10
They were consistent11 with the things we had been told in12 private before.13
Okay. So14 now that these individuals are known, we15 can see clearly who they are and who they16 represent and what positions they hold in17 both the Senate and the House.18
In the event20 of that worst-case scenario that we don't21 get from the State -- sales tax aside22 issues, just issue of pension right23 now -- what would be the reaction of the24 Administration if we stay at 20 instead25 45 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 of going to 40? What would be the2 impact?3
It would be a4 $330 million impact over the life of the5 plan, with a substantial increase in 20116 of well over a hundred million. So we7 would have to make cuts very quickly to8 compensate for the loss of that9 amortization.10
And 201111 would seem to me, if we're lucky, to be12 the time when we may be getting back on13 our feet nationally, you know '10, '11,14 hopefully sooner, but two years.15
So the17 potential of having the necessity to make18 a very large payment to the Pension Fund19 in 2011, at a time when the economy may20 or may not have rebounded, would be --21 how would you term -- what would you term22 that situation to be?23
That would be24 damaging.25 46 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1
Which would2 create the need to -- it would -- we3 would be required to make the payment,4 correct?5
So there7 would be no way around making the8 payment.9
And the11 payment -- the extra payment has to come12 out of the General Fund.13
Thank you,19 Madam President.20 While Mr. Dubow is still there,21 since he volunteered to come to the table22 on pension issues.23
I didn't think I'd24 get away that easy.25 47 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 (Laughter.)2
I asked3 Ms. Bell a question earlier which may not4 have been appropriate but may be5 appropriate, since the Administration is6 here, talking pension issues.7 If we look at those four8 classifications I described earlier --9 one being retirees, two being vested10 workers, three being non-vested workers,11 and four being future workers -- should12 there be a hierarchy in terms of13 protecting those different14 classifications?15 In other words, there's the16 issue of protecting the Fund and then17 there's the issue of protecting who the18 Fund is supposed to benefit.19
I guess the best20 answer is, we should ensure that all our21 retirees receive a pension and that they22 receive the amount that is consistent23 with the plan that they're in.24
But should25 48 4/15/09 - COMMITTEE OF THE WHOLE - FY '10 BUDGET1 there be a hierarchy in terms of who2 we're protecting? I understand3 protecting the health of the Fund, but4 should there be a hierarchy in terms of5 who we're trying to protect? And I'm6 creating those four classifications --7 retirees, vested workers, non-vested8 workers, and future workers.9
But should12 there be in hierarchy in terms of who we13 protect?14
Well, I guess16 you may not want to answer the next17 question then.18 If there were a hierarchy,19 should some classifications pay more to20 protect their hierarchy?21