COUNCIL OF THE CITY OF PHILADELPHIA PUBLIC HEARING AND PUBLIC MEETING BEFORE THE COMMITTEE OF THE WHOLE - - - Room 400, City Hall Philadelphia, Pennsylvania Wednesday, January 27, 1999 10:57 a.m. - - - BILL 990001 - An ordinance approved December 3, 1956 as amended and amending the Municipal Retirement Benefit Plan 1987 Ordinance, which became effective January 8, 1987 as amended, by adding new sections to, in the case of both ordinances, provide for increases to the benefits of certain uniformed and non-uniformed retirees, beneficiaries and survivors by providing for certain increases under certain terms and conditions and making certain related technical adjustments. PRESENT: COUNCIL PRESIDENT ANNA C. VERNA, Chair COUNCILWOMAN AUGUSTA A. CLARK COUNCILWOMAN JANNIE BLACKWELL COUNCILMAN DAVID COHEN COUNCILWOMAN JOAN L. KRAJEWSKI COUNCILMAN JAMES F. KENNEY COUNCILWOMAN DONNA REED MILLER COUNCILMAN MICHAEL A. NUTTER COUNCILWOMAN MARIAN B. TASCO COUNCILMAN ANGEL L. ORTIZ COUNCILMAN FRANK DICICCO COUNCILMAN BRIAN J. O'NEILL COUNCILMAN RICHARD T. MARIANO COUNCILMAN W. THACHER LONGSTRETH COUNCILMAN FRANK RIZZO - - - VINCENT VARALLO ASSOCIATES, INC. Registered Professional Reporters Eleven Penn Center, Suite 600 Philadelphia, PA 19103 (215) 561-2220 2 1/27/99 PUBLIC HEARING - COMMITTEE OF THE WHOLE I N D E X Joseph Herkness . . . . . . . . . . . . . . . Kenneth Kent, FSA, FCA. . . . . . . . . . . . Pension Board Actuary 7 William M. Mercer, Incorporated 8 Charles McPherson . . . . . . . . . . . . . . 104 9 Chief Financial Officer 10 Joseph C. Vignola, Executive Director PICA 129 11 12 Tom Cronin, President . . . . . . . . . . . . 237 AFSCME District Council 47 Les Yost, President, Local 22 . . . . . . . . 237 Pete Matthews . . . . . . . . . . . . . . . . 237 President, District Council 33 Rich Costello, President FOP Lodge 5. . . . . 237 Bob Eddis, Recording Secretary, Lodge 5 . . . 237 3 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 P R O C E E D I N G S
Will all Councilmembers please take their seats. This is the public hearing of the Committee of the Whole to consider Bill No. 990001. I would ask Mr. McPherson to read the title of the bill.
Bill No. 990001, an ordinance approved December 3, 1956 as amended and amending the Municipal Retirement Benefit Plan 1987 Ordinance, which became effective January 8, 1987 as amended, by adding new sections to, in the case of both ordinances, provide for increases to the benefits of certain uniformed and non-uniformed retirees, beneficiaries and survivors by providing for certain increases under certain terms and conditions and making certain related technical adjustments.
Our first witness will be Mr. Joseph Herkness. (Joseph Herkness comes forward.)
Yes. (Councilman O'Neill addresses President Verna inaudibly off mike.) 4 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
Oh, we're just dealing with the bill at the moment.
We had them. I thought they were distributed. They will be distributed. Mr. Herkness, would you please proceed?
Thank you, Council President Verna. I'm here today on behalf of the Finance Director, Ben Hayllar, who could not be present to offer testimony for Council Bill 18 990001.
Madame Chair, I'd like to know why the Finance Director is not here.
Everything we are talking about is the Mayor saying what he will or won't do based on input from the Finance 5 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 Director. If we do not have the Finance Director here to defend his position, I think it's unfair to the Council and unfair to Mr. Herkness to be here defending the Administration's position, particularly what we discussed all day Monday, dealing with the differences between and 8 percent when the sharing begins. 9 Thank you. 10
Council President Verna and members of City Council, I am pleased to appear today before the City Council Committee of the Whole to testify concerning Bill No. 990001, which would provide certain lump-sum increases to city pensioners, beneficiaries, and survivors, and establish a Pension Adjustment Fund to provide a mechanism for future pension adjustments. The Administration agrees with all members of this Council that longtime city pensioners, their beneficiaries, and survivors, many of whose pension benefits have been eroded by inflation, are entitled to an increase in their benefits. This can now be done because of last 6 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 week's sale of $1.25 billion of pension obligation bonds, which will reduce the fund's unfunded liability from approximately 50 percent to approximately 27 percent. As long as cost-of-living adjustments are funded from the earnings of the Pension Fund and not by the taxpayers through the General Fund, we can support additional payments to retirees and beneficiaries. In this regard, Bill No. 990001 is a significant advance from the provisions of Bill 12 No. 980708, which the Mayor disapproved on January 14, 1999. As set forth in the detail in the Mayor's veto message, the, quote, cost-of-living provisions of the old bill created significant risk to the General Fund and could also have jeopardized the financial stability of our Pension Fund. The, quote, Pension Adjustment Fund provisions of Bill No. 990001 eliminates these risks, and the Administration, therefore, supports these provisions. Bill No. 990001 establishes a gain-sharing approach that would create a Pension Adjustment Fund that would receive one half of all investment returns from the Pension Fund in excess 7 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 of 1 percent above the actuarial assumed earnings rate. The Pension Board would be empowered to make pension adjustments out of the assets of the Pension Adjustment Fund. Because the Pension Adjustment Fund would consist only of gains accrued in excess of percent, the General Fund 8 would not be required to support distributions 9 from this fund or from the Pension Adjustment 10 Fund. Bill No. 990001 reflects Council's intent that the Pension Adjustment Fund distributions should be funded solely from the Pension Fund investment returns and that the General Fund will not be required to support the Pension Adjustment Fund in any way. While the Administration supports the Pension Adjustment Fund provisions of this bill, we must repeat our concern that the cost of the two lump-sum payments required under Sections 131.1 and 120.1, the costs of these two ad hoc payments will be significant -- at approximately $88 million over a ten-year period. And this is more than was intended in the original budget planning. 8 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 Thank you, and that's the end of the testimony from Mr. Hayllar.
Yes. Mr. Herkness, and again, Mr. Hayllar's not here and if there's an area that he can better answer, I'll be glad to wait not today but some other time for him to answer. It seems that we had a long discussion on this bill both Thursday and Monday. And our biggest stumbling block within the Council is clearly -- vis-a-vis the Administration and among ourselves is clearly whether the sharing starts at 10 percent or at 9 percent. And what I would like to hear from you -- your statement was very clear that the Pension Adjustment Fund, being set up the way it is with the actuarial certification using the smoothing, the adjusted market value, spreading the risk over five years, the upside and the downside. You said, and I quote, that this Pension Adjustment Fund now, as opposed to before, eliminates risk to the General Fund. 9 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 How does that change if 10 percent is okay and protects the General Fund and the Pension General Fund, both funds? What is the danger of 9 percent? Or is there a problem with 9 percent as opposed to 10 percent when the sharing would begin? Could you explain that? I've yet to hear in two days anyone tell me what the problem is. I see the problem for the Pension Adjustment Fund, but I've yet to hear what the concern is about the Pension Fund itself if you start sharing at 9 percent -- which means, I believe, and correct me if I'm wrong, that that half a point that the Pension Adjustment Fund would not get, because you would not be sharing that first full percentage point between 9 and 10, would be worth in an adjusted pension obligation fund, the higher fund, about $22 million in any year that there was an adjusted market value of at least 10 percent. What is the driving concern that this has to be 10 percent and not 9?
I've discussed this a number of times with Ben Hayllar. I can only -- to the best of my ability, I'll paraphrase what 10 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 his comments would probably be, and then I'll allow Ken Kent, who is the Pension Board's actuary, to comment if you want any further comment. The percent is a projected target, no 7 different than we have a budget in our 8 households. The idea is that if you miss that 9 projected budget, what do you do? You need to have some sort of dollars to offset that. And the investment losses or gains are not the only experience changes that the Pension Fund has. There is a possibility for losses due to people living longer and salaries going up, so -- above year assumptions. So that it's a cushion so that if you miss your budget, you will be able to offset that and not have a future threat to the City's General Fund. That's basically the down-and-dirty concept, that it's a protection in case you do not have good darts on your projections.
Could I ask you, Councilman, to speak -- 11 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
I'm sorry. Thank you. If the provision for a starting of sharing at percent were 9 instead, what would 6 be the risk? Once you've introduced smoothing 7 you've introduced the actuarial certification, 8 what would be the risk to the Pension Fund? 9
Why don't I ask Ken Kent 10 to specifically address that, quote, risk.
My name is Kenneth Kent, I'm with William M. Mercer. I'm the actuary to the Pension Fund. If the sharing begins at 9 percent, there is a higher risk that the actuarial assumption will not be met over a long term.
Would it be significantly different if it were 9-1/4 before the sharing started? 12 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
The 9 percent assumption that is used in valuing the -- that's used in making the assumption on return of assets in use in valuing the liabilities of the Pension Fund --
Okay. Is that better? Okay. Basically assumes that there will be years where you'll earn in excess of 9 percent and years where you'll earn under 9 percent, but over time will get a 9 percent return. Once you have any mechanism that says that those excess returns are shared, it increases the potential that your long-range return will be under 9 percent. So there is a risk with any sharing, that you're 13 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 effectively decreasing the ability to meet your assumption if you believe that assumption is accurate and the best representation of the earnings rate of the fund. The higher the threshold for sharing, the lower the chance of not meeting your assumption. How much more significant you lower is based on anyone's guess of what the future market rate of returns will be and the future potential that the fund will, on a regular basis, exceed the assumption.
And the higher the sharing threshold is, the less chance there is that there will be money available to share with the Pension Adjustment Fund and the Pension Fund?
That's true, and that goes to the definition of gain-sharing. And that is that if in fact over a period of time, if you look at an average of five or seven years of return, if the average return does not exceed 9 percent, then you would think that there should not be an opportunity for gain-sharing 'cause there effectively is no gain-sharing. So it goes to the definition that says 14 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 that if the market returns and the returns in the fund are expected to be better than our assumption over a period of time, then you should share those greater expectations as they're realized. So it goes to gain-sharing. If all you make is your assumption over long term, and that's our best guess, then there would not be any gain-sharing.
Right. And the majority of like funds that you're familiar with have 8 percent as their actuarial assumption rather than 9?
So already because, even though we didn't know there was going to be a bill dealing with a PAF and when gain-sharing would start, 'cause we've been doing this for a long time, our more aggressive 9 percent actually serves as a very conservative protection for the Pension Fund when you introduce gain-sharing, because the lowest anyone would ever in their right mind would agree to would be 9 percent, with a 9 percent assumption; is that correct? You wouldn't be talking about an 8.5 15 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 sharing if your assumption was 9 percent and you had smoothing; it just wouldn't make any sense. So we're really talking about 9 being the lowest number we could be discussing here, with any reason. I mean, we could be discussing 10, 11, 12, but when your actuarial assumption is 9, you wouldn't be discussing 8 or 7 or 6; you would just be killing the fund doing what. But we already have -- and what I'm trying to illustrate here is by having a 9 when others are at 8, there is already a whole percentage point that can't be shared just because of the assumption, the actuarial assumption. And I have no problem with just; all I'm trying to do is establish that that's just a fact, that 9 percent is maybe a point higher than other funds, but it ensures in a sharing situation that you don't even start talking about it until then. So there's a whole point of conservatism built into this thing because of your assumption being 9 instead of 8. Regardless of whether 9 was the right number to have as an assumption or not, it brings us to this day today in this legislation where 16 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 there's a whole percentage point difference between you and the prevalent actuary assumption that protects the fund that much more before you arrive at an agreed-upon number, whether it's 9, 10, 11, or 12. Is that a fair statement?
It protects the fund if you're trying to protect the fund against gain-sharing. It does not protect the fund if you're addressing protecting the fund against the volatility of the market.
Right because we've been trying to do that all along. I'm saying once you use the 9 to try to push the higher returns and have gain-sharing -- not gain-sharing but the smoothing work on the 9 percent assumption rather than an 8 or some other number lower than 9, it just so happens that when you introduce sharing, you're already at a higher number. And that has significance when you start talking about sharing. The higher the baseline is for sharing, the more the fund is protected. There's no question about that, just 17 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 as a general statement. And we're at 9 where another fund might be at 8 if they had the prevalent percentage.
The higher your actuarial assumption, the higher the threshold before you can share. However, the higher your actuarial assumption, the more difficult it is to year-in-year-out see market returns that will equal or exceed your assumption.
That's correct so it actually works both ways in terms of -- when I say "protecting the fund," I mean causing less money to go into an Adjustment Fund that would be used for increases, whether they be ad hoc COLAs or one-time bonuses. As that number gets higher, whether it's 9 percent or 10 percent, it prevents the possibility of that much more money going into the Adjustment Fund and also increases the amount of money that can go into the fund itself for regular distribution. Is that correct?
I don't understand the point of going into the fund itself for regular distribution. 18 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
Well, if you're at 10, if you put your floor -- well, if you put your actuarial assumption at as opposed to and 5 sharing started at the point of the actuarial 6 assumption, would there be more money in the 7 Adjustment Fund if you used 8 than if you used 9? 8
Yes, but there are a number 9 of different components when you start to move your actuarial assumption around that you also need to be aware of. If your assumption was at 8 instead of 9, the City's obligation to contribute would be dramatically higher.
I understand there are other components. All I'm talking about is -- we went over, and I'll go over with you now for the record. If you go back to 10 years and we had had a PAF and the fund was adjusted to the much larger amount that's going to occur after the pension bonds are sold, there would have been, in spite of a bull market and great returns, I think everyone would agree for the Pension Fund, only two years where a 9 percent gain-sharing would 19 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 have occurred, and only one year where a 10 percent gain-sharing would have occurred. Is that correct?
No, it would have been three years at percent and four years at 9. 7
But two of those 8 are -- two of those at the 10 are just 9 insignificant numbers? In other words -- 10
I don't have the chart in front of me, but the other day we went through this, and there was only two years where there was any money.
Two points: three at 10, four at 9. And the reality is that during that period of favorable market, we barely made on average 9 percent to meet our assumption.
Okay. So if any of those dollars were shaved off, we would not have met the actuarial assumption over that ten-year period.
Okay, because of smoothing, though, an percent gain in one year 4 becomes a 12 percent gain in that year '97. 5 So smoothing changes -- we were talking 6 about market value back in December, when we had 7 the other bill, the bill that was vetoed. 8
Market value would 10 have had a -- if there had been a PAF with market 11 value, there would have shared everything from 9 12 percent to 18 percent, with no cap on the sharing. 13 It would come down to 12 percent under, with the 14 effect of the five-year smoothing. And that was 15 the best year we had in ten years. 16 The fund would have shared, with the 17 newly introduced PAF, approximately 3 percentage 18 points -- I think it was 3.1 or 3.2. And the effect of that at 9 percent would be that they would have shared somewhere -- how much is 3 points worth under the adjusted 4.1 billion?
No, this is when we had the 12 in '97. And if you had a 9 percent floor. I just want to give the two scenarios 21 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 'cause that's our best year, and a year we only reached once in ten. Each point is worth approximately 44 million under the adjusted --
Under the anticipated size of the asset value of the Pension Fund after the POB.
That's why I'm saying the adjusted 'cause I want to use the real number that would be --
Okay. So in that scenario, if we had a 9 percent floor, there would have been approximately 66 million going into the PAF; is that correct?
Actually, just looking at the statistics, if you were sharing above 9, you would be splitting 5.6 percent. If you were sharing above 10 during that same period, and this is going back 10 years, you'd be sharing --
No, no, let me -- 22 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 you're going -- you're ahead of me.
-- of sharing versus 2.2. And it would be approximately 66 to 70 million would be shared each would get under that full 3.2 sharing if 9 were the number.
Under that scenario, which at 4.1 would be 22 million bucks, ballpark.
If you were sharing -- 23 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 if it was 12.2, you'd be sharing the 2.2 under 10 percent. That gives you 1.1 go. If you went back to 9, you share another half, so that gives you 1.6.
So you've got a half a 9 point advantage. At 4.1 billion, it's about 20, 10 21 --
It's $22 million difference going into the fund. But the total for that year, under that POB-adjusted amount, would be approximately how much under 10 going into the PAF and how much under 9?
Okay, 42 million under the 10 percent, and 66 under 9. That's in the best year by far that we have on the ten-year rear projection camera. If we go back looking at the experience of ten years, 1997, the year we're talking about, the Pension Adjustment Fund gets 42 million under 10, 66 under 9. Can you go back to '96 and give those 24 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 same numbers, when the return was, I believe, 10.1?
Okay, 10.1. What is shared if you use in total dollars? 7
About million, 9 okay. And then what is shared if you use 9; 3 10 million?
It's 22 million? Okay. Okay, so 9 -- the difference between using 9 and 10 in 1996 would have been the difference between the Adjustment Fund getting 2 million or the Adjustment Fund getting 22 million; is that correct?
Okay. What are the other two years where there was -- where the fund got more -- earned more than the actuarial assumption in the last ten years?
In 1993, the fund earned 9.7 percent; and in 1990, the fund earned 10.7 percent. 25 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
In 1998, last year, it was 11 -- 11.9, I think it is. From 6/30, ending 6/30/98. It's ballpark. The new valuation will show 11.9, I believe.
In '93, I'm sorry. In '93, it was 9.7 percent. So under the 10 percent, there would be nothing going into the Pension Adjustment Fund. And what would it have gotten at 9?
About 12 million, okay. And what was the other year, where it was 10.7? 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
1990. And 10.7 would give what under a percent cutoff? 5
Okay, 34 million. And the other six years we didn't meet our actuarial assumptions, so there wouldn't be any talk of sharing under either 9 or 10 percent.
Okay. Now, gentlemen, I ask each of you if you can state for the record whether you think it's unreasonable, given this experience and what we know going into the future, if you think it's an unreasonable risk for the Pension Fund to have sharing begin at 9 percent. That's the question.
Councilman, I think the question has to be, Is there risk to the City's General Fund not necessarily the --
Well, I didn't ask 27 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 that question. I'll ask that question second if you'd like to answer it.
Do you believe that starting sharing at percent instead of 7 percent is an unreasonable risk to the Pension 8 Fund? 9 Joe, I'll start with you. 10
Me. The risk to the Pension Fund is that if you do not make the 9 percent, the assets begin to deplete.
Just give me your conclusion whether you think it's unreasonable to start this at 9; then you can tell me why.
I -- I think that you -- it is unreasonable to the point that you forget your projections and you just say, Well, we're going to be right on target all the time. And, therefore, you do not have to have any sort of cushion, or you do not have to have significant 28 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 cushion. So in budget planning -- and that's really not my area of expertise -- the budget plan would have to be -- if I could use a dart board analogy, the darts have to be much, much better. And to that extent, you know, where you begin reasonable and unreasonable is reasonable people disagree where that would be. I believe that you absolutely need some cushion if you missed a point for that 9 percent, which we've been very, very lucky. It's been in effect since 1981, the 9 percent assumption, and it's very close to an 11 percent on average over time. So we've been luck the capital market's rising tide lifts all boats. This fund and the City's General Fund has been very, very lucky to have this experience. Where it begins and ends, Councilman, that's a very, very difficult question. The budget planners really have a very difficult job their.
I would want a cushion. 29 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 If I would -- let me just give you -- this is my opinion, Joe Herkness's opinion, no one else's. If I was saying you're going to plan 9, I'm going to say I need something when the people begin to grow older, live longer, and the salaries are going up. As we have a problem, we can't figure out why it's 8 percent this year, and we have an assumption that's much lower than that, there's an issue there. If that turns out, we have another loss in your budget. So that's the reason that there's additional situations where you could have additional losses aside from the investment gains or losses. If it was just investment gains or losses, the risk would be significantly low, all right? You might be talking about something different, but there's --
Joe, I'm going stay with you for a minute. Would 9-1/4, with first quarter going to the Pension Fund, which would be about $11 million, I guess, under the $44-million-per-point calculation building up over a period of time, would that -- and obviously it would worth more than 11 as you start increasing 30 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 the fund even more. But would that quarter point going first to the Pension Fund -- so instead of one point going, a quarter point would go. Would that be a reasonable amount to give you the comfort you're looking for?
That question needs to be asked of the budget people because the Pension Fund receives its money based on the returns. The Pension Fund is not involved in the budget. We basically tell the City what they owe us.
When you say "the budget people," you don't mean budget people in --
Oh, yeah. The City's Budget Bureau, the -- we give them the experience, and we say, Here's what the experiences, you owe us another 10 million this year.
Okay, Joe. You're getting to the General Fund, and I don't mind getting to that; I just want to stick with the Pension Fund now 'cause that is your area. And I 31 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 agree that that's their area, the General Fund.
And I'm sure they can answer, and you can try to answer for them on that. But right now, I'm just saying, would a quarter percent coming in off the top, the first quarter percent before any sharing and what that would mean over a period of time, would that give you the comfort level you would be looking for or would be satisfied with?
Councilman, from purely the Pension Fund -- the Pension Fund view, if nobody cared, you know, basically what any other entities -- any other problems that any other entities had and if the trustees just basically put blinders on and said, you know, we know what our job is, we don't care what the rest of the situation is, that the Pension Fund doesn't have that level of concern that the General Fund would have because they just give the General Fund the bill. And so from the Pension Fund, just purely the Pension Fund, whatever it is, the City 32 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 has to make up that difference if it's below 9. So the Pension Fund is basically guaranteed that 4 over time, although you're spending the money 5 every year, cash out. And if the losses, the 6 money begins to get amortized over a longer period 7 of time. So there is a drop in the size of the 8 fund if you in incur less than 9 percent over a 9 long period of time. Is it reasonable or unreasonable from the Pension Fund's view? This organization gives us the ordinances. If they say, Send X-amount of dollars out, we send X-amount of dollars out. We then calculate the bill, get it as precise as possible, and then give the news to the City's General Fund every year around February.
So it's really -- and this is helpful, Joe. It's not what the impact is or the risk is at this point to the Pension Fund, whether we're at 9 or 10 or some other number; it's what the impact may be to the General Fund because of --
Yeah, I think that's -- Ben Hayllar's testimony clearly says that the previous -- the problem with the previous bill -- 33 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 and if I could paraphrase a little bit here, one of the major reasons for the veto was the exposure, the potential exposure, to the General Fund -- meaning the City's General Fund not the Pension Fund.
Okay, and I don't have any problem with that. But what it doesn't say is -- I mean, Mr. Hayllar, unless he was on Mars the last couple of days. Knows that the big issue -- the Mayor even knows it -- is between 9 and 10 percent of where you start the sharing.
His testimony, which I would expect if he wasn't even on call, would have been as complete as possible, would have specifically addressed the differences and the real problem -- whether the real problem is political, whether the real problem is genuinely in the Pension Fund or genuinely in the General Fund to the City. There's nothing in his testimony that 34 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 talks to that. And I would like to know what the additional risks are to the General Fund that concern the budget people, that they are insisting -- that the Mayor insists on percent, when I 6 believe reasonable people could agree that 9 7 percent is plenty of protection all around. 8 I don't think, as a policy decision, 9 the Mayor's given us a bill that has a COLA in 10 it. We've got two bonuses in there that are separate and apart from any discussion about 9 or 10, percent the bonuses. If we're going to have a COLA and that's going to be a policy of the City, don't give us an empty COLA. Explain to us what the impact is. There may be an impact. We talked on Thursday. There's cost avoidance. The better the fund does, and if the fund doesn't have to share anything or if it doesn't have to share as much as it would otherwise, there is a cost avoidance to the City if the fund does well and doesn't have to share it or it shares less. We all heard that. If that is what's driving this discussion, I would just like us to understand it, 'cause that's the one part we have not heard in 35 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 this -- where the Finance Director's position is on the difference between 9, 9-1/4, 9-1/2. The Finance Director, the last time I checked, was not an elected official, but he is obligated to give us this information so we can make policy decisions along with the Mayor. He has not done that, and I believe he's remiss in not doing that because these are very serious questions and it's really boiled down to the difference. If you go over ten years in the past, the fund averaged of 10.8. That fund does not have enough money going back ten years to be a Pension Adjustment Fund that anybody would want to have any confidence in or really be hoping to get something out of. It doesn't have a whole time more if you go to 9 from 10, but it certainly gives you something to work with. To give a number on the record, adjusting for the pension obligation bonds, what is needed in any given year to give -- based on today's valuation after the sale of the bonds, 4.1 billion or so -- what kind of actual dollar number would the Pension Adjustment Fund have to have to 36 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 give a percent ad hoc COLA one time to give that 3 out?
Everybody in the system. I think we heard it in the caucus room 8 the other day, but I'd like it on the record. Each point is worth 34?
Approximately, yeah, so you're looking at about a $100 million.
You're looking at $100 million, okay. In the last ten years, using 10 percent as the base for sharing, was there enough accumulated -- this is for Kent -- was there enough accumulated under 10 percent in a hypothetical PAF, using the higher adjusted pension obligation bond amount in the fund, was there enough accumulated in the four years -- I'm sorry, in the three years that would have been sharing up to 1997 to get a 3 percent one-time ad hoc increase?
Okay. Was there 37 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 enough to give a 2 percent one-time over ten years ad hoc increase? Ad hoc COLA increase?
I do mind 'cause I'm on a roll here and I'm going to forget everything I'm saying. And this is critical, Michael.
I understand, Councilman. I'm just trying to understand the terminology that you're using.
Well, if he understands it. (Councilman Cohen addresses Council inaudibly off-mike.)
If I could make this clear, I will. I'm sorry. If I could just make this clear.
This is not going to make this a free-for-all please. (Councilman Cohen continues to address Council inaudibly off-mike.)
It was just a point of information. I was asking for clarification of a term. When the Councilman asked about a 2 38 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 percent one-time COLA --
Ad hoc COLA, which was described the other day as across the board affecting the base but not repeating itself the next year as another percent or percent. In other words, if you got one in ten years, your base pension would go up 2 percent forever, whatever it was. If it was 100 percent, it would then become 102 percent. But unlike a regular COLA, it would not be 2 percent next year, 2 percent the following year and 2 percent the following year.
So if the person is getting $100 a month in this year.
They would go to 102 percent the next year, and then the third year, they'd go back to 100?
Okay, so it is 39 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 continuous.
Yeah, it is continuous, but there's no 2 percent additional the following year, which a regular COLA would have.
What would 2 percent under the -- 2 percent ad hoc COLA under the 10 percent floor, would that have been possible in the last ten years?
About 1-1/2 percent. So over ten years, using a 10 percent floor, there would have been a 1-1/2 percent one-time COLA. Okay, thank you. Now, going to the 9 percent floor over that same ten years, now you have four years of 40 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 sharing because there was a 9.7 year in '93. Would there have been enough money to give a 3 percent COLA in the PAF?
Okay, we just about would have made it. So the difference, going backwards, using the experience we have, it would have been a one-time 1-1/2 percent ad hoc COLA versus a 3 percent one-time ad hoc COLA. And what -- See, Madame President, I believe there's two issues here -- one that I believe has been introduced today and we don't really have the answers to, which is the General Fund's worries. And there is a cost -- there will definitely be a cost in cost avoidance. Mr. McPherson has explained it, the actuary has explained it. In today's environment with a Pension Fund, the more the Pension Fund makes, the less the City pays. Then, obviously, when they're not making as much because part of it is being shared 41 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 at some high level (over or over percent) with the Pension Adjustment Fund before you get into the area over the cap, which all goes to the Pension Fund itself, there's going to be less cost avoidance. There's no question. These dollars will come from somewhere. Unless the Pension Fund is overfunded -- not at 70 or 75, but at 100 or 102 or something -- there's going to be an impact. The question, I think, for all of us to consider and maybe hear from the Administration for the first time is what those projected impacts are. Are they Armageddon, a quarter of a billion dollars? Are they 100 million a year, as I heard two night ago from the Mayor? Absolutely not. They are much, much lower and may, in fact, be a very reasonable amount, considering it's the Pension Fund making the money that has allowed, in the last ten years, the City to avoid payments that it would have otherwise made. Why shouldn't the pensioners be getting the benefit of that? The Administration is not here. I believe I've heard enough from Mr. Herkness. And I just ask the actuary to be on call because I think the heart of this matter is, one, do we 42 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 want, in the next ten years, assuming the greatest market we've ever seen again, as we have seen for the last ten years -- everyone agrees on that about the market -- where the adjusted returns, the posts smoothing, the adjusted market value returns were 10.8 after you brought them all down to even out the two years that were very, very bad, the two 1-percent years -- that with all that protection in the fund, it only left an average of 0.8 percent to share, which means 0.4 percent under one scenario and 0.7 percent under the 9 percent scenario. The result being that there was approximately 100 million after ten years to give out of COLA to pensioners. One time they get it in ten years. One and a half -- no one's going to vote, either the Pension Board or this Council, I believe, for a 1-1/2 increase over ten years. But that money would certainly be there, that 50 million or so, to give out as a bonus or some other things. But that's just the parameters of what looking at, is that there would be 50 million in one case, 100 million in the other. So let's look at the difference. The 43 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 difference between the two is 50 million. Under percent, which is the Mayor's floor at this 4 point, there would be 50 million. There would be 5 100 million under the 9 percent floor, $50 million 6 spread over ten years. Now, if you take the 50, 7 you spread it over ten years, it's 5 million a 8 year. But that's not the increased cost to the 9 General Fund. It is something much less than 10 that. And if the actuary could help me, in that scenario, what would be the impact to the General Fund if, over ten year years, the Pension Fund itself -- the corpus of the fund, because the PAF would be getting it instead -- got $50 million less over ten years?
Ultimately, the General Fund would be paying in the $50 million.
So it would 5 million a year would be cost to the General Fund?
It would grow slower than that and continue to be paid after that ten-year period.
Could you explain that. 44 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
Sure. Each year in which the return is less than the percent -- and over 4 this ten-year period on the adjusted market value, 5 it was less in the aggregate -- the loss is paid 6 off over a 15-year period, much like a mortgage; 7 we call it "an amortization." 8 Effectively, if there was a $5 million 9 loss in a single year, the General Fund's obligation would go up about 1/10 of that, or $500,000.
Excuse me, this isn't a loss. This is less gain over the 9 percent.
Well, yes, but what I said before is that the less gain over 9 percent up to at this point has been supporting the return under 9 percent.
Over time, it averages out to dollar for dollar, yes. So that if in this ten-year period, the fund actually had an 8.8 percent return, then the City's obligation or the General Fund has been affected by having to meet 45 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 that difference.
Okay? And if you shared at a percent -- over 10 percent, then the average 6 return would drop from 8.8 to 8.5. If you shared 7 over 9 percent, it would go from 8.8 to 8.2. 8
Okay. So then are 9 you saying -- and I'm really trying to get clear 10 on this -- that that $50 million that would have gone to the PAF over the last ten years with a 9 percent rather than a 10 percent would essentially just be paid right out of the General Fund?
Yeah. Sooner or later, there -- you know, there -- the General Fund's obligated.
So any PAF that we would establish, whether it be at 10 or 11 or whatever, the money comes out of the General Fund?