COUNCIL OF THE CITY OF PHILADELPHIA BEFORE THE COMMITTEE OF THE WHOLE OPERATING BUDGET HEARINGS-CONTINUED - - - Room 400, City Hall Philadelphia, Pennsylvania Tuesday, February 15, 2000 9:35 a.m. - - - BILL 000005 - An ordinance adopting the operating budget for Fiscal Year 2001. PRESENT: COUNCIL PRESIDENT ANNA C. VERNA, Chair COUNCILWOMAN JANNIE L. BLACKWELL COUNCILWOMAN BLONDELL REYNOLDS BROWN COUNCILMAN DARRELL L. CLARKE COUNCILMAN DAVID COHEN COUNCILMAN FRANK J. DICICCO COUNCILMAN W. WILSON GOODE, JR. COUNCILMAN JAMES F. KENNEY COUNCILWOMAN JOAN L. KRAJEWSKI COUNCILMAN W. THACHER LONGSTRETH COUNCILMAN RICHARD T. MARIANO COUNCILWOMAN DONNA REED MILLER COUNCILMAN MICHAEL A. NUTTER COUNCILMAN BRIAN J. O'NEILL COUNCILMAN ANGEL L. ORTIZ COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center, Suite 600 Philadelphia, PA 19103 (215) 561-2220 386 I N D E X JOSEPH PERRELLO .............................. 388 JUDGE CERMELE ................................ 397 LINDA ORFANELLI, Director of Finance ......... 399 JOE HERKNESS, Executive Director, Board of Pensions and Retirement ................. 401 MARK BONAVITACOLA, Chief Investment Officer .. 413 VINCE JANNETTI, Secretary, Sinking Fund ...... 424 ROBERT DUBOW ................................. 429 JOE FARALDO, City Treasurer .................. 435 KAREN YANCY, Deputy Treasurer ................ 438 LOUIS APPLEBAUM, Procurement Commissioner .... 455 JAMES ROUNDTREE, Deputy Finance Director ..... 459 JOE MARTZ, Managing Director ................. 470 FRED VOIGHT, Committee of Seventy ............ 485 NANCY KAMMERDEINER, Revenue Commissioner ..... 574 DENISE GARRETT, Chief, Water Revenue Bureau .. 578 MICHAEL ISARD, ............................... 593 NIKKI MARX, Deputy Revenue Commissioner ...... 597 DAVID GLANCEY, Chairman, Board of Revision of Taxes ................................ 599 JOSEPH MARTZ, Managing Director .............. 618 ESTELLE RICHMAN, Director, Social Services ... 627 DIANNE GRANLUND, Deputy Managing Director for Criminal Justice Population Management .. 629 SYLVESTER JOHNSON, Deputy Commissioner, Operation Philadelphia Police ........... 653 DONNA WOLF, Director, Targeted Assistance .... 661 JOHN F. TIMONEY, Police Commissioner ......... 692 CHARLES BRENNAN, Deputy Police Commissioner .. 715 SYLVESTER JOHNSON, Deputy Commissioner, Operation Philadelphia Police ........... 719 TOM NESTEL, Deputy Commissioner, Police Dept.. 736 THOMAS COSTELLO, Commissioner of Prisons ..... 789 PRESS GROOMS, Deputy Commissioner, Prisons ... 792 DANIEL RAKOWSKI, Administrative Service Director ................................ 795 DIANNE GRANLUND, Deputy Managing Director for Criminal Justice Population Management .. 802 HAROLD HAIRSTON, Commissioner, Fire Department 807 BRIAN ANDERSON, Chief Information Officer .... 818 ROBERT DUBOW ................................. 829 JOAN DECKER, Records Commissioner ............ 837 387 2/15/00, Operating Budget, Bill 000005 P R O C E E D I N G S
Good morning, everyone. This is the continued public hearing of the Committee of the Whole regarding Bill No. 5. We were in the process of hearing -- well, we did hear testimony from the Finance Director -- Your button's on, did you want to be recognized, Councilman? Your light's on. Do you want to recognized? Number one? Okay. What I'd like to ask is that we continue with the questioning of the Finance Department. (Finance Department representatives come forward.)
Each Councilmember will be given five minutes of questioning on the first go-around. Mr. Perrello, you state in your testimony that your division plays a vital role in freeing up funds that would otherwise be spent on claims or claims-related issues making them available for other uses. Then why, Mr. Perrello, does the City's General Fund indemnity account continue to increase from year to year? And when 388 2/15/00, Operating Budget, Bill 000005 do you see a reduction in this account?
Madam President, the division as a whole, through the efforts of the employ disability unit primarily, has basically saved the City, if you add up all the savings from the medical payment plans, medical costs, as well as the lost time days and the wage replacement costs, hundreds of millions of dollars in the last six years. That's primarily where we're looking at our savings and contributions to the City as well as insurance savings where we have resulted in an $8.5 savings in insurance cost in the last five years and an additional $13.4 million in savings in the wrap-up programs. These are the areas that we're attempting to really stress the savings that we can plow back into the City for beneficial programs. The cost of the indemnity budget is primarily made up of two components, the Law Department caseload as well as Risk Management caseload. And the Risk Management Department manages both General Fund and Water Fund money. And it is our attempt to continue to try to reduce the cost of the claims that go to litigation by expeditiously settling them on a claims basis. 389 2/15/00, Operating Budget, Bill 000005 The numbers continue to go up on a reserve basis because the number of claims filed against the City continue to increase.
Thank you. Also on of your testimony, you mention that your unit crafted a comprehensive insurance program to cover the Republican National Convention. How much is that going to cost and who will be paying for it?
That's being paid for out of the budget of Philadelphia 2000, and the approximate cost of that insurance for the entire convention, which includes both the City, Philadelphia 2000, and the R & C, in fact, is approximately $700,000.
Thank you. The Chair recognizes Councilman Kenney.
It's not on here. Mr. Perrello, just a question on strategies as opposed to litigation and your comments that the Reserve Fund has gone up because the claims have gone up. We read from time to 390 2/15/00, Operating Budget, Bill 000005 time -- and of course, we don't have access to every claim and every settlement, but we read from time to tome what seem to be obnoxious settlements from people who either assaulted a police officer and wound up with broken nose winds up with a $25,000 check. It's almost as if it seems that the claims are going up because we're settling them quicker and with some money. Is there some kind of strategy or balance we need to find in ones we decide to take to court in order to put the claimant who may not have a legitimate claim through kind of the mill of the court process so that we just simply aren't handing out checks to people who apparently are in the wrong themselves? It is somewhat disconcerting to the citizenry and myself when I read about settlements of people who, you know, had stolen a car, you know, and wound up, you know, after the police were trying to pursue them, killing three people and we wind up paying all three families as if they were rewarded for their kids stealing a car. To me it doesn't seem -- and maybe there's a strategy that in long run shows it to be cost effective, but is that a reason why maybe we're getting more claims 391 2/15/00, Operating Budget, Bill 000005 because people think we're going to pay them?
Unfortunately, Councilman, this is one of the most litigious cities in the United States.
We deal with this issue on a lot of fronts. Unfortunately, the third-party claim situations is one of the biggest ones. In Risk Management, we handle only those prelitigation claims, and it's our philosophy that if we can settle the claims at a prelitigation stage, it will cost substantially less than if the claim goes to litigation.
Less in potential award or less in the amount it costs from a City employee standpoint to do them, or a combination?
Well, from all facets of that, Councilman. If I have a claims adjustor who's basically an employee that's making somewhere about $40,000 a year versus a Law Department attorney who's making probably double that, the time and effort that it takes us to settle that claim versus going to the Law 392 2/15/00, Operating Budget, Bill 000005 Department where then the plaintiff has his own attorney and their expenses involved, normally the factor goes up two, three, or four times. So the value of the claim, just because of the value from both the City standpoint and the plaintiff's standpoint, is much more if we let it go to litigation. The fact remains, though, that we in Risk Management will never settle a claim that we feel has no merit to it.
Well, no merit or minimum merit? I mean, have you ever been -- without being specific, have you ever been in a situation where you really authorize the issuance of a check when it really just got you in the throat that you really shouldn't be giving this clown money?
At that point in time we won't do it, no. If we feel there is some merit, even though it's marginal, we'll offer a minimum settlement to see if we can make the claim go away to avoid it becoming --
I recognize the cost-effective strategy potentially of doing that. In some way do you think, and I guess it would 393 2/15/00, Operating Budget, Bill 000005 just been your supposition, does the reputation that you're going to get something out of it make it more likely that someone's going to file a claim? I mean, considering the litigious nature of the City and considering the number of lawyers and the number of ambulance chasing so-and-sos that are out there, at some point in time aren't people just filing because the City's going to offer them something? If they file a claim for 100,000, the City offers them 10; we save 90, but the person is inappropriately getting some money.
Primarily, the only two ways to attack that are, one, through a more enhanced fraud program, which we're trying to do now.
A more enhanced fraud program, which we're trying to do now in cooperation with the Law Department and the District Attorney's Office. And secondly, by thoroughly investigating the claims before we make any offer to settle.
Have we looked at 394 2/15/00, Operating Budget, Bill 000005 the potential of hiring outside help in investigating fraud and those types of things? My thought is I would much rather be paying a company the money that I would save in paying some deadbeat and spend the same amount of money but changed the reputation that somehow simply filing the claims will wind you up with some amount of money in the end. I mean, are there firms out there -- I mean, I know in private industry when a worker claims that he or she is hurt, they've gone as far as -- and I'm from South Philadelphia and down near the waterfront, and they've gone as far as to send guys around with cameras in vans taking pictures of people fixing their aluminum siding and then use that against them on their Workman's Comp or on their disability claims. Do we do anything like that with these people?
Yes, we do, sir. First of all, we are members of the Citizen's Crime Commission. And secondly, we do have an anti-fraud claims adjustor on the Risk Management staff whose job is to get cases referred to him by the other adjusters and then work through the Citizen's Crime Commission and with the DA's 395 2/15/00, Operating Budget, Bill 000005 Office to investigate and prosecute these claims.
I'm even talking about something else, as far as hiring a company that has an economic incentive to ferret out these people. For example, our fraud investigator, does he or she work on commission or on salary.
Do they work on commission or salary, our fraud investigator?
I'm wondering whether or not a commission-based approach would create a resource for the City that is almost a dogged attack on some of these people. I know people myself, whether it's the City or whether it's SEPTA, I mean, it's just, you know, you win the lottery. People complain in Philadelphia about the cost of auto insurance. I mean, you go up to Tioga County and two farmers bang into each other, they go to each other's barns and fix their bumper. They don't have a pain clinic and a lawyer and a psychologist and everybody. There's a whole wealth of people out there that are just feeding off the public. And that, again, as you 396 2/15/00, Operating Budget, Bill 000005 know with private auto insurance, creates an untenable situation for citizens of Philadelphia because insurance rates are usually a thousand bucks above those in the suburbs or in the rural areas.
And I don't criticize your efforts because I think you have probably in the end saved us a substantial sum of money. I just think part of the problem is that these shysters and their clients belief that they're going to get some money by simply filing a claim even if it's not what they asked for originally.
I do like your recommendation about putting this on an incentive basis, and we will look into that.
Thank you. The Chair recognizes Councilman Nutter.
Thank you, Madam Chair. Good morning. I wanted to ask Judge 397 2/15/00, Operating Budget, Bill 000005 Cermele some questions about the Office of Administrative Review. From the testimony and the budget documents, can you tell me how many hearings do you have on an annual basis for the littering violations? JUDGE CERMELE: I'd have to get back to you with an exact number. There are not a lot of --
Judge, can I get you to talk into the mike there? JUDGE CERMELE: Excuse me. I'd have to get back to you with an actual number of actual hearings that are conducted on the violations. The way the process works, it is somewhat unlike the process that we use for parking tickets. That is, we do not render a final judgment on code violations notices. Rather, what we attempted to do is to settle those matters with the individual. And by settle, we want them to pay a $25 fine.
As opposed to a $300 which the ordinance calls for. Those cases that 398 2/15/00, Operating Budget, Bill 000005 we're unable to settle, either by saying, "no, we don't think you're liable for anything" or "yes, we think you should be paying $25," if the person then does not pay the $25 or does nothing, we eventually file all of those cases in the Municipal Court and seek judgments in the amount of $300. So I will provide to you through the Chair in writing the number of cases that we actually hear on the informal basis at the BAA and a number of case that we bring to judgment in the Municipal Court.
That would be helpful. And can you also get same information for any code violation notices issued in '97, '98, or '99 for the tobacco ordinance?
Thank you. The Chair recognizes Councilwoman Tasco.
Thank you very much. I have a couple of questions, one for the Director of Finance. On , 8-43, it's just an interesting line I just noted. Line 298, "Payment 399 2/15/00, Operating Budget, Bill 000005 for Burials and Graves," could you explain that, please?
Certainly. Sadly, there are people who have no families and no one to provide for their burial. And the City for many years has taken care of people who are homeless, whatever, who have no one to bury them. And the City basically -- there used to be what we used to call Potter's Field. But we provide burials for those people, that's one thing. The other thing that's covered under there is the amount of money that is paid for veterans, and I think you may have seen that in the paper on Sunday. Veterans, a long-standing law apparently in 1935 was passed by the State and it's a county service function and we pay $75 to the widow or widower of the veteran.
Individuals who have no family, are they buried in Potter's Field 400 2/15/00, Operating Budget, Bill 000005 or are they buried in private graves? And what is the process for a family to access or someone to --
No one's come forward. The medical examiner basically has these bodies. They may be someone that was picked up, you know, frozen, whatever, sadly. I guess a certain period of time an investigation is done to make sure that no one's been located, and that's really handled -- we don't really handle any of the details. It's really handled out of the medical examiner's office, and they would really be able to explain to you what the process is.
Thank you. Could I ask Mr. Roundtree some questions? Is he here?
No, his testimony is later on, so he hasn't arrived yet. If you'll hold that, please.
I think that's it right now. 401 2/15/00, Operating Budget, Bill 000005
Thank you. Are there any other questions from members of the committee? (No further questions.)
Seeing none, the next department is the Board of Pension and Retirement. Thank you. (Board of Pension and Retirement witnesses come forward.)
Good morning. Kindly identify yourself for the record and proceed with your testimony.
Yes, ma'am. I am Joe Herkness, Executive Director for the Board of Pensions and Retirement, and I'm here on behalf of the Finance Director, Linda Orfanelli, to render testimony for the agency Board of Pensions and Retirement.
And I'm Marc Bonavitacola, Chief Investment Officer of the 402 2/15/00, Operating Budget, Bill 000005 Pension Fund.
Good morning. Do you have testimony, Mr. Herkness?
Yes, ma'am. Good morning, Council President Verna and Committee of the Whole. I am Joe Herkness, Executive Director and Director of the Municipal Pension Fund, and I'm here to present and deliver testimony on behalf of the Director of Finance, Linda Orfanelli, Chair of the Pension Fund's Board of Trustees. With me is Marc Bonavitacola, Chief Investment Officer for the Pension Fund. 6 billion unfunded crude liability. As we entered Fiscal 1999, the fund had only one half of the assets required to meet its long-term obligations. 3 billion. 74 billion. 2 billion in proceeds from the single pension bond issue, which happened to be the largest bond issue that was ever issued in the state of Pennsylvania. 07 percent. 38 percent. The Pension Fund's investment performance improved from what was the 90th percentile or the lowest 10 percent ranking in the -- we use the William M. Mercer public funds universe as a barometer, to the 67th percentile, and that was on a three-year basis ending in the of FY '99. On a one-year basis, the fund rose to the 17th percentile. 1 billion. In FY 2001, the number of participants receiving monthly annuity payments will have surpassed the 32,000 mark, continuing a very small 404 2/15/00, Operating Budget, Bill 000005 but steady annual increase in the number of recipients. The more than 32,000 retirees, survivors, and beneficiaries will receive over $400 million in pension benefits during the next fiscal year. Sixty-five percent of those receiving the benefits will have their monthly payments electronically deposited. That is a little short of our goal of 70 or so percent, but we continue to make progress. We'd like to have almost everyone on deposit, but 65 percent from about 40 percent four or five years ago is steady progress. In addition, by the end of FY 2001, nearly 20,000 eligible participants -- I'm sorry, that's FY 2000, sorry. Nearly 20,000 eligible participants will have received the second and finally ad hoc bonus payment that was afforded by Council Bill 990001, and that will total over $36 million a loan. There was a payment that they received on April 30th of 1999, this is the second one and that will go out in June, June 30th. Two other important legislative initiatives have occurred over the last year. Council Ordinance 990001-A established a Pension 405 2/15/00, Operating Budget, Bill 000005 Adjustment Fund with the sole purpose of affording regular pension benefit increases to the system's participants. This legislation created a mechanism by with the annual investment gains greater than percent and less than percent 7 on an actuarial adjusted basis will be shared 8 between the participants and the Pension Fund. 9 The assets will be available for benefit 10 increases -- half the assets will be available for 11 benefit increases and the other half will remain 12 in the Pension Fund. The first annual calculation 13 for this pension adjustment fund will take place 14 in the second quarter of FY 2001. 15 As you know, Council has adopted a Deferred Retirement Option Plan, better known as the DROP Plan. This extremely popular option has drawn over employees in its first four months in existence. The option allows employees who have reached normal retirement age to continue working up to four years while their monthly pension benefit accrues in a lump sum. That lump sum DROP account is then payable to the employee at regular retirement. Over 21 percent of eligible employees are presently in the DROP, and that figure is 406 2/15/00, Operating Budget, Bill 000005 expected to double over the next three years based on experience of other funds and basically our guesstimate on the popularity of the fund. We think it will be close to 50 percent or more in the next couple of fiscal years. The Pension Board has had a policy of attempting to use minority firms and local managers whenever possible, investment managers.
At the end of December 1999, nearly 10 percent of all the funds under active management were managed by minority-owned firms and well over half the fund's actively managed assets were managed by firms located in or around Philadelphia. 3 percent of the assets actively managed were held by minority-owned firms and just 31 percent of the funds under management were handled by Philadelphia-area firms. This year, the board of trustees also established an opportunities fund, which is comprised of $100 million to be invested by 8 to 10 local and minority managers whose firms are 407 2/15/00, Operating Budget, Bill 000005 just not large enough to be employed or be hired by the huge Philadelphia Pension Fund. Initial allocations for that fund are expected to be made within the next 60 days. In FY 2001, the Board of Pensions will establish a Web site -- well, it has established a Web site. The Web site will be expanded to include a link to all the funds public investment information. We will also have a summary plan description on the Web site, pension ordinances, and various other important pieces of information that might be relative to pension benefits. Hopefully, we will have that up and running and updated within the next three to four months. The Board of Pensions continues to have oversight responsibility for the City's Deferred Compensation Plan. The plan's assets have grown to over 300 million, and the number of participants in that plan have increased by 10 percent since 1997. There's presently a little over 11,000 participants in the Deferred Compensation Plan. Reducing administrative fees remains major objective, and since 1997 over 300,000 in annual administrative fees have been 408 2/15/00, Operating Budget, Bill 000005 eliminated from the plan. Participants' statements continue to be received to days 4 after each quarter's end, increasing a previous 5 delivery time by at least 15 days. This year for 6 the first time quarterly investment education 7 presentations for plan participants were 8 successfully introduced. These presentations are 9 announced by payroll and will become a permanent 10 component of the Deferred Compensation Plan. 6 million. 8 million in 14 debt service for the pension obligation bond that 15 was issued in Fiscal '99. 16 The administrative costs of the Pension 17 Fund are borne by the fund itself and there no 18 direct appropriation from the General Fund. 1 percent. In FY 2001, we'll have 62 budgeted positions for investment counseling, technical active services, our health and welfare support and general Pension Fund support as compared with 61 in FY 2000. 409 2/15/00, Operating Budget, Bill 000005 Mr. Bonavitacola and myself will be glad to answer any questions.
Thank you very much. Mr. Herkness, you mentioned in your testimony that the second ad hoc bonus payments will be made in June. I'm rather curious. If a retiree did not fall within the requirements in FY 2000, however, they now fall into the requirements, would they be eligible to receive a bonus in June?
If they become eligible this year, they can get that bonus?
Yes, ma'am. If they were ineligible in July of 2000 based on the criteria then but become eligible for the program within the next 12 months, they will receive that bonus effective on June 30, 2000, yes.
Thank you. I know that there was a great deal of controversy when the City adopted the DROP Program, and apparently, you have indicated that 410 2/15/00, Operating Budget, Bill 000005 it has been rather successful. The current length of the DROP Program is four years. Do you think that this is an adequate time period, or should it be lengthened?
My opinion, my personal opinion is that four years is a good solid pilot program. This legislation that was passed is a pilot program, and the Board of Pension and Council will be making a decision at the end of four years based on the actual cost it will be estimated -- the actual costs that will be calculated by an actuary. I think four years is a solid pilot program. And at the end of the four years, I think it gives you enough room to make your decisions out into the future how has it affected the work force, how has it affected morale, is it good, does it make the plan better, more popular? I guess a long-winded yes.
Thank you. The Chair recognizes Councilman Nutter. Oh, I'm sorry. The Chair recognizes Councilwoman Tasco.
Thank you very much. 411 2/15/00, Operating Budget, Bill 000005 On the DROP Program, can you give us an idea of the impact it has? Does it have any impact on the Pension Fund? Is it good for us, is it bad for us? Having that program, is there an advantage to us?
Yes, ma'am. Councilwoman, when we designed or created the initial parameters of the DROP Plan, the objective was to make it the target of being revenue neutral for the General Fund based on the General Fund's present allocation and then we can calculate what the entrance, the DROP entrance might cost because of the changes in experience. If it causes the average retirement age to increase, that saves the City money technically on an over the long run calculation. If the average age of the participants begins to decrease, that causes an increase in the City's contribution. There is checks and balances within the plan itself, the interest rate, etc. The object is to have a zero cost. The language in the ordinance says that it should not have a material impact on the City's normal cost and General Fund, annual General Fund contribution. That word "material" is going to be 412 2/15/00, Operating Budget, Bill 000005 the largest challenge. What will "material" mean? You know, is it 500,000 a year? If it ends up a million a year, at what point will the Board and the Administration say, "This is costly and, therefore, we want to terminate the program." But we're confident in putting the parameters in that the cost would not get to those levels because -- will not reach those levels because the participation in the plan is percent out of the 11 box, so to speak, and even if it reaches 60 or 65 12 percent of the eligibles at any given time, we're 13 confident that it still will not incur the General 14 Fund to increase its annual contribution. That 15 will be looked at person by person and year by 16 year, and when the Council will be making the 17 decision probably sometime in the fourth year, 18 late in the fourth year of the plan. They will 19 the actual numbers of the DROP Plan costs because 20 people made decisions versus what they what the cost would have been had there been no DROP Plan. It's not an easy number to reach, but that's the objective, and the objective is to have not a material impact on the City' annual contribution.
You stated in your 413 2/15/00, Operating Budget, Bill 000005 testimony that there is minority participation in the fund. Are most of those minority firms who participate, are they in the opportunities fund program or how many of them are in who are just regular investors?
They're both in the regular -- in the large fund, we have over 9 percent of the actively managed. That's dollars 10 managed by individual firms and not index accounts are in the large fund. There is -- why don't I let Mark, the Chief investment officer handle that question.
We have approximately four firms that are minority owned in the large fund, managing about $400 million of assets, 350 to 400 million of assets. And the opportunity fund was approved. Presently, there are 11 management firms to manage a total of 11 -- $100 million. There is one more firm that will probably be addressed at the next investment committee meeting. But these firms are relatively small firms who are unable to handle what we would consider a full allocation in the large fund.
Those companies in 414 2/15/00, Operating Budget, Bill 000005 the large firms, what is the average investment amount do they manage?
That's basically all fund managers, some fund managers? What's the largest fund managed by any one firm, investment firm?
There is one firm that manages what we consider a tactical asset allocation portfolio which is some what of an index portfolio that's as large as 350 million, but that's not really an actively managed account. The largest actively managed account would be $227 million.
That would include majority as well as minority funds that are in the large fund? 415 2/15/00, Operating Budget, Bill 000005
One other question. The stock mark, are our fund managers, are they fairly conservative? How have we benefitted from the positive market?
Our objective is to attain the highest risk-adjusted return that a prudent investor could attain with the supervision of various consultants and the oversight of the investment staff of the Pension Board. We are invested in the stock market. We have investments in stocks of foreign companies, we have venture capital investments, so we have the whole spectrum of impact vestments which is how we were able to attain an excess of 14 percent for fiscal year '99. Is it risky? We like to think that it's not very risky, that it's very well diversified and that will continue to produce superior returns, risk-adjusted returns going forward.
Thank you. The Chair recognizes Councilwoman 416 2/15/00, Operating Budget, Bill 000005 Miller.
Thank you, Madam President. I'd just like to get some information for myself around the DROP Plan. In your statement it says that when no one reaches normal retirement age, that's when they can enroll in the DROP Plan. So does that mean that if 55 is your normal retirement age, you can't enroll until you reach age 55 and then stay in the program for four years? Or can you enroll at 51 and stay in the program for four years? I never quite understood that.
You cannot -- Councilwoman, you cannot enter the DROP until your normal retirement age, which is 55 for Plan J. So that you can apply within 90 days, but you can't officially go into the DROP and have your contribution cease until you are normal retirement anal. Now it's 55 for Plan J, it would be 60 for Plan Y which is the other tier of the non-uniform plan. For some police and fire it's 45, and in the other tier for police and fire it's age 50. That's why we say normal retirement age. It's 417 2/15/00, Operating Budget, Bill 000005 different for different plans. But you have to be that particular age. You can't go in four years before and then retire.
Okay. If 1200 people have signed up for the DROP Plan and you predict the number with double over in the next three years, since this is a four-year program which is supposed to be cost-neutral, do you have any opinion yet as to whether we can afford to continue this pension benefit on a long-term basis?
Yes, ma'am. We are confident that the numbers of active participants who enter the DROP would have to go well over 60 percent before there would be a material -- any type of material increase in the City's contribution. We sort of tried to calculate that when we put the parameters in, which is why the interest rate is 4.5 percent. As you know, the City assumes a 9 percent rate on the vestments, so that if the investment return for the Pension Fund 418 2/15/00, Operating Budget, Bill 000005 was not percent, let's say it was 8 percent, the City technically is on the hook, the General Fund, taxpayers, for the extra percent. But by the same token, if they make the percent, the General 6 Fund accrues that benefit over the long-run 7 calculation. So it's 9 percent, we get 4.5 8 percent on a tax-deferred basis to the DROP 9 participant. The other assumed 4.5 percent remains in the pension fund. So that's, you know, on the asset side of the sheet, so to speak. We pay 4.5 out, but we save 4.5 because the normal cost is then not -- there's not a contribution on an annual basis when you're in the DROP. The City's contribution stops because you are technically not accruing any more pension benefit. Even though you're working, your pension is not growing, it is frozen, your DROP account is technically what your pension is. You accrue it for four years or the number of years that you choose to stay in the DROP and then you take that as a lump sum and your DROP account payment is then your monthly annuity payment for the rest of your life as a pensioner. So the City saves the normal cost contribution and it picks up on a 419 2/15/00, Operating Budget, Bill 000005 actuarial adjusted basis to 4.5 percent every year that they assume on the interest investment. So that's how -- someone says, "How can this not cost, you know, where's the shell? This is a shell game. Herkness, you're just --" The thing is, there's dollars on each side of the ledger, so to speak, so that you can target that cost-neutral point, and what will drive that is if there's an enormous increase in the participation. For instance, let's say it's 80 percent or 85 percent, then it's possible that there could be a material increase to the City's contribution. We will be able to calculate that precisely because we'll know who's in the DROP and we'll be able to tell City Council and the Board the precise costs of the decisions that the people have made to go into the DROP Plan.
You're welcome. The Chair recognizes Councilwoman Brown.
Good morning. 420 2/15/00, Operating Budget, Bill 000005
I have a couple follow-up questions to Councilwoman's Tasco' inquiries. First, let me commend or at least I recognize the dramatic improvement that the Board has made with regards to participation of minority and women or at least minority and local. The operative words for me are "local" and "minority." Does local mean Philadelphia or the Philadelphia five-county area or South Jersey?
That is a great question. "Local" has been a very fluid term. We have struggled with that question, what does local mean. The firms that we list as local, some are in Wayne, Pennsylvania; some are in Conshohocken, but I think it's fair to say that the Delaware Valley.
Maybe if we get same weather forecast or whatever, but it is a very, ver difficult term. And we debate with the 421 2/15/00, Operating Budget, Bill 000005 trustees on, you know, what do you mean by "local"?
But it has not over the last several years meant just the City of Philadelphia. It has basically been, you know, the Delaware Valley.
Voorhees, New Jersey, some parts of South Jersey, we have one of the our minority firms is in Voorhees, I think, right across the bridge.
So that's considered the Philadelphia area but inside the City of Philadelphia. Local is a more expansive term.
And there would be those of us who would agree that southern Jersey is a part of Philadelphia. Secondly, "minority," break that down. Women, Latino, and African-American, what are those numbers?
The precise numbers? 422 2/15/00, Operating Budget, Bill 000005
If you can share that. If not today, forward that information.
We can come very close to total amount. The total number is just over 6 percent of the minority firms. The local and 7 minority combined is well over half, it's around 8 62 percent of all the assets that are actively 9 managed so that there's like 25 or more individual 10 managers who are -- the dollars that they manage averages around 100 million each. Of that group, 62 percent of those firms are in the Delaware Valley.
Very well. Final question. How does professionals of that field hear about opportunities? What's your process for sharing, getting information available to those who are in this particular profession?
I would say that the investment community is very well informed of any ongoing searches for new management firms. The Board has approved two local management firms to 423 2/15/00, Operating Budget, Bill 000005 oversee the opportunity fund, and both firms maintain databases of these firms and, as needed, would solicit additional information from the firms for any replacement allocations in those funds.
Your answer sparks another question. The Board has approved recent firms. How long is it from the point that an application is submitted for consideration through to a final approval for a particular firm to participate?
First thier need, we have to establish a need to hire a firm. The Board then initiates a search. We gather information with the help of outside consultants and then we bring the information to the Board, and it varies depending on the complexity of the assignment or the contract.
Very well. My finally final request is that could you please provide to the Chair a listing of the firms in 424 2/15/00, Operating Budget, Bill 000005 those categories we just talked about. Thank you very much.
Thank you very much, gentlemen. Thank you, Madam Chair.
Thank you. Are there any other questions from members of the committee? (No further questions.)
The next department is the Sinking Fund. (Sinking Fund witnesses come forward.)
Good morning. Please identify yourself for the record and proceed with your testimony.
Good morning, President Verna. Vince Jannetti, Secretary of the Sinking Fund Commission. I'm here to testify on behalf of the Commission's Fiscal 2001 operating budget. In the General Fund request for Fiscal 425 2/15/00, Operating Budget, Bill 000005 2001, we are looking at $157 million which includes 47.8 million for lease payment in Class 200, for payments on such facilities as the Criminal Justice Center and the Municipal Services Building. We have 109.7 million for general obligation debt service and other debt-related costs. The requests from the Water Fund all Class 700 totals 152.3 million. This is all for payments of principal and interest on water sewer bonded debit. The Aviation Fund request in the amount of 72.7 million is like the Water Fund, all Class 700 and for payment of airport debt service. The Commission also has a request in the amount of 4.5 million in the car rental tax funds to provide for payments on stadium debt from car rental tax revenues. This concludes a brief testimony -- a brief summary of my brief testimony, and I'd be happy to answer any questions that Council may have.
Thank you. What are the assumptions in your budget 426 2/15/00, Operating Budget, Bill 000005 with regards to new borrowings and the assumed interest rates?
On the new borrowings, there's an assumption for a $250 million blight bonds. The interest rate could be up to -- it's projected to be somewhere up to -- it's from 4.5 to 6.5 percent.
To 6.5 percent. There's also a provision in the budget for a new transit tax revenue anticipation notes. These are projected to be $275 million at 5 percent.
Thank you. The Chair recognizes Councilwoman Tasco.
On -4, I just need you to explain to me under the General Fund you have a decrease in rent. What does that mean?
I'm sorry. A decrease in. . . ? 427 2/15/00, Operating Budget, Bill 000005
"Rent-Other," what does that mean? Is that a decrease?
Yes, ma'am. That is in the -- we make payments on the Redevelopment Authority's housing revenue bonds.
I'm sorry. We make payments on the Redevelopment Authority's housing revenue bonds, and the cost of those bonds in fiscal 2001 are dropping. So basically that's the decrease in my 200 Class. You're talking about the --
The long-term, the $1,244,113 in temporary loan notes, explain that to me.
As I just described the 428 2/15/00, Operating Budget, Bill 000005 annual trans, which is the money we -- the bond issue we sell early in the fiscal year to bridge the gap until February tax revenues in the current year in Fiscal 2000 the costs were 14.9, almost $15 million. The projection for Fiscal 2001 is for $13,750,000 in interest costs which would, you know, be a drop of $4.2 million.
And you've calculated in the debt service on the borrowing for the blight removal initiative?
Yes, 250 million with an interest rate 4.5 to 6.5 percent which would be -- I think it comes out to $16.9 million.
Thank you. The Chair recognizes Councilman Nutter.
What is the new borrowing referenced in the Aviation Fund? What is that for?
I'm not totally sure, Councilman, what the airport is planning on doing. 429 2/15/00, Operating Budget, Bill 000005 During the appropriation of this budget staff at the airport and their consultants gave me these numbers. So. . .
Well, you know, you got to be careful of what people try to put in your budget, you know?
You never know what they might be up to over there. Is Mr. Dubow around or. . . (Rob Dubow comes forward.)
I'll have to get back to you on that. I'll have to check with the airport.
Mr. Dubow, is that for the Scott Paper building?
Okay. And Mr. Dubow, from yesterday I think we had reached agreement right before the break that you're going to provide us with information on various aspects of different lines in the Sinking Fund budget on total cost of the blight removal program?
Yes, we will get that to you. 430 2/15/00, Operating Budget, Bill 000005
Okay. And you'll let us know about the Aviation Fund, right?
Thank you. Any other questions from members of the committee? Seeing none the next -- oh, I'm sorry.
Where do you note the debt service for the Blight Program, which page is that?
That's in Class 701 for the interest portion and 702 for the principal in the General Fund.
The budget provides for a full year's debt service on the blight bonds which would be two interest payments and one principal payment on -9, the center section, the Schedule 700. 431 2/15/00, Operating Budget, Bill 000005
When we originally laid the budget or when I originally did the budget, I had it in the wrong class. I was under the impression that it was going to be, you know, a City bond deal.
The Chair recognizes Councilman Nutter. I think it should be in Class 200.
Your testimony is just slightly confusing about -- I mean, you have the dollars in 700. Some of us, I think, believe it should be in 200. How are you going to do 432 2/15/00, Operating Budget, Bill 000005 this?
Right now, Councilman, where it is in the document is in 701 and 702.
So you're going to leave it there? Are you going to come back with an amendment sometime later on?
What, you're just going to send us a new page next week or something? It's in the budget, it got introduced, it's in 700. What do you mean you can just switch it? I mean, it's not like a memo or something.
Councilman, it becomes a function of how they structure the deal when they do it as to, you know, where it is.
A deal has not been structured yet. 433 2/15/00, Operating Budget, Bill 000005
And if it's not in the proper classification, then what would you do?