Yes. It affects the General Fund's obligation to contribute, so the General 46 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 Fund is ultimately going to be paying for it.
Yes, but there's a difference in the timing of the dollar; that's what I'm trying to say.
Tell me what impact that would be, for instance, in 1997, which is the biggest year, the year we actually had 12.2 percent.
Right. Well, see, if you isolate a single year, you'll get a different answer.
So let me explain that. In 1997, where the fund return was 12.2 percent, it reduced the General Fund's obligation to contribute.
By between 8 to 8 million dollars. It's a rough estimate. Now, as I said, taking that single year 47 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 out of context that's the answer. The City's obligation to contribute would be decreased by about to million dollars each year for the 5 next 15 years. 6 However, adding into context the fact 7 that in '95, the return was only 7.8 percent, it 8 means that the City's obligated to contribute an additional $3 million as a result of that experience. In '94, again, the return was 7.8. So on top of that, the City's obligation increased $3 million. Over the past ten years, if we look at just the investment portion and impact on the City's obligation, the City's in the a paying position. In other words, the City's obligation is higher than our assumption guessed it should be by a small amount, and the amount is small enough that we do not, as the actuaries, feel that we have to recommend a different assumption, okay? And this addresses one of your other concerns, which is not one of ours to answer as far as the risk. But if you are sharing in excess of 9 percent versus 10 percent and we looked at the last ten years for historic inference of the 48 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 impact, the net result resulting return over that period of time would be 8.2 percent. And that would reach a threshold of concern that we would have with regard to the maintenance of the 6 percent assumption. 7 And that has implications not only on 8 what we assume for investments but how we value 9 liability to the extent that your assumption for valuing liabilities goes down from 9 to 8. That means that you assume less of your liability will be met by future investment income and more of your liabilities must be by met by future contributions. And the difference is -- a rule of thumb is that your liabilities may grow 15 percent, which would dramatically increase the City's obligation to contribute. So we really don't want to have to go over that bridge.
Now, if the difference between 9 and 10 inferred, doing a ten-year inference, would be $5 million a year roughly --
-- having the 10 49 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 percent cap, just having to share all the 10 percent, by definition would have cost the General Fund itself million a year because there was -- 5 that was the first 50.
Okay. So you make a choice if you're us collectively to have a fund at all, and at percent, looking at it 10 historically, it would cost us about $5 million a year to have a sharing fund that would have gotten what we've seen in the historical perspective. And if we wanted to lower it to 9 from 10, it would cost us an extra 5.
And somewhere between 9 and 10, we can figure out the percentages. If it's 9-1/2, it's going to be 2-1/2 a half extra million dollars a year on top of the 5 at the bottom that's already sort of in the pot. Okay. I think I understand it better, Madame Chair. There are clearly numbers involved here that affect -- and I guess this is what Mr. 50 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 McPherson was. . . This was your gloom and doom scenario, Charlie, of the sky falling, and I do understand there's costs involved that have to be dealt with, and at least I know now where they're coming from and why they're a concern. But just to give some more perspective to it, whether it impacts an extra 2.5 million or 5 million a year, what was the Pension Fund's contribution the last couple of years? I don't know.
I think last year, it was -- I have the numbers. My recollection was that it was about 232 million?
And the cost avoidance to the City because there was no PAF -- I mean I'm not saying because there was no PAF, but there was no PAF so all of the cost avoidance went to the City. And I know there's a number that those good returns saved the City. That 10.8 average over ten years saved the City from its contribution. I don't need that number right now 51 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 but just a general answer to this question. Those funds are significant, those over percent funds, the funds that were gained over 5 the actuarial assumption -- that 10.8 adds up to 6 quite a bit of money. Who got the interest on 7 that money over the ten years? Or was that shared 8 also with the City? Did the Pension Fund get it, 9 did the City get it, or was it somehow split?
Well, if you're saying that any dollars that represent returns in excess of the assumption grow with interest, those dollars are in the fund to meet the liability.
So the City doesn't get any cost avoidance based on interest on that?
How about the money that's in the smoothing account, that's set aside for smoothing, the five-year running amount that's kept there? Does the Pension Fund get the entire interest gained on that money, or is there some way that the City avoids cost on --
No, any return on those dollars that are not recognized for valuation are 52 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 still in the Pension Fund, purposes and none of the interest on any of the dollars in the Pension Fund revert directly back to the City.
Well, I don't mean directly. When I say "cost avoidance," I understand that term. Does the City give any less because of the interest gained on that? Which is the same thing -- I don't care whether I'm --
Because the assumption is that the interest gain on that is 9 percent and that that's part of the basis of determining the costs.
Okay. Thank you. I have no further questions at this time, Madame Chair.
Thank you. The Chair recognizes Councilwoman Blackwell.
Thank you, Madame President. Just a follow-up to the questions already asked. We've learned in the last week 53 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 that this smoothing that was placed in this new bill changes all the money that we're talking about, so we're not talking about real money but maybe one fifth of what we thought we would, and it also affects the period of time of investment. So my question is, again, if we had -- if I understand correctly what was just said, Councilman O'Neill asked you and you replied that looking back historically over ten years, if the threshold was 10 percent, the pensioners would only get something once; is that correct? Is that what I heard? And it's twice if the threshold is 9 percent. Now, maybe I don't understand what I'm hearing. I'm trying to make it English and trying to translate English into --
I think he was a 3 percent increase -- at any time could, there have been a 3 percent increase, and I think that answer was no. And could it have been a percent, and I 22 think it was a "yes." And then 2 was in between, 23 based on the earnings. 24
The answer didn't direct 25 itself to how often there would be a benefit 54 1 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 improvement for retirees; it was to the level of that improvement. Basically, over the last ten years, the difference between the and the 5 percent is about half. 6 So that if the threshold is at 10 7 percent, the improvement is about half as much as 8 what it would be if the threshold begins at 9. 9
All right, let 10 me ask it another way. Would you compare between 9 and 10 percent because that's easy rather than saying 1, 2, and 'cause that's easier other than saying 1, and for those of us who may not be accountants by profession. But would you tell us, based on 9 percent on one hand and 10 percent on the other, per this bill and the historical reference where you can look back ten years and you could look up five years and tell us what a pensioner could get. If I'm if I'm a widow of a pensioner or a pensioner myself or a retiree, what could I get? What could I get, what kind of increase could I get? Based on our ten-year back projection which you're familiar with, what could I get as a retiree, and when and how often? 55 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
Okay. We discussed as one illustration and just as an illustration because, according to the language in the bill the Pension Board would have the obligation to identify how the PAF would be used. The illustration that was discussed is that at a percent threshold, 8 retirees'. 9 Benefits could be improved by about 10 1-1/2 percent. So someone who is getting $100 would be able to get $101.50 a month for the rest of their life with the proceeds. At a 9 percent threshold, that same retiree would be entitled to $103 a month for the rest of their life -- to just put it into a perspective.
That's -- well, a month if that's -- we're talking or percent increase in the monthly benefit.
Translate it. It's $2 or $3 for every -- 56 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
So if you're getting a $300, pension, so you may get $303. Is that right?
For a $300 pension, you get about $305 versus -- no, 3 -- well, it's 310 versus 305.
Okay. So if you're getting $300 now, you may be getting $305, or did you say $310?
Well, 305 if the threshold begins at 10 percent, and 310 if the threshold begins at 9 percent.
Now, if we did not have smoothing, what would you get?
Mr. Herkness? 57 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
Mr. Herkness, can you answer the Councilwoman's question?
I don't think I can. If you didn't have smoothing, there would be a total different method of calculating. If you said let's forget that you had an asset valuation or a smoothing process, you would take the market value of the fund, then you would take some number of return and run some scenarios. If it was -- if you used the market value of the fund, you could go -- you'd have to go back and calculate that. You could get that number. Off the top of my head, I don't know. I know I did a 10 percent scenario that went back about thirteen years and, you know, we had somewhere around 126 or $130 million in the fund, you know, over that period that was just based on over 10. And that was using the asset valuation; process we did not use market value. If we used the market value, that number would be larger, there's no question about it.
One final 58 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 question: Do you have any idea or can you explain to me why either $5 or $10 in additional money per month for retirees has created this kind of problem, all the furor -- well maybe "furor" isn't the right word -- all of the dissention about the Blackwell bill and all of this about Mayor coming up with another bill? I absolutely do not understand and would like somebody to explain how a poor guy or poor woman who gets a $5 or $10 increase can break the City's budget. We've got a Republican Convention that's coming and that's going to bring us a minimum of $300 million. We got all kinds of stuff. We had the Mayor bring in his budget. I just wish somebody could explain to me the threat of giving people who make $300 a month an additional 5 or 10. I don't understand it. Maybe I could have -- I prefer then, Mr. Nutter, if you don't mind.
If you want to clarify, I just wanted them to answer and not 59 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 yourself. Fine.
I just wanted to just at this moment and where the Councilwoman is, I just wanted to make sure that the record was clear that the response that Mr. Kent made about what percent someone may get per month based on how much money there is is only based on whether or not the Pension Board decides in the distribution of the funds in the pension adjustment account to go that particular route in terms of distribution. There are various ways to distribute the money in the Pension Adjustment Fund. It could be as, Councilman's own's example was, the one-time COLA. It could also be similar to what the front part of the bill and similar to what your bill had proposed that you could give someone a lump-sum payment. Under that scenario, using the same figures that we're presently using to get people a check in July of '99, that amount is $44 million that would allow someone to get a $1,000 base, plus $100 for every year of service over ten. So, for example, if the Pension Fund 60 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 decided not to do a one-time COLA with the money, but decided to do a lump-sum payment, the person who has been retired for fifteen years would get a $1500 check.
Excuse me, Mr. Nutter, I have no idea if -- you've gone from -- I just asked them about $5 and $10 breaking the City.
Now you've gone up to somebody getting $1500. I have absolutely no idea what you're talking about but I really would appreciate it if they would respond to that question. I'm just trying to figure out what the threat of $5 or $10 is to the City for people who make nothing.
I'm trying to understand why we are here and why, since Ben Hayllar's out of town and they represent the Administration's point of view, I'm asking them to explain it to me and to all of us so that we can understand why we have this debate.
Right. 61 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
Why we had to have two bills and what this whole point is to -- all of this about so very, very little. I mean, what's 5 or $10 going to be? My goodness, I give that out to homeless people more than that in a day. My goodness, I just don't understand, so I wanted them to explain it to me.
Councilwoman, in our opinion, the total cost must be counted as to say what the total expenditure in any given year would be for the pension adjustment, whatever you'd want to give to all 30,000 -- or in this case, there's about 20,000 beneficiaries out there and survivors and retirees who would receive something based on 131.1 of this bill, and that's X-amount of dollars. That amount has a certain level of pressure on the General Fund. The City's agency bill goes up because of the increased costs there, and that is presented to the City and they pay it off. A 5 percent, a percent increase would be 25 very small for someone at 300 as it goes up. The 62 1 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 total amount is what you have to deal with. If the amount of money that was going to be given, and let's say there was an ad hoc passed just by Council -- not in the Pension Adjustment Fund, just the Council decided to give 1 percent or they decided to give $10 to everybody in the Pension Fund, $10 a month, no matter whether you earned $25,000 a year or whether your pension was $8,000 a year, you would have to do that calculation and see whether that would increase the City's General Fund contribution. But under the act, Act 205, the State law, which is really what drives increases that a municipality wants to give its retirees, you have to fund that increase over ten years, and the retirees might receive it all at once or they might receive it over their expected lifetime, which could be -- some would be less than ten years, some would be much more than ten years. But you have to put that money in addition, in addition, to what you've already been told by your actuary that you have to put in this year. So that, for the sake of argument, if it was only a $10 bill and the City already puts 63 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 in 100, the City would have to put in 110 for the next ten years because they made -- there was an ordinance passed and you would have to pay additional. So it's really the State law that drives it and protects the future. Because if you passed an ordinance and didn't fund it, then you would return to what happened many, many decades ago, where they put in a pension benefit and almost paid as you go, and then the unfunded group where since -- the '70s, the City has 12 consistently paid the Pension Fund money towards 13 that unfunded and it has ever so slowly gone down. 14 The pension bond obligation, which is 15 really historic, as is this legislation, and if I 16 could just make my own comment again, I'll get off 17 the air on this. You were about to say, you know, 18 why are we fighting so much? It really is sad 19 that people who have the same objectives have been arguing so much over what is truly historic, you know, legislation. And I'll get off the air on that one. But it's the total amount of any increase that is given the retirees. The City has to fund that over ten years. And if it was to 64 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 active employees, they can fund it over twenty. So they must -- that must be in addition to what they're paying now because of State Law Act 205, which was put in into 1985. And the City -- we were asked in previous Council sessions, you know, what we've been paying. We've been receiving amounts in addition to the minimum obligations from the City's General Fund so that the Pension Fund is very happy about getting more than the State says you would have to get. Last year, it was 247 million and, you know, the pension bond obligation will adjust that, but it's still -- you know, going up to 72 percent funded is a great thing for the Pension Fund.
I will comment and then I'm finished, Madame President. And that is from the beginning, we have tried -- the union has tried and has been willing to meet with everybody. In spite of the negative stuff about the press, the unions threatening, they've done everything but get on their knees. They have brought their people in here, they have brought all their actuaries and other financial 65 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 experts here. They have tried to do everything. And yet, we read that they filled the chambers when every year Mayor gives his budget address, every City department is here. When the School District testifies, kids aren't even in school that day. But yet, when it comes to this kind of bill, labor is told that they use some other kind of threatening technique when retirees who are home anyhow come in. It think it has been very really unfairly painted. I believe that from the beginning, they have been available and certainly I have. I told the Mayor as recently as yesterday when he came by to speak to each of us after his budget address, that they are willing and I am willing to try to work out anything and have been from the very, very beginning. But for some reason when it comes to a bill where people are at the bottom rung of ladder, there are too much complications to get it done. We can get anything done. We may even end up with stadiums. We can come up with any way to deal with the State, with the federal government to fund those things we choose to. But when it 66 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 comes to people -- as always -- who need it most and who have given the most service to our city, there's always some impossible way, there's always some impossible costs, there's always all kinds of reasons why we can't do it. I would hope, Madame President, that we can take these amendments, try to be fair about 'em and not try to decide again, as labor has been told, take what we want or you get nothing, which is what they were told last December. I would hope that we would all, in good faith, I agree with Mr. Herkness that we all want pensioners to get something. But I mean it's even more ridiculous when you hear how much they get. Then all of this, all the time and effort that's put into this, they're getting nothing. Let's try to at least be fair and come up with a bill that everybody can go out of here feeling that they have some level of dignity and respect and that all this process was worth something for those people who need it. Thank you, Madame President.
You're welcome. 67 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 (Applause.)
Thank you, Mr. President. I used to think I understood a little bit about when a company made money in a year and when they lost money. But, apparently, in the pension field, it's different. You make money but if you don't meet an expected gain, then you call it a "loss," even though you've made money, right? So if you're expectations are at 9 percent, as you said, and you get an 8 percent increase on your investment, no private company would report a loss, would they? They'd say it was great, we made an 8 percent increase. But in the pension field, is this universal, that it would be regarded as a loss? Or is this something special?
Councilman, I think the private sector -- not that I -- I know what you're saying. I think the private sector massages numbers, you know, an incredible amount, and the 68 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 private sector would probably say, We're short of our projected earnings. And the analyst would say the stock shouldn't be bought or something like that. But, you know, that's only opinion about the private sector.
Right. So when talk of a loss in the sense of not having met the expectations, it may not be the loss as we generally think about it; maybe we are just disappointed that the goals that were set have not been achieved, and we only make a profit when we get above our goals. Right? In other words, instead of the school standard tests that were given out recently showed improvement in the schools and we're cheering all over at the great gains, even though the results were far from establishing that people that graduated high school could read and write.
That's right. If you have a projected of $100 one year and then 110 and then 115 and then 130 and you're assuming that, and if you don't make your assumption, if you make your assumption or greater, you wouldn't have to put in the 113, 115, 130. But if you fall below 69 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 it, you have to put in even more than your assumption. I think that's a correct perception that you're saying there.
Am I right in understanding that the body of the Pension Fund has multiplied by about 400 percent in the last twenty years? A.
That it went from about a fund of a billion to currently a fund of about 4 billion?
When the fund really got its so-called feet wet in the capital markets, it was about $880 million around 1984. It is now market value of about -- not counting the pension obligation bond -- 3.4 billion.
So my percentage is roughly accurate, except that it only took fifteen years, not the twenty years I projected for basically the fund to quadruple itself, the corpus of the fund.
You know, I have such troubles understanding the deep concern about 70 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 the stability of the Pension Fund. I mean, is somebody expecting a nuclear attack on Philadelphia so that suddenly at one time, we're going to have to pay out all the money? I mean, I just don't understand why a 4 -- billion, billion, 4-1/2 billion maybe with the proceeds of the Pension Fund, why we're so concerned about the level of increases we're talking about. Aren't these increases that we're talking about far below what Social Security pays its retirees on the normal COLA? How do we compare with it? We haven't done anything in the last ten years. How long has it been since pensioners got any basic increase based upon the cost of living or on any other basis?
In 1984 and 1985, there was a $25 increase per month on the pensioners' salary. There was a State-supported increase for police and fire that took place in 1988 that took effect January 1989. That was laddered. You had to be out five years, ten years, fifteen, you got different amounts of money. And then way back, in 1980, which is, 71 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 you know, granted, a long time, there was an percent increase passed for non-uniformed. You had to be retired as of 1975. And in the '84 $25 a month, you had to be retire by July 1, 1981.
So it's been a long, 7 long time. Whether its police and fire, it's at 8 least ten years since any of them got any kind of an increase.
And maybe fifteen years for the general employees that retired.
It just seems to me -- I thought Councilwoman Blackwell made a very compelling general case that it really makes no 21 sense. I remember when the father of one of our distinguished colleagues, Councilman Rizzo, was Mayor of the city, we had an annual budget of maybe a billion dollars a year at that time -- I'm 72 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 not even sure it was that high, but it was in that area. And a newspaper reporter asked him about a $3.5 million expenditure, and the finance director then was Lenox Moke (ph.), who was nationally respected in the finance field, and he said, "Don't bother me with a trivial question when you're talking about $3.5 million out of a budget of about a $1 billion." And I would submit we're talking even of much less money compared to this corpus. I just don't understand where there can be any kind of a danger if the amounts we were tripled over what we're talking about here. Now, let me ask you, before I get back to the numbers. There are other aspects of Councilman Nutter's bill that disturb me mightily. And I have to say that I understand that when people who work for the Mayor and the City Solicitor's Office, or whether they were trained there and currently now work for City Council, they still have that same approach they always had. I can understand that they want to protect in every way the members. But tell me, why is there this language 73 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 -- all of us had just gotten used to the words, this averaging asset valuation five-year period. I can't even remember the words that follow each other 'cause it's new strange language. But apparently that isn't enough. So, Councilman Nutter, I'd like to address this directly to you. I suddenly find in the new version -- maybe I missed it before -- that if the Pension Board has authorized it, for any reason they don't like this asset valuation spread method over five years, maybe if it doesn't produce the result they're looking for, then the Pension Board on its own may substitute such other generally accepted valuation methodology as may be approved and adopted from time to time by the board. Now, I don't know where that language comes from, but it's the easiest excuse in the world --
I believe that Councilman Nutter can answer that, Councilman Cohen.
Thank you. 74 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 The Chair recognizes Councilman Nutter.
Because I don't understand why that is. You mean Council's not going to have anything to say about it?
Thank you. The Chair recognizes Councilman Nutter.
That language came as a result of some of the discussion the other day that no one else uttered there but myself. I'll tell you why and it may not be necessary. But when we had the discussion the other day the issue was raised about why does the current bill 14 have the phraseology adjusted market value of assets valuation method. That is the method that is used by the Pension Board to evaluate or to value our assets. That is their methodology. It is why that same methodology is used for the Pension Adjustment Fund, so that there is consistency. The Pension Board decides what valuation method to use.
I guess City Council could change it. There could be financial 75 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 market implications to that and we can have that discussion if you would like. But the Pension Board does decide what valuation method to use.
Do we have any power to change that -- we as City Council?
Councilman, you're my lawyer, and I would defer to your knowledge in the area. I believe that the City Council, probably by ordinance, could change the valuation method. All I can say to you is that you would be changes the total valuation of our Pension Fund which could have financial market implications for the credibility of the pension system, but our actuary can respond to that. I don't know when the Pension Board decided to use the market adjusted value; I could not answer that question. I don't know if they've been using it for two years or fifty years. All this phrase means is that if the Pension Board does ever decide to change its method of valuing the Pension Fund, that the same 76 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 methodology should be used for the Pension Adjustment Fund so that you don't have one valuation method being used for the $4.4 billion Pension Fund and then some other valuation method being used for the Pension Adjustment Fund. And if there is a difference between the two, quite honestly, there could be some implication on how the Pension Adjustment Fund is valued. I don't necessarily think it's a particularly important line in here and that's why, quite honestly, I offer to you if it is of that level of concern, we can take it out. I just wanted to point out -- and I would have gone through this in the presentation that if the Board ever changes its valuation method, there should be consistency in how all assets are being valued because you remember, even in the previous bill, in all of the testimony in this is that the funds in the Pension Adjustment Fund are not being removed from the Pension Fund. They are staying in the Pension Fund. So I guess theoretically you could use a different valuation method for dollars that are credited to the Pension Adjustment Fund even 77 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 though they're not separate, but you'd be using a different valuation method for the $4.4 billion Pension Fund. I don't necessarily know that you want to do that. This line was put in to recognize that there has to be consistency in the valuation method that's used. It does not have to be here. If it is objectionable to you, I'd be glad to take it off, but I think we needed to at lease have that discussion.
Well, I think it ought to be eliminated from the bill. We now know we don't fully understand but at least we have a little familiarity with it. I think before that method is ever changed, it ought to be brought by the Pension Board to the City Council, go through the explanations we're going through now so that we understand why they're changing it; rather than having somebody like me very suspicious that the reason they're changing it is because they want to find another way to avoid giving a COLA or to lower the amount of it.
Because that will be 78 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 our suspicion all along.
I know you asked me a question, and I don't want to take any more of your time, but would you mind, while we're on this point, if you would ask the people at the table when they decided to go to the present valuation method that they're using?
As far as I can remember 79 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 back, we've been smoothing, there was a change one time from a three-year to a five-year. And that was in either '88 or '89, but they have been smoothing certainly during the existence of Act 205 from 1985, and probably before that, because there was a -- in 1980, they didn't even have the investments marked at market, what they call "marked at market," so that the cost of the investment might have been $100, but because of what it's worth in today's market, it might have been 90. So there was a significant value less than the fund -- than what they paid for it. So they needed -- they phased that in --"they" meaning the actuaries and the City from 1981 to 1985 to bring it to market -- marked it to market so that what's ever in the fund is valued at mark value on June 30th every year, and not play a game so to speak, that I bought it for 100 and I can only sell it for 80. That's what, you know, in 1980, that's what they were presented it so they phased it in. When they actually did the smoothing -- certainly from '85 forward because Act 205 came in 80 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 then, and in their presentations, it was three years. It definitely went to five years smoothing in 1989. So certainly at least years and 5 probably 15. 6
Thank you. With 7 respect to the power to make distributions of 8 funds, I raised this issue in the discussions. I 9 still find that Council can enact distributions -- 10 my word only -- that word is not in the bill, but I say it applies because it says Council can enact distributions if the Board fails to provide for any distributions during any period of 14 consecutive months. 15 It is very easy as a lawyer, and the 16 City Solicitor's Office has enough good lawyers to 17 know that if they give a nickel increase, they 18 have enacted a distribution and deprived Council of the power to decide that it's an inadequate distribution, and I don't know why that language is there. Why is there a limitation on Council's legislative powers inserted into this bill? And I will ask whether you would accept, Councilman Nutter, an amendment to eliminate that 81 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 restriction? I understood from your talking that Council could at any time, if it reached the conclusion, enact a distribution, that we had the ultimate power at all times. But this is a limitation by which Council can be denied any power to direct distributions as we are, you know, in this bill.
I don't need a lengthy response if you say yes, you will accept it. (Laughter.)
I understand that. You're talking about Section 131.4.
In Paragraph (b). That section was inserted for a particular circumstance. If you turn, Councilman, to the last page, under Section 3, which starts on 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 and extends to -- I'm sorry, Councilman?
I understand but you won't find this in there. It's on the very last page.
Yes. "City Council expressly reserves the right to amend the authorizations, directives, and provisions of this ordinance at any time as it deems necessary." That is a much broader reserving of rights to the Council. The issue that you raised on going into came as a result of discussions between and among Councilmembers and the union leaders that specifically talks about a lack of 83 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 distributions over a certain period of time, the eighteen months. We also have a one-year reporting requirement that the Board has to tell us within 30 days at the end of every fiscal year what distributions they have made. If they have not made any, why they have not made any. The section that you were talking about (b), on going, to , was certainly no 10 attempt to limit Council's ability to make distributions; it was pointing out an example in reporting period that would require the Board to tell us something if they haven't made any distributions in eighteen months.
May I suggest an amendment eliminating it? Because it is using the language of accountants. It is a commonly accepted legal principle that when there's a general grant of power which contradicts a specific statement of power, the specific applies. And in my opinion, the court may very well rule that Council is limited by this section, despite the general statement that appears on and 8.
I understand that. 84 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
Because we don't need -- with and 8, we reserve that power. 4
The reason I have pretty much not said anything during the bulk of the hearing is, Councilman O'Neill was raising a very important point that is the primary subject of dispute, which was about the 9 and 10 percent issue on the cap. The intention today was to at least try to get as much testimony on that particular issue. It is a very specific issue. And then I had planned to actually go to the table and walk through -- section by section and paragraph by paragraph -- the various provisions. We have not even technically gotten to the point, other than them being on your desk, of talking about the proposed amendments and going through that discussion. So I had certainly planned to do that. Except on the 9 and 10 percent discussion, I would probably be the more appropriate person to try to 85 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 answer or at least respond to some of the questions that you've raised as opposed to the actuary and Mr. Herkness, who can specifically certainly engage in discussion about what the Board does or even the discussion that Councilman O'Neill raised, which is a very important issue and he makes a very good point. That's how they ended up at the table first.
Well, I'm making again the request that you consider an amendment that would eliminate that language. I tried to follow. I'm not sure -- I just couldn't follow it, but I just believe that Council ought not to be about the business of limiting its own powers.
I understand that. There was no intention to limit Council's power.
And that is a premise we ought at any time, when appealed to by any group, have the right to consider any subject and make a decision within our general legislative powers.
I will have an 86 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 amendment ready and will hope that you will be ready to accept it.
Then I still find great difficulty in determining when a survivor of a retiree gets the benefits. I think -- suppose a 30-year-old employee retired for some reason.
And meets the necessary standards -- maybe he's 40 years old. Do his beneficiaries -- and then he dies immediately thereafter.
Right. 87 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
Do his beneficiaries then have to wait ten more years before they get anything?
Again, Councilman, unless the Chair determines otherwise, we have these other two witnesses at the table. That's in the first part of the bill. There's actually a separate sheet of paper that explains what that amendment is. And if the Chair wants to go into a discussion about amendments, I'm pleased to do that but --
Yes, there is a response, and you actually have an explanation on your desk.
We will go amendment by amendment. You have a copy, Councilman, of the proposed amendments that were circulated yesterday?
Yes. 88 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
We will take them up a little later and we will actually go amendment by amendments, and I think Councilman Nutter then be able to try to explain.
And he will explain it to everyone, and we will be able to question him on every one of the amendments at that time. Is that satisfactory with everybody?
Do we intend at some point in time to vote on this issue today?
Well, this is my point of information -- maybe you'd like to have another point of information. But my point of information is: 89 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001
Do we have a general idea in the Chair's mind when that may take place without holding you specifically to it? I mean it's --
It was my understanding that we were going to do this by this afternoon.
All right. I would like to just support Councilman O'Neill's statement. I think Mr. Hayllar is a very necessary witness. For example, Mr. Herkness, when he testified, emphasized that it was the General Fund and not the Pension Fund that they were trying to protect. Yet, as I read the statement from Mr. Hayllar, he says to the contrary in the final paragraph. As set forth in detail in the Mayor's message, the cost-of-living 90 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 provisions of the old bill created significant risk to the General Fund and could also have jeopardized the financial stability of the Pension Fund. Mr. Herkness, that is not intended to criticize your statement. You were explaining your view as the Executive Director of the Pension Fund. But Mr. Hayllar expressed a concern about both funds, and we would like to hear that. And I think we would like to understand one general question. You say that Act 205 is the determining factor in how much money the General Fund of the City has to contribute to the Pension Fund?
And do I understand correctly that in the testimony on the pension -- on the bond, the floating of this $1 billion-plus bond, we were told that the General Fund who would immediately gain a reduction of $23 million a year over the next ten years and what it would have to 91 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 pay to the Pension Fund? Well, it would seem to me that that gain itself -- that that is a gain in the sense of a reduction in the liability of the General Fund to the Pension Fund and would much more than pay for what we're talking about in this bill. And, therefore, I don't understand again how we talk about this bill jeopardizing the General Fund at a time when the General Fund is gaining an enormous amount by reduction into the General Fund of $23 million a year over the next 10 years. I'd like to hear a comment from anybody, because that's a mystery to me.
Councilman, previous testimony at the pension bond hearings was that the General Fund would accrue net dollars between the debt service that you would have to pay on the bonds, which went out at 6-1/2 percent, a little bit less than what they had expected and what they had previously projected to pay into the Pension Fund over many, many years, which was steadily increasing over time. And I think they've come up with an average. I'm really not sure. I'd have to check 92 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 with a Payne Weber or whatever. They came up with an average savings to the General Fund from the two numbers, which is the incentive to do the pension bond, I assume.
Now, you know, I'm not a mathematical genius, by I multiply by 10 8 and I come to an immediate savings to the General 9 Fund of $230 million, and all the two payments are 10 going to be costing is $88 million. 11 So I just don't understand. In that, I 12 join Councilwoman Blackwell, and all of these 13 questions about the damage of the General Fund and 14 to the Pension Fund at a time when the position of 15 the General Fund is actually being enormously 16 strengthened -- even considering the payout over 17 the two years. 18 Now, that may be rhetoric, but if 19 anybody want to answer that, I'd be delighted to 20 have an answer so that I could explain to the 21 folks in my area of the city and then to folks 22 generally in my duties as a Councilman at large 23 why we're so consumed by the subject matter and why the Mayor says this is threatening the financial stability of the City. 93 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 Thank you, Madame President.
You're welcome. The Chair recognizes Councilman O'Neill.
Madame Chair, I believe that Mr. McPherson may be able to answer that question when he returns. I think he knows how much the General Fund is projected to save as a result of the pension obligation bonds. I just have a couple of follow-up questions for the actuary. Ken, you mentioned earlier -- I'm just trying to get some clarification on this -- that with a 10.8 percent return, which was the 10-year return on the chart we were using up to 1997, that even at a 10 percent floor that would -- where sharing starts at 10 percent, that that would cost the General Fund money because the actuarial assumption would go below 9 as a result of that? I don't understand because --
If they get the 94 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001 first 10, how do they --
The difference between that 8 and my earlier testimony is, over the last ten 9 years, it was 8.8. 10
That's a question, you know, of what you count and what you look at.
Okay. I think Mr. (unintelligible) said 10.8 yesterday; I've been using it all along. So, actually, over ten years, we would not gotten into sharing even at 9.
There would have been funds that were shared. However, the average return over that period of time was less than the 9 percent. There would still have been years where you exceeded 9 or 10 percent respectively. 95 1/27/99 COMMITTEE OF THE WHOLE - Bill No. 990001