Very briefly. That's the issue I was actually raising. This is not a matter of political support for minority business and employment participation. This is actually a matter of how we move a group of people or peoples from one level of opportunity to another level of opportunity. And sometimes a technical discussion needs to take place in terms of how we get there that it is not driven. In terms of people being here for 10 years or 20 years, however long they've been, there are a number of years, and I don't mind saying this for the record, where people rubber-stamped budgets and what they questioned on the record was irrelevant. People rubber-stamped projects and they will vote for 00506 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 minority participation knowing that it wasn't going to happen. So what people did during prior budget processes and what people did in terms of prior approval projects in regard to minority participation, I could care less. This is a legislative process. This is a political process. I will use procedure or whatever else to challenge whether people are being serious about creating new opportunity for people or not. Thank you.
You're welcome. The Chair now recognizes Councilman Ortiz.
Thank you. There have been structural problems that have prevented minorities from participating in the process and those structural problems have still not been eliminated. And it's part of, one, the political and economic culture of Philadelphia. And I think that's what the disparity study goes towards. 00507 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 And that's why we need to be able to look at it, because if we are able to look at this, we'll finally move the discussion from the simplistic to the real core of what it is that is preventing people from fully participating and why we have spent huge billions of dollars since 1980 in this City and before that in terms of construction, in terms of hotel building, convention centers and minorities. Although, we continuously become the majority in terms of populations. In terms of blacks and Latinos and women, they have not fully participated in that economic boom that has taken place. And that the dollars seem to be transferring outside and business have not been created. And what we see in that period of time, instead of having economic corridors and business corridors being renovated and new businesses, the Ridge Avenue, the 5th Street, the South Street, we have seen them deteriorate as the big boxes have come in. The retail small stores and businesses have been put out of business. A lot of those things have taken 00508 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 place because of the decisions that we have made in this Council without taking into consideration the full impact that it has. And I believe that it's about time, if we're going to talk about how much money is being spent, we have to be able to see who gets it and who makes the decisions as to how that money is spent and who it goes to. That goes for businesses, that goes for jobs, that goes for in terms of the union and the role the union plays in the overall process. I think if we get that picture, I think it's going to be a picture that is going to take courage, real political courage for political representatives to move forward and try to put into legislation the solutions that are needed. Mr. Gamble, welcome to Philadelphia. COMMISSIONER GAMBLE: Thank you very much.
A colleague of mine is not here, Mr. Cohen, and he would have had a field day today. He would have had incredible fun. He asked me to ask these 00509 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 questions and I'm going to ask them of you because he has a special interest. And we brought this up -- prior to this year we brought it up with universities like Temple and University of Pennsylvania. How much does the City spend on apparel such as uniforms and so on? COMMISSIONER GAMBLE: We'll have to get back with that information, Councilman.
Could you also provide us with a list of the bidders for the apparel products, including the type of apparel to be supplied in the amount of the overall contract? COMMISSIONER GAMBLE: Yes, we can.
And if you have any knowledge or anybody in your shop, I don't expect you recently here, but you come from a city that is well-known as one of the largest ones with sweat shops, specifically apparel sweat shops, and L.A. is famous for them. We would like to find out if that apparel is done in the United States or in China, in Taiwan, Ecuador or Guatemala or who's 00510 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 this lady on TV, Kathy whatever, she had them done in Hondorus, right? COMMISSIONER GAMBLE: Yes.
What percentage of that are union shops? And if you have set up any guidelines to determine the working conditions that the company has that we're buying from so that they're not exploiting workers, they're not going ahead and subcontracting out to sweat shops and so on, along the line. Could you give us answers to these questions? COMMISSIONER GAMBLE: Yes, I can. I will. I will try to.
By the way, how much are we paying the consultant that we're hiring for that thing about naming and rights and so on? COMMISSIONER GAMBLE: That hasn't really been determined as far as that, but we will give you the RFPs.
Well, you have a figure of how much we're going to spend on this? 00511 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 COMMISSIONER GAMBLE: Councilman, it's under evaluation. And we may not be moving forward with it at all. It's really just a planning process. Proposal doesn't mean it's going to take place.
The purchase of services in the 200 and 300 that you have, if you can give us the last two years of that, who we have purchased service from, and how much, and the quantity of money, and the ones that we have currently, and the expenditures along those lines? COMMISSIONER GAMBLE: Yes.
And could you put down in terms of that who are the majority companies, who are the subcontractors, minority input, and so on, down the line? COMMISSIONER GAMBLE: Yes.
Thank you. COMMISSIONER GAMBLE: Excuse me, Councilman, are you referring to just the goods?
Well, yes. You have here for purchase in terms of a certain amount in the 200 -- Class 200 and Class 300, 00512 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 and I just wanted to find out in both. COMMISSIONER GAMBLE: Are you talking about what we purchase?
I'll get to the other departments when they come in. COMMISSIONER GAMBLE: Okay.
Thank you. The Chair recognizes Councilwoman Brown.
Thank you, Madam President. Welcome to Philadelphia, Commissioner. This is my third year sitting here and I've always been struck by both the gender and ethnic make-up of department heads. How many deputy commissioners do you have? COMMISSIONER GAMBLE: I have two deputy commissioners.
And their gender? COMMISSIONER GAMBLE: One female and one male. 00513 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001
Middle managers? COMMISSIONER GAMBLE: I have to get back with you on that.
Could you, please? COMMISSIONER GAMBLE: Yes. Yes, I will.
Thank you very, very much. COMMISSIONER GAMBLE: You're welcome.
Thank you. Are there any other questions for members of the committee? (No further questions.)
Thank you very much. And good luck to you. 00514 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 Board of Pensions and Retirement is next. (Witness comes forward.)
I am James Kidwell, Acting Executive Director of the Board of Pensions and Retirement. I am pleased to present testimony on behalf of the Board's trustees and its chairperson, Janice Davis. With me today is Anthony Johnson, Chief Investment Officer of the Board. 271 million. In Fiscal '03, we will have 72 budgeted positions. This represents an increase of four positions. The increase in staff positions is a direct result of DROP, bonus payments made to the retirees, survivors and beneficiaries, and changes to the Deferred Compensation Program. 3 million. In Fiscal '03, the City's general fund contributions to the fund will be more than 00515 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 the minium municipal obligation required under Act 205 of the Commonwealth of Pennsylvania. The City may take this funding approach because the Pension Fund remains over 70 percent funded. This funding level is very significant because it enables the fund to meet its pension obligations to current and future retirees. 6 million in debt service on Pension Obligation Bonds issued in February '99. 4 billion by the end of Fiscal Year '06. The fund recorded a significant growth between the late '80's and the later half of the '90's. 6 percent during the first half of FY02, the current capital market indicators show signs of an economic recovery. If the market returns continue to trend upward through the first half of FY03, investment earnings will help offset the benefit payments. 02 percent of 00516 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 the fund's market value because of the Enron collapse. Having a well-diversified portfolio has helped cushion the Pension Board against negative events. In January 02, the Board began to implement the asset reallocation of its portfolio that it adopted at its meeting in December '01. 5 percent in private 13 equity, and 5 percent in tactical asset 14 allocation. 15 Currently, the Pension Plan assets are invested with 26 investment managers, 30 alternative investment limited partnerships, 4 real estate investments and eight direct investments. Included in the 26 investment managers are the 10 managers in the Opportunity Fund which the Board funded in August '01 with $100 million. The Opportunity Fund which focuses on emerging and minority investment managers has been successful. The Board will allocate an 00517 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 additional $40 million to the program within FY03. 8 percent of the capital committed to the investment. In March 28, '02 the Pension Board will be providing a $14 million bonus payment to eligible retirees, survivors and beneficiaries. The bonus is being paid from the Pension Adjustment Fund established by active City Council on March 8th, '99. With this bonus, the Board has paid cost-of-living increases in four consecutive years totalling $126 million. In FY03 the Pension Fund is expected to make over $432 million in benefit payments to its retirees, survivors and beneficiaries. In Fiscal '03 the Board will significantly improve response time for requests for information from employees by developing an active employee database with the ultimate goal of providing 00518 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 employees with an immediate accurate pension estimate as well as with a more current pension estimate in their annual benefits statement. The Board continues its endeavor to expand its Website to make available such things as the Pension Code, benefit formulas and important information about upcoming finance and retirement seminars. The Board continues to promote the Deferred Retirement Option Plan which is 29 months into the four-year test periods the Board anticipates an increase on a number of employees retiring from DROP. The Board is establishing procedures to expedite payment of the accumulated lump sum retirement DROP benefit within 40 days of retirement. There are currently 2,582 uniform and non-uniformed employees enrolled in DROP.
The staff has determined that over 2500 employees will become eligible for DROP enrollment during the remainder of the four-year test. The Board has established financial education seminars to assist employees in deciding to participate in DROP or continue to 00519 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 earn credited pension service. On June 1, '02 the Board will be making available group long-term health care insurance to retirees, survivors, beneficiaries and their parents. The Board's cost is administrative only. The participants will be required to pay 100 percent of the premium. The group plan offers affordable monthly premiums to protect against the devastating cost of long-term care. Individuals who are unable to perform normal activities of daily living such as eating, dressing or bathing due to illness, injury or aging will be eligible for a daily benefit allowance based on the level of coverage selected. I thank you for listening to this testimony. Anthony Johnson and I will be happy to address any questions that you may have.
Mr. Kidwell, has the actuary reviewed the impact of the DROP Program, and if so, what are the preliminary findings?
The actuary made a presentation last week at the February Board 00520 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 meeting on a very early look at DROP as of June 30, 2000, which was only nine months into the four year test period. One concept they struggle with is how do you measure the cost of DROP versus if you did not have a DROP. And I guess what they came up with is that a very early look would indicate that they came up with $11 million cost for the DROP versus if there was not a DROP.
I heard, I think last week, that there are 2,400 employees whom have opted for the DROP Program?
That's correct. Our records would indicate -- our latest records that are official would be about 2,582.
So the first eligible group would be when, October of 03?
The earliest date of enrollment was 10/01 of '99, four years out would be if they stayed the entire four years they would have to be retired by September 30, '03, that is correct.
What is 00521 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 the projected unfunded liability of the Pension Fund for FY03, '04 and '05?
I don't have that information with me right now, but I will be glad to provide it to you.
And would you let us know will this represent the unfunded liability in excess of percent in any year; 10 and if so, what years? 11
Do you 13 expect funds to be paid into the Pension 14 Adjustment Fund in FY02 and FY03? 15
There will be no 16 payments made to the Pension Adjustment Fund in 17 FY02 or FY03. 18
19 Mr. Kidwell, can you tell us what type of 20 investments are included in your tactical 21 assessment allocation? 22
Good afternoon, I'm 23 Anthony Johnson, the Chief Investment Officer.
Good afternoon. 00522 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001
We invest in outside managers in diversified portfolios both of stocks and of bonds.
Well, how many money managers does the fund have?
How often 10 do you review their performance and what is the 11 performance criteria that is used? 12
We look at the 13 performance monthly through a flash report, look 14 at their monthly returns, and formally, on a 15 quarterly basis for the Board, we look at both 16 the historical performance quarter, one year, 17 three years. We also look at the structure of 18 the companies to make sure that things are 19 sound. 20
For those 21 managers who are under-performing, what happens 22 to them and at what point do you replace a 23 manager? 24
We have an eight-stage 25 performance rating for each manager starting 00523 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 with satisfactory being the top, down seven levels determination, based on historical performance. We also factor in their performance given the market environment. There are times when a manager's style is out of factor. There are times when the market is acting in what term is called "irrationally" but their process is still sound. We have to factor those things into evaluating our managers. But we do mark them against a market benchmark and against a universe median of other comparable managers.
Thank you. The Chair recognizes Councilman Kenney.
Thank you, Madam President. In light of the discussion relative to money managers and the rating system, how are money managers selected in the first place?
We use an outside consultant to help us screen a database of 1,500 managers and call it down to a list relevant to 00524 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 the style in which we're searching. For instance, large cap value, we'll identify large-cap value managers that fit the criteria of the Board; criteria being performance, stability of the organization, fees.
They're selected, I believe, back in 1996 by a previous CIO.
Recently -- well, relatively recently, in the news there was some bit of a controversy relative to an investment company called Sturdivant. I don't know if you were there then or if you were familiar with that company. Could you explain to me what process was engaged in, seven step 00525 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 process, examination of that company, what happened and why did it seem to take a story in the paper to have them removed as a money manager?
I wasn't there when Sturdivant was hired and I also was appointed CIO right around the time Sturdivant was terminated, but I will give you my comments on that.
Staff had reached a recommendation of termination, that is true. However, at that time in the market -- and I'll step back a little bit -- there was a phenomena going on with gross stocks. And by that I mean, there's a lot of money coming into the country from foreign investors, and many domestic investors were pushing the value of technology stocks higher and higher. The benchmarks that we used to mark our managers, the Russell 1,000 value, are looked at by Russell, Frank Russell, once a year. There are stocks in the value benchmark that were once considered to be value and a 00526 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 comparable universe to our managers, but over a short period of time with the escalation of the technology market, many of those stocks became growth stocks. So you were looking at a benchmark that wasn't quite right for our managers. True, staff had put on a recommendation of termination, but we had to sort of see the market through that market cycle to make sure that it wasn't just a matter of their style, it was out of favor relative to the benchmark which had changed its stripes, or if it was truly a fundamental problem with Sturdivant. In the end it was determined by the Board that it was more appropriate to terminate our relationship with them than to continue on with them.
Was there any influence or any information that was being provided by the administration relative to the continuation of Sturdivant prior to its ultimate termination that they should stay on?
I believe it was a 00527 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 Board decision to continue to look at Sturdivant relevant to the market conditions.
And who on the Board supported the maintenance of Sturdivant until its ultimate termination?
Could we get the minutes to that or the appropriate parts of the minutes of that meeting to determine who it was that was actually suggesting that we retain them? It seems -- I mean, this is not something you need to comment on, but it seems that after the story broke is when the real consideration on whether to keep them or get rid of them was really made. And had the story not broke, we may be still sitting here with an under performing company. I mean, I will give credit to and admire the recommendations of the staff who are professionals in this and deal with this. I assume everyday that they saw some serious concerns that recommended that -- pushed them to 00528 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 recommend termination. So I think from a staff perspective, things were handled correctly and you were all looking out for the welfare of our retirees who depend on their City municipal pensions for their ability to live day-to-day.
Let me finish. So I want to thank the staff for their due diligence. My concern is what the Board did with that recommendation and what the motivations for that Board decision was in keeping them as long as they kept them.
Councilmember, as staff was reevaluating we continued to reduce our exposure to Sterdivant so that while they were making certain that it was in fact a problem with the firm and not just style drift, we had limited the exposure. We were in the process on a monthly basis reducing our exposure.
I guess, though, in some ways you have to question how they got there in the first place. And I know they got there prior to you, but we'll go back to the 00529 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 similar theme of political connections and the selection of professionals and other contractors and vendors with this City. Whenever there's a prior relationship with a City official that happens to be able to be linked in some way, whether it's just perception, to a company that's under-performing, and as a result of that under-performance, that hard working, long-time City employees, police officers, fire fighters, sanitation workers, recreation workers are somehow shortchanged because of political considerations in the appointment of the firm in the first place and any extended retention of them when staff was recommending that they go. So I will commend again, commend staff for their continued due diligence and thank them as a potential pensioner myself for your hard work in trying to protect us. It's the Board that I'm concerned about in their decision-making process and in the politicalzation of the selection of these money managers. Of the -- by the way, what are 30 00530 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 alternative investment limited partnerships, what do they do?
That's another -- a more common term you would hear would be "private equity", where we invest in companies that are typically not traded on the market, they are privately held. We invest in them at the early stage or later stage or pre-IPO stage.
Of those 26, is 15 there anybody who has a problem with performing? 16
No, that's a very good 17 question. Since I've been with the Board of 18 Pensions, which has been two years and a couple 19 of months, we have terminated 13 different 20 managers and we've hired three with the -- we 21 have a search going on now to hire an additional 22 five. 23 So we've done a lot of work in the 24 two years that I've been here to improve the 25 performance of the Pension Plan, but to-date, 00531 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 none of the managers hired by the Board of Pensions are at terminate status.
And who's conducting the search, is the staff doing it?
Currently, this particular search; is being conducted by William M. Mercer.
I want to thank you, and I want to thank you for your very forthright and intelligent testimony. I'm very comfortable with the way in which you present yourself in this particular board, and I am very confident that you guys are doing the right thing. I want to thank you personally for the way in which you have testified here today.
Thank you. The Chair recognizes Councilman Nutter.
Thank you, Madam Chair. Mr. Kidwell, did I understand your 00532 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 response to an earlier question that with regard to the Pension Adjustment Fund, you were not expected to make any payments in FY02 and FY03?
I believe the question was: will there be any credits made into the Pension Adjustment Fund? And I believe my answer was no, there will be no funds placed in the Pension Adjustment Fund. The Board did approve a bonus payment that will be made at the end of March.
Right, I have that. Now, what is your testimony based upon that you already have reason to believe that there would not be any credits placed in the Pension Adjustment Fund in FY03?
Under the formula to place money into the Pension Adjustment Fund, the fund had to have earnings in excess of 10 percent. And the fund did not earn an excess of 10 percent.
Well, we're 00533 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 still in FY02, aren't we? I think you're talking about FY01, for which you probably just did the certification in September?
The gains and losses are eradicated over a five-year period. And the way it's calculated, the losses that we suffered in Fiscal Year '01 were significant compared to some of the losses relative to the 10 percent that we experienced the year before that. So if you look out in the year '02, '03, the projection is that we will not have enough money to fund the PAF.
And what do you expect the -- the distribution in March, is this the $35 times the number of years?
Are you saying that the $14 million payment will then exhaust the money in the Pension Adjustment Fund?
Yes, the Board voted at its December meeting to use all remaining dollars in the Pension Adjustment Fund and that calculated to $35 for each full year. 00534 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001
Now, I seem to remember that there was a provision somewhere in the bill that talked about if there was not going to be a distribution in a particular year, and I understand that you're looking at March 28th for this year's distribution, but it all stands to reason that if you're not making a credit to the fund in '02 and '03, then there's probably not going to be a distribution next year; does that all flow logically?
So my recollection is if that situation were to happen, then the Board, I believe, was supposed to make some kind of report to the Council about that to see what if anything we might do to help insure that there was a distribution; do you remember that?
I believe -- I don't have the -- I can't quote verbatim the code, but I believe it says if there is no distribution made within three years that there will be a report back to City Council that there has not been a distribution within three years. And 00535 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 then City Council may be able to take, or adjust, or make an appropriate amendment to the code to provide for our distribution.
I think my recollection is a little more. One, I think there is an annual report of requirement about what's going on, which, I would at least say for the record, I don't really remember getting much information about what's been going on with the Pension Adjustment Fund. I know that distributions have been made. I did not necessarily find them out from the Board or through any report. And I believe that there are a number of different reporting requirements in Bill 990001, that's my recollection. We spent a lot of time working on that. I mean, we can go back and certainly take a look at it, but I think that there were a number of different reporting requirements based on a variety of scenarios: if there is a distribution, if there's not a distribution, if there's not a distribution over a certain amount of time. I think what you mentioned about two 00536 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 years may actually be -- I'm sorry, what you mentioned as three years may actually be two years. And that the Council wanted to know at a fairly early stage if there are problems with the Pension Adjustment Fund. We want to know about them, we want to know about them early so that we can make any adjustments. I think that there is a provision in the bill that allows for a situation if there was not an adjustment that Council may be able to appropriate dollars specifically for a distribution. This is obviously now going back a couple of years and many bills ago, but I understand that you can't control what happens in the market place, but if we're now down to the last $14 million, I think we certainly need to know in as soon a time period as possible what our prospects are. We have now created a certain environment with our retirees and since there is no other mechanism, no automatic cost-of-living adjustment other than this mechanism that we put into place, I think if one of the reasons we're experiencing this is because of a downturn in 00537 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 the economy, then certainly retirees on fixed income are hit by that in a fairly significant fashion. I mean, their bills don't go down, but they also have no ability to grow in terms of if the pension is their primary source of income.
Councilman, if there's a report that the Board failed to file to Council, I certainly will see that that report is made to Council concerning the distribution to be made this Fiscal Year. And I believe I'll go back and review the bill in full to see what other reports or notices we need to provide to Council.
Thank you. What has been the return over the past couple of years?
I don't have the exact numbers. I can get that for you though. But Fiscal Year '01, I know, was a negative 5.5.
How does that compare with other municipal pension systems? 00538 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001
They are about medium compared to other pension plans. 50 percentile, which is significantly higher than we were a few years ago. We are increasing the returns of the fund, but our return at that time was about median.
I'm going to recommend, or at least request, that there be some opportunity for direct conversation not only about the various reporting requirements which we discussed some of them today. And without having the bill in front of either of us -- we don't necessarily have to resolve that issue, but I think beyond whatever the ordinance required by way of reporting requirements, I think that given the amount of time and effort and interest the Councilmembers expressed back in 1999 about this particular issue, there needs to be some kind of meeting with the appropriate information so that we can anticipate what we might do in calender year '03 to help insure that there will be some distribution to our retirees, to make sure that we are able to maintain a certain level of 00539 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 support as it relates to this particular program and the benefits that people have received so far. Let me go back now and ask what our stated goal is in terms of a rate of return; is that still percent or is it 9 and a half? 8
There was also discussion at that time as to whether or not that was an appropriate rate. Is it your belief now that that is still an appropriate expected rate of return, or was that rate of return being driven by the size of our unfunded liability?
The actuary at the February Board meeting last week gave an indication that the 9 percent actual rate of return is a supportable rate.
Well, what's the rate year-to-date, Fiscal year-to-date?
Our rate of return? Fiscal year-to-date, December 31st was a negative 1.1. Just for the six months for this 00540 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 year.
You're going to have to have a pretty banged up six months of the Fiscal Year --
The actual rate of return really is a long-term goal. You're looking at a three-to five-year return. If you look at our plan over that long a period of time, we are currently not quite there, but if you look at the market benchmark we are above it, but still not close to 9 percent. Our estimated return going forward, we believe, will, over the next three to five years, reach that goal.
Let's talk about on of the testimony, you made mention of the number of managers you have and then broke down by categories. You talked about the Opportunity Fund, you talked about some limited partnerships. I could not completely clearly figure out from this testimony who is doing what. Now, it reads, "Demographically, the Pension Plan invests in six minority investment 00541 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 managers, which represent 4.5 percent of the Pension Plan, and four limited partnerships focused on minority and female operated businesses, which represent 11.8 percent of the capital committed to the investment". What does that all mean?
Sure. In actual invested dollars, about 4.5 percent of the plan is invested in those four managers that invest in public stocks. For the limited --
Correct. For the limited partnerships, those are investments in which we commit capital over time. Typically, a three-to five-year period is the investment period for our limited partnership, but we've already committed those dollars. And that percent, 11.8 percent, represents the amount of money we've committed 00542 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 up front to those investments, but it will take some time.
Is that separate and apart from the six investment managers?
Now, 4 and a half percent of the Pension Plan is -- it that $120-some-odd million, 130? It's 4 and a half percent of 4.3 billion?
And how does that compare with other major cities across the 00543 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 country and -- I mean, that and a half percent average, is it low, is it high?
Tell me a little bit about these limited partnerships, what exactly does that mean?
Those are the private equity investments in which the Board has invested. They purchase companies, or they buy into companies that are hoping to go public, or they buy into ideas in which they can parlay those ideas into a financial gain in which they can sell off their interest to somebody else. And those are typically ten-year investments.
The ones that represent the 4.5 or the limited partnerships?
For the six firms, Smith Graham & Company is one; the others are included in the Opportunity Fund. Off the top of my head, I couldn't 00544 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 tell you exact names. I can get that list for you though.
Okay. If you can get us a list to the Chair, I would greatly appreciate it. Now, lets talk a little bit about, on the first page, the minimum municipal obligation required under Act 205. I'd like you to speak in detail about what the proposal is. This is obviously a budgetary matter. Why are you not making the normal Pension Fund payment and what would it be? BUDGET DIRECTOR DUBOW: Rob Dubow, the City's budget director. When we got our initial letter from the actuary that laid out what our required contributions would be for this year under our current funding policy, they were substantially higher than the amounts that we had in last year's plan. I think about 169, but I don't have it in front of me. We asked the actuary whether there was a different payment stream that we could make that would cut into that payment. 00545 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 The first set of numbers they showed us was the MMO, which actually would have been about $40 million a year lower, but if we had only paid the MMO by the time we got out to 20, 25, our annual contribution would have actually been $220 million higher than the amount it would have been under our current funding policy. So we didn't think that was a real responsible way to go. We asked the actuary whether there was a middle ground and they said there was. And what they told us we could do is pay an amount that was halfway in between the MMO and the current policy and treat the difference so it was a $40 million gap. Paying that amount halfway in between would be about $20 million, and then they said you could pay that $20 million back over 10 years at the Pension Fund's assumed earning's rate of 9 percent. So in essence, the Pension Fund would be earning the same amount as if it had that money. And that was the best we could do in terms of holding the fund harmless.
At its most 00546 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 basic level, does this represent, in essence, a borrowing from the Pension Fund to reduce the City's overall debt obligations? BUDGET DIRECTOR DUBOW: Yes, you could call it a borrowing from the Pension Fund. I guess that's one way you can look at it.
If we made our regular payments and did not proceed down this particular path, what would our unfunded liability be in -- you seem to talk about these in either 10, or year time periods; is it 13 72 percent funded or is at 70 even? 14 BUDGET DIRECTOR DUBOW: I think it's 15 -- 76. 16
If we made 17 payments the way we were to make them -- 18 BUDGET DIRECTOR DUBOW: Yes, we 19 would incrementally go up. I think eventually 20 we would get into the mid 80s in the out-years. 21 That's the way the actuary described it to me. 22
And the 23 out-years being how far out? 24 BUDGET DIRECTOR DUBOW: I -- 25
Is that more of 00547 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 a 25-year thing or -- BUDGET DIRECTOR DUBOW: No, more like to years. 5
What if any 6 risks is there to the Pension Fund by pursuing 7 this particular strategy? 8 BUDGET DIRECTOR DUBOW: There's not 9 a risk to the Pension Fund. The risk to the 10 General Fund is that if earnings stay low, we'll 11 have to make added contributions next year, but 12 the Pension Fund is held harmless because we're 13 committing to make these payments to the fund. 14
You also make 15 mention of the need to pay $55 million in debt service on the Pension Obligation Bonds we issued in February of 1999? Now, how long were those bonds; were they 30 year?
Pension Obligation Bond is a 30-year bond. I believe $2,029 is the last payment.
And are the payments pretty much consistently up in the $55 million range on those? 00548 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001
Am I reading the testimony correctly, that it's $55 million this year?
Don't the debt service payments usually stay fairly even overtime unless you back-loaded them? BUDGET DIRECTOR DUBOW: Actually, the payments for the next five years are on the back of the plan, but I don't have my plan with me.
I think it's in Appendix 3, maybe . I can come over and show you.
So 52.9 -- I'm sorry, that's back in '01. 55.6, 58, 67, 72, 76, so it actually seems to be slightly back-loaded. It seems to be increasing as we go out, is that accurate? BUDGET DIRECTOR DUBOW: I think the problem is none of us were actually involved 00549 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 with that, but we will get you a whole debt service schedule.
So let me make sure I understand what we have here. Because of the fund's performance, the City needs to make increased payments to the Pension Fund, correct? BUDGET DIRECTOR DUBOW: That's correct.
And because we did the Pension Obligation Bond in '99, we also have a separate stream of debt -- the primary purpose of the Pension Obligation Bond was to more immediately get our unfunded liability number down or our funded number up, but we took on an additional debt by doing that. And that debt has an increasing debt service over at least the next five years and possibly longer. At the same time that we're facing the pressure, unless the fund turns around and starts performing in the superior fashion, we're also faced by pressure on the fund's side that we have to increase support for that. So we have an increased operating support for the fund itself and increased debt 00550 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 service for the Pension Obligation Bond which we floated in the first place to help the fund to increase its funded liability level? BUDGET DIRECTOR DUBOW: That's right. And, actually, by the end of the plan, I think our pension payment is $100 million higher than it is at the beginning of the plan. So that combination of the factors you're pointing to significantly increases our contribution over the next five years.
Excuse me, Councilman, can I ask a question, if I may?
What happens if the Pension Fund doesn't earn 9 percent this year? BUDGET DIRECTOR DUBOW: Well, I guess you'd look at the smoothing fact, but that's one of the major risks in the plan. If we continue not to earn at 9 percent, then our contributions will have to be even higher than the amounts that are in the plan.
Thank you, 00551 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 Councilman.
Sure, thank you. Do you have any short or medium-term plans for how to try to work ourselves out of this situation? I mean, I thought part -- again, that was also a couple of years ago. I mean, I thought part of the sale's pitch on doing the Pension Obligation Bond was to get our unfunded liability number down, which ultimately was going to assist us in lowering the amount we had to pay into the pension system. It now appears that both numbers are going in the wrong direction.
One of the risks that any government undertook when it issued Pension Obligation Bonds was that it would be able -- because they were taxable bonds, that they would be able to earn a level of -- they'd have a level of earnings on the proceeds that would exceed the earnings -- the cost of the interest rate.
We've not achieved that, 00552 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 that's been difficult. And that was the risk that was taken.
Well, let me ask this question, and I understand all of this is in the short-term, relatively short-term evaluation. We took these actions a couple of years ago. I mean, what so far has been the benefit of having done that?
At this point, we are funded above the 70 percent level and that would be the primary benefit. BUDGET DIRECTOR DUBOW: I think one of the other benefits, and this also will depend on how earnings go overtime, is that in the out-years under the Pre-Pension Obligation Bond world, our payments kept going up and up and up so that the further you got out, the larger percent of your General Fund payments were going to -- your pension payments. It won't work that way under the schedule because if you look -- when you get out to 20, 25, for example, you're paying only about $94 million. So it actually would be a far smaller percent of your General Fund than it is 00553 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 now.
Well, I understand that, but we have to get through -- BUDGET DIRECTOR DUBOW: Oh, I understand that. I mean, you're asking whether there were any other benefits. I wasn't saying anything beyond that.
We have to survive to 2013 -- BUDGET DIRECTOR DUBOW: Yes.
-- to ever get to the decreasing level. BUDGET DIRECTOR DUBOW: That's absolutely right.
I mean, you have to basically live long enough to see the benefit. The question is, can you live that long? BUDGET DIRECTOR DUBOW: Right.
Just for the record, because I know that 70 percent funded was an important number, so Ms. Davis, I'd like to give you the opportunity -- I mean, you said one of the benefits was getting the 70 percent. 00554 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 Why don't you at least put on the record the significance of 70 percent and what that means to retirees?
Because at that point, the plan is said to be funded for those who are retired, those who are retired and current employees.
Because of what you do, I'm sure that you're going to continue to be mindful of this situation. I think, though, that given some of the decisions that have been made -- you didn't participate in the early ones -- you now have been kind of dealt a series of cards that you have to make the best out of the hand that you have. To the extent that you can keep us informed on a fairly regular basis as to how we are either moving out of the current situation, if we are moving to a better one, or if we are moving to an even more negative environment, it would be very helpful to stay on top of this one and not let it get too far before we are having even more problems similar to the Pension Adjustment Fund situation. 00555 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001
I'm usually pretty easy to get along with. Yes or no. 9 Okay, thank you, very much.
Thank you, Madam Chair. I look at the testimony and it indicates that we are going to be increasing the number to 72 of the retirement councelors.
Could you tell me, state governments, municipal governments, private sector, do they have to in some cases out source the retirement counseling? Can you tell me how other municipalities, other governments, how this private sector approaches retirement counseling?
I have no knowledge 00556 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 of what other municipality pension plans do as far as how they conduct their pension counseling, pension calculations.
Just the people, the bodies, whether it's done by City employees, are these all civil service people?
Could you possibly conduct some research and find out how large Philadelphia corporations, how the State of Pennsylvania, Federal government do this business?
I would like to get at least a feel for that because we are going to re-call you to the budget process to ask about how we do that in other areas?
I will try to have that for you by the end of -- 00557 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001
If it needs to be more elaborate, we will ask you for that?
To plug a possible loophole, I've learned that the DROP Program may have a loophole in it, that the employing officer, for lack of a better word, can hire a person back the day after they take advantage of the DROP.
The hiring of personnel is not really a Pension Code issue, it's really one of personnel under Civil Service regulations. Any employee who was previously employed has the ability to become reemployed.
But I understand the DROP Program was designed to limit the number of employees. Now, I'm running into people already that are telling me that they are being considered already for reemployment. If the Fire Department chooses to keep a person, the Fire Commissioner can make a request and 00558 2/25/02, COMMITTEE OF THE WHOLE, BILL 02001 that person can stay, the Police Department and so on and so on and so on. Do you call that a loophole?