COUNCIL OF THE CITY OF PHILADELPHIA COMMITTEE OF THE WHOLE - BUDGET - - - Room 400, City Hall Philadelphia, Pennsylvania Tuesday, March 25, 2008 10:15 a.m. - - - PRESENT: COUNCIL PRESIDENT ANNA C. VERNA COUNCILWOMAN JANNIE BLACKWELL COUNCILMAN W. WILSON GOODE, JR. COUNCILMAN BILL GREEN COUNCILMAN CURTIS JONES, JR. COUNCILMAN BRIAN J. O'NEILL COUNCILMAN FRANK RIZZO COUNCILWOMAN MARIAN B. TASCO BILLS 080022, 080157, 080160, 080164 and 080165 - - - V A R A L L O Incorporated Litigation Support Services Eleven Penn Center 1835 Market Street, Suite 600 Philadelphia, Pennsylvania 19103 215.561.2220 215.567.2670 2
Good morning, everyone. This is a continued public hearing of the Committee of the Whole regarding Bill Nos. 080022, 080157, 080160, 080164 and 080165. I believe the first department will be the Board of Pensions and Retirement. (Witnesses approached witness table.)
Please identify yourself for the record and proceed with your testimony.
It's Gwendolyn Bell, Executive Director of the Board of Pensions and Retirement. MR. McDONOUGH: Chris McDonough, Chief Investment Officer.
Good morning. 3 3/25/08 - WHOLE - BILL 080022, etc. MR. McDONOUGH: Good morning.
Good morning, Councilperson Verna and members of City Council. My name is Gwendolyn Bell and I'm Executive Director of the Board of Pensions and Retirement, and Christopher McDonough, Chief Investment Officer, is here with me today. The Board of Pensions and Retirement has submitted a budget for Fiscal Year 2009 for $10,610,000, an increase of 305,000 from Fiscal Year 2008. This increase results from contractual salary increases and the addition of investment unit positions and fringe benefits. The next paragraph is just a breakdown by class of what those increases are. There are 79 employees in the Board of Pensions and it's actually a decrease of two positions from last year. The goal is to continue to reduce overtime and to improve services to 4 3/25/08 - WHOLE - BILL 080022, etc. participants. And the salary increases are $188,000 of the 305. The rest is our fringe benefits. There are currently 1,760 members in the DROP program, and last year was the largest year for DROP retirements with 989, and there are another 565 scheduled to retire this year. So we're averaging around 60 a month. And we have had an additional 230 retirements as a result of DROP for one month. So last year was a very busy year for us. There have been continued cooperation with Pension, Law and Risk Management to coordinate the overlap of benefits between Workers' Comp and Pensions. The progress has been made and been continuing through opening communications and reducing the need to recapture funds for repayment situations that occur when the Board of Pensions was not made aware of the person's eligibility for Workers' Compensation. A 5 3/25/08 - WHOLE - BILL 080022, etc. Pension Board staff member will be dedicated to work exclusively with obtaining medical records from the third-party carrier and Risk Management, as well as the participants' departments. This assignment will include a follow-up with the Board's Medical Panel Chairs. The number of specialists working with the Medical Panel has expanded to provide central locations for disability screening. That had been a problem because some of the specialists had moved out of central Philadelphia. Since Fiscal Year 2008, the two-day pre-retirement workshops have increased to 20, with the average attendance increasing from 44 to 60 participants. E. program has been in place for two years and continues to receive participation on an average of 40 persons per session. A recent assessment of the need of additional sessions has resulted in the addition of several one-day 6 3/25/08 - WHOLE - BILL 080022, etc. pre-retirement workshops, and these sessions target employees who are not eligible to retire, but who are vested. E. program is 35, and there's been a very positive response from the younger employees, who really need to get the information they need to plan for their futures. The Deferred Compensation seminars have expanded to include visits to off-site departments with existing and newly appointed employees. So when there's a new class with the Police and Fire Department, the office goes out and does orientation for them. The processing time for loans for the Deferred Comp has dropped from 11 days to four, and there are just currently over 13,000 active members in the Deferred Compensation plan. Total plan assets are 475,500,000, and that was as of January. The Fiscal Year 2009 goal is to increase the participation by 15 to 7 3/25/08 - WHOLE - BILL 080022, etc. 20 percent. The Board of Pensions is well on its way to becoming paper free and is now imaging all incoming mail as well as current files. The processing time for an application is now one half what it was last year because the Pension staff can now access file information from their desktops. Counseling sessions have been reduced by approximately minutes 12 per session.
13 The Mayor's Office of 14 Informational Services, MOIS, has 15 recommended that the current pension payroll system be replaced, and that system is now more than 16 years old. 2 million to purchase an off-the-shelf package, which should be 8 3/25/08 - WHOLE - BILL 080022, etc. Oracle based. And Pensions has worked closely with MBEC to ensure minority and women participation with the vendors that we're considering. MR. 9 percent for the fiscal year ending June 30, 2007. The return placed the Fund in the first quartile among all public funds. 9 percent and the funding ratio was 54 percent, up from 52 percent as of June 30, 2006. During the 2007 fiscal year, Board continued its efforts to increase the participation of minority and women-owned firms in the management of the Fund's assets. 1 billion, or 22 9 3/25/08 - WHOLE - BILL 080022, etc. percent, of total plan assets at the end of the fiscal year. During the second half of 2007, the Board approved a new asset allocation. The primary changes in the asset allocation are a substantial decrease in the exposure to domestic equities and an increase in both developed international and emerging market equities. Assets were also added to the fixed-income asset class. The Board continues to look for ways to diversify the Fund's assets while producing an attractive return at a reasonable level of risk.
It is the goal of the Board of Pension staff to continue to provide education and improved services to its members, and I respectfully request your approval of this proposed budget.
Thank you very much. For the record, can you tell us 10 3/25/08 - WHOLE - BILL 080022, etc. how the Board of Pension selects its money managers? MR. McDONOUGH: Yes. With the exception of private equity and real estate, all money manager opportunities are advertised on the City's website in accordance with the applicable law. Notice is posted for an opportunity for a minimum of days. After that point, 11 all responses are evaluated and a subset 12 of the list is presented to the Board for 13 consideration. The Board will select 14 several firms to interview, after which they'll select the manager they think is most appropriate.
What are the performance standards that you apply to your money managers? MR. McDONOUGH: We review the managers' performance in several ways. We compare their performance to the appropriate benchmark. We compare it to their peers, so other managers managing money in a similar style. We also 11 3/25/08 - WHOLE - BILL 080022, etc. utilize several statistics that measure the amount of risk the manager is taking in order to generate the return that they provide to us. And all those statistics are also compared to their peer universe as well.
Can you tell us what happens if they do not perform as expected? MR. McDONOUGH: Yes. We have a rating system, and the ratings are basically satisfactory, watch and probation. If a manager underperforms over a short-term period, they'll be placed on watch, which means basically that we're concerned about their performance and we're closely monitoring them. If their underperformance continues, they'll be placed on probation. At that point, a face-to-face meeting will be held either in our offices or in the offices of the manager. A report will be written for the Board by both the investment staff and the 12 3/25/08 - WHOLE - BILL 080022, etc. consultant, which we call a probation report, with a recommendation as to whether the manager should be retained or terminated at that point. If we're going to recommend retaining them, we'll provide an explanation of why we think that's the appropriate action to take. The Board will then make a decision. The manager will either be terminated or if they are retained, we will reevaluate the manager on a quarterly basis until they're either terminated or until they perform well enough to be removed from probation status.
Who are your money managers and how are they paid? MR. McDONOUGH: We probably have upwards of 80 managers. I'd be happy to provide a list of the managers.
I'd appreciate that. MR. McDONOUGH: Most of the 13 3/25/08 - WHOLE - BILL 080022, etc. managers are paid an asset-based fee. So they're paid a percentage of the assets they manage. That fee ranges from as low as two basis points for index fund management to as high as two percent for hedge fund management.
Is it paid through appropriations? MR. McDONOUGH: No. It's paid out of Pension Fund assets.
Wouldn't paying them through appropriations more accurately reflect the true cost of the pension system? MR. McDONOUGH: Possibly. We can document very well at this point exactly what we're paying all of the managers, so I don't know that the numbers would necessarily change if it was paid in a different manner.
But it wouldn't be reflected in the budget. MR. McDONOUGH: Correct.
Well, 14 3/25/08 - WHOLE - BILL 080022, etc. that's what we're trying to achieve. Would you look into that, please? MR. McDONOUGH: Absolutely.
And I think Mr. Dubow is back there, so he would be able to assist you on that. And you are going to provide us with the money managers. I would like a listing of the managers and what they were paid in 2007 and their estimated payments for 2008. What is the Board's investment strategy? MR. McDONOUGH: In terms of the asset allocation?
Yes. MR. McDONOUGH: The asset allocation approved by the Board in the second half of 2007 is approximately 21 percent domestic equity, 23 percent 22 non-U.S. equity, 30 percent fixed income, 23 12 percent private equity, five percent 24 real estate, and six percent absolute return strategies. 15 3/25/08 - WHOLE - BILL 080022, etc.
Can you tell us how often it is reviewed by the Board? MR. McDONOUGH: Every three to four years the Board does a formal asset allocation study. On an annual basis we do a review of the asset allocation to identify any areas where we might be able to make small changes and take advantage of market opportunities.
If the City were to issue a pension obligation bond, how would the Board invest the proceeds? MR. McDONOUGH: We're currently studying that matter. Our plan is to do a full asset allocation study and develop a new asset allocation which will be suitable given the new funding level. Also, if the actuarial assumption rate were to be reduced in conjunction with the issuance of the bond, we would need to take that into account. Our intention is to have a plan 16 3/25/08 - WHOLE - BILL 080022, etc. for investing the proceeds of the bond approved by the Board well in advance of the receipt of the funds. Given the size of the bonds, the plan would likely include a final target allocation, asset allocation, as well as interim steps to ensure that the funds were invested in a timely manner.
Thank you. The Chair recognizes Councilman Jones.
During your 2007 testimony for FY08, you stated the Deferred Compensation plan had about 13,006 active members within the plan, representing about $470 million. At the time of the hearing, you projected a 20 percent increase plan participation. By 17 3/25/08 - WHOLE - BILL 080022, etc. your testimony today, I see it's one percent actual, and I wanted to get a sense of why that was. And we're up to about, what, 13,157 participating members and what was the falloff due to?
Some of it was due to the large number of people that left in DROP, and as a result, they roll their money out of Deferred Comp or cashed it in when they left. And I don't know if Chris has anything to add to that. But the numbers for DROP were extremely large last year. That resulted in the number of the Deferred Comp participants staying approximately the same as it was last year.
We anticipate that after 2008 the number of DROP retirements will be reduced greatly, and we do anticipate -- because the Deferred Compensation staff is out in the departments, we anticipate an increase 18 3/25/08 - WHOLE - BILL 080022, etc. for next year.
Can you give me some idea about what the financial impact is versus one plan versus them participating in the Deferred Comp? What impact financially does that have?
I'm not really sure of your question. The Deferred Compensation is a supplemental retirement.
So it doesn't have a financial impact if they participate?
The Deferred Compensation is individual savings. The amount that a person puts in is their choice, and it supplements our defined 19 3/25/08 - WHOLE - BILL 080022, etc. contribution plan. So it's very separate.
Okay. You stated that you have a new asset allocation plan? MR. McDONOUGH: Yes.
And I understand that it is allowing you to have greater investment in foreign investments; is that right? MR. McDONOUGH: Correct. We did increase our international equity allocation.
And are you planning to take advantage of that new freedom in that investment abroad? MR. McDONOUGH: We have. We are and we have started. The target allocation was increased from 12 percent to percent, and the actual allocation 22 today has increased from 12 percent to 19 23 percent, and we're in the process of 24 hiring several new managers to round out that allocation. 20 3/25/08 - WHOLE - BILL 080022, etc.
Well, according to the Wall Street Journal, international markets are down. For example, South Korea is down 13.3 percent; UK is down 14.9 percent; Japan is down 18.5 percent; France percent; 8 Hong Kong 24 percent; and China, with the 9 largest economy, down 27 percent year to 10 date. Why are we looking abroad for 11 investments and have we considered urban 12 markets like Philadelphia for good 13 investments? 14 MR. McDONOUGH: Well, in terms 15 of the recent performance, all equity 16 markets, both domestic and international, 17 have produced negative performance this 18 calendar year, and, in fact, the 19 international market has performed basically similar to what the domestic market has done so far this year. Last year, domestic markets, the domestic equity market, was up about five percent. International equity markets were up about 17 percent. So our 21 3/25/08 - WHOLE - BILL 080022, etc. allocation is based on longer term, our longer-term outlook. And I'm sorry. Your second part of the question had to do with urban markets?
All good investments should begin at home, and I was wondering, do you look at the local markets, Philadelphia in particular, Commonwealth of Pennsylvania, for good investments? MR. McDONOUGH: We evaluate all opportunities brought to us. We have to follow the exclusive benefit rules, so all investments must be made in the best interest of the participants. So we first must evaluate an investment on its investment criteria and potential return. All else being equal, yes, we would like to make investments that benefit the area if they produce an attractive rate of return.
Well, based on international markets, we can't be too 22 3/25/08 - WHOLE - BILL 080022, etc. much far off of some of the returns that they're producing right about now. So I'd be interested in what investments have you evaluated from the Commonwealth of Pennsylvania and even the City of Philadelphia, if there are any, if there are any. MR. McDONOUGH: We do look at real estate managers and private equity managers that focus on -- it's usually the Midatlantic region. We haven't come across any that are specific to Philadelphia or Pennsylvania, but we have invested with venture capital firms that focus on businesses located in the Midatlantic region. Several of our real estate managers do target the Midatlantic region as part of their investment strategy.
You also mention that 1.1 billion, or 22 percent, of the plan's assets are under minority and female management? MR. McDONOUGH: Correct. 23 3/25/08 - WHOLE - BILL 080022, etc.
Which are those firms? MR. McDONOUGH: There's approximately firms. Would you like 6 me to read the names of them? 7
You can 8 submit them to the President of Council 9 and she can distribute it to the members. 10 I think that is something of issue -- 11 MR. McDONOUGH: I'd be happy 12 to. 13
The 18 Chair recognizes Councilman Goode for a 19 point of information. 20
Is there any 21 one firm among them that stands out in 22 terms of the size? 23 MR. McDONOUGH: Yes. The 24 largest of them is a firm called 25 Rhumbline Advisors. It's 24 3/25/08 - WHOLE - BILL 080022, etc. African-American firm based in Boston. It manages approximately $500 million for us.
I understand that you also have an in-house investment personnel that actually looks at investment; is that correct? MR. McDONOUGH: We have an investment staff, correct.
And what's the size of that staff? MR. McDONOUGH: Currently, there are, in addition to myself, two full-time employees and one person that dedicates part of his time to the Pension Fund, and we're currently looking to fill two additional positions.
Are there any minorities or females in that configuration? MR. McDONOUGH: The two full-time are both females.
Thank you. 25 3/25/08 - WHOLE - BILL 080022, etc. MR. McDONOUGH: You're welcome.
Are you finished? Thank you. The Chair recognizes Councilman Green.
Just a quick question about one of the first -- the increased results from contractual -- the increase of $305,000 over our Fiscal 2008 estimated obligations, this increase results from contractual salary increases and the additional investment unit positions and fringe benefits. Have you entered into personal services contracts longer than one year?
Excuse me. Personal services contracts for staffing? 3/25/08 - WHOLE - BILL 080022, etc.
And you have outside advisors that do most of the investment work that I think you described. So perhaps maybe you could redescribe the process of choosing investments and evaluating portfolio managers and include what's done by your staff and what's done by outside contractors. MR. McDONOUGH: Okay. We work with several consulting firms to assist us in the selection and monitoring of investment managers. We consider them an extension of our staff because our staff is relatively small. We're not able to review all of the potential opportunities to us, so they help us narrow down the universe. We do not rely solely on the consultants. We do all of our own work 27 3/25/08 - WHOLE - BILL 080022, etc. and produce our own reports internally for the Board. We typically provide recommendations to the Board when it comes time to select an investment manager. The consultant will usually also provide a recommendation as well. At the end of the day, the Board makes the final decision about who is hired and when a manager is terminated. All of the managers have standard one-year contracts with three one-year renewals, although we always have the option of terminating at any time for any reason.
How are the consultants compensated? MR. McDONOUGH: They are compensated with a flat fee per year.
A flat fee based on? MR. McDONOUGH: The services they provided. We negotiate a fee at the start of their contract for the services they will provide to the Board. 28 3/25/08 - WHOLE - BILL 080022, etc.
And that contract is renewed annually? MR. McDONOUGH: It's one year with three one-year renewals at our discretion. At the end of that four-year term, if it lasts that long, an RFP process is undertaken to do a new -- before a new contract is executed.
Rather than going through names here, will you please provide the Chair who those people are and what their responsibilities are and their annual compensation? MR. McDONOUGH: Yes, I will.
Thank you. I note that the Board of Pensions in your testimony, you say that it's well on its way to becoming paper free, which is an issue of mine and I commend you for it. You mention that processing time for an application is now one half that of last year. How many people are involved in processing applications on your staff? 29 3/25/08 - WHOLE - BILL 080022, etc.
There are positions. We currently have three vacancies. Unfortunately, I have to admit that we're still calculating pensions by hand, and so the proposal -- the programs that we've looked at would allow us to not only bring over information from payroll and Personnel to feed into the system, but it would also allow us to do our calculations and take leaves of absences and credited services into consideration.
Yes, we have. Yes, because we're able to go on desktop and pull up a person's file, look at their payment history, look at their employment history online rather than flipping through a folder. So it's been a tremendous savings of time for us.
I note that the filled positions as of 12/07 were 71. The budgeted positions are 79. Are any 30 3/25/08 - WHOLE - BILL 080022, etc. of those positions people who process applications?
Yes. We currently have three open positions for counselors. We'll have another vacancy at the end of the year. We're losing a lot of experienced people due to DROP.
I guess that confuses me a little bit, because if you've cut the processing time down by half, why would you need to fill positions? And especially if you're implementing new technology that will automate processes that are currently done by hand, it seems to me that we could maintain those reductions in that staffing level and get those efficiencies.
We are losing another three people to DROP, so these positions that we're filling now will eventually level off, because it takes approximately four years to train a counselor. There's a counselor trainee 31 3/25/08 - WHOLE - BILL 080022, etc. for one year, counselor for two years, counselor for two years. So we're losing supervisory staff. Those people have in excess of eight to ten years of experience. When they drop out, these people will be fully trained.
I understand what you're saying. Have you begun redefining your workflow processes to take advantage of the fact that it's half the processing time and are you going to do a workflow process study as you implement new technology to determine whether or not these positions are really necessary?
Yes. And we think that once we have the new capabilities of doing these calculations online, as people leave through DROP we will not need to replace some of the staff.
Okay. You mention that people are doing things by hand and calculations, which means that there's no connection between your 32 3/25/08 - WHOLE - BILL 080022, etc. computer system and the payroll systems that would allow you to directly check facts and get information one way or the other.
Unfortunately, not yet, and programs that we're looking at will be Oracle based and they will be tied into the new Oracle personnel system that was recently purchased. And so we hope that we will have the capacity to interact with Personnel. Payroll is still going to be -- payroll has not been replaced. So we will still have to pull over payroll information, and our hope is that within the next couple of years, we'll be able to more readily access information from payroll. But the systems that we're looking at can feed us payroll information, bring it into the off-the-shelf packages that we're looking at. So that will streamline the process.
Great. I'm sure Terry will get to payroll 33 3/25/08 - WHOLE - BILL 080022, etc. eventually. So it's my understanding that there's not currently an audit trail within your systems. In other words, somebody could enter someone's salary who has been with the City for five years as having been with the City for years. 9 They could have made 55. Somebody could 10 change that number to 100,000, and 11 there's really no way for -- if that's 12 done, there's no way for you guys to 13 catch up to that without doing a manual 14 check of each person and going back and 15 checking that against the other records. 16
We're checking 17 manually. We have a counselor that does 18 the calculation. We have what's called 19 peer review, a second person that checks 20 the calculation, and before any payment is made, the Controller's auditor, who is housed in our department, signs off. So there are three checkpoints before payment is made.
But after 34 3/25/08 - WHOLE - BILL 080022, etc. that initial thing, someone could go back in the system, change the information and there would be no way to catch up to it.
No, because there are only certain people allowed to adjust benefits. I don't believe --
Anyone with access to the system or a password that could get in could do that; is that right?
There are a handful of authorized employees within the department that can go in and adjust, and those are people at the supervisory level. I would say there are five people in the office that can adjust it.
-- a database recording what the old number was and what the new number was and who made the change?
We have a record of 35 3/25/08 - WHOLE - BILL 080022, etc. who made the change, because an employee has an ID number that's associated with the change.
Do you know what the old information was or is that deleted from your system?
No. That would have to be done by a report. But those changes are still subject to peer review. It would be the person making the change and then it would be the person checking and then the Controller's Office as well.
That's workflow processes, though, that is before they go into the computer system. So someone can go into the computer system and make that change and just skip the whole peer review process. Now, they would be violating your workflow processes and your rules, but that could happen. And so -- is that correct?
I don't believe it's correct, because there are -- there's what's called a preliminary run done. 36 3/25/08 - WHOLE - BILL 080022, etc. Before the preliminary is signed off, it has to be peer reviewed. So I would say that we have a system that kind of does checks and balances against those things happening.
I'm sure if Terry is buying an off-the-shelf system, what's going to be put in is a system that will provide security and an audit trail so that you can know the old information and the new information.
I think it's very important to do that, and I also would suggest perhaps that once you can get the payroll records automatically, that you do so for some past years and perhaps have the City Controller do or somebody do a forensic audit to make sure that -- because you were doing things manually, make sure that things didn't get messed up.
We're subject to an audit by the Controller's Office on a 37 3/25/08 - WHOLE - BILL 080022, etc. yearly basis and we contract an independent auditor to come in, and they do check --
I understand that, but you can't go through every record.
And the only way to do that is to automate it. What I'd like to suggest you do is, once you get this new system in, that you take data from some older years and cross-check it to make sure that there's nobody in the system with an incorrect amount.
If you do that, please provide the information to the Chair when that's completed. Last year you mentioned was the highest retirements in DROP with 989 people. Could you tell me what the average retirement age was prior to 38 3/25/08 - WHOLE - BILL 080022, etc. DROP's implementation and what the average retirement age is today?
It's my understanding that the average retirement age has dropped two years.
If you knew that, why did you have to get me that information?
Okay. For the Chief Investment Officer, could you please describe the last pension obligation bond, what happened with the money and how long it took us to recover that loss? 39 3/25/08 - WHOLE - BILL 080022, etc. MR. McDONOUGH: I don't have all of the details, but I'll provide the best that I can now, and if you'd like more, I can do more research. But the bond was issued -- the proceeds were received by the Fund in February '99. They were invested immediately in what was called the Liquidity Fund, which was a group of index funds that the Board had set up to manage the inflow of the City's annual payment and the pension obligation bond and outgoing monthly benefit payments. The Fund continued to grow from -- I think it was maybe 3.5 billion before it was issued. The bond took the fund to 4.6 billion. The Fund continued to grow through August of 2000 and reached 5.2 billion at its peak. That happened to be the time that the bubble burst, and the fund declined in pretty much a straight line from August of 2000 through March of '03, is when things started to turn around. 40 3/25/08 - WHOLE - BILL 080022, etc. I believe -- I don't know how far down the Fund went offhand. I believe back down to approximately the 3.5 or so that the Fund was before the bond was issued. Late last year in 2007, we did cross the $5 billion mark again in terms of total fund assets, and based on recent market performance, we're slightly below that today. We're at about $4.8, $4.9 billion.
So we borrowed 1.25 billion, put it in the market and the market immediately went down? MR. McDONOUGH: Right, but the decrease in the Fund wasn't attributable solely to the investment. About 700 million of the 1.1 billion can be attributed to the fact that the Fund was paying out more in benefits than they were receiving from the City over that time period. So there was a funding deficit during that time period.
Well, you 41 3/25/08 - WHOLE - BILL 080022, etc. would apply that to the whole fund, not just to the extra money. MR. McDONOUGH: We don't separate the extra money for any type of reporting purposes. It was considered part of the total Pension Fund.
So it was 700 million of the entire fund, not the 1.1 that came in? MR. McDONOUGH: Correct. So if the Fund lost 1.1 billion, 700 million of that was attributable to the deficit between the amount the City was paying in and the amount the Fund was paying out.
Can you tell me what the minimum mandatory obligation would be just leaving the Pension Fund status quo and having us put cash in every year? So, in other words, taking a look at the current system, what the MMO would be in 2019 and then again give me 2020 and then again in 2026. MR. McDONOUGH: I do not have that information with me today. 42 3/25/08 - WHOLE - BILL 080022, etc.
Will you please provide that to the Chair? MR. McDONOUGH: Yes.
Can you tell me what the purpose of -- is one of the purposes of the DROP program to retain experienced employees longer?
That is the concept of DROP payments. Initially when they started throughout the country, that was the concept, because it allowed departments to plan and replace employees and to train, yes.
Would you say given that that's one of its main purposes, that the DROP program has been an extraordinary failure for the City and for the pension system?
I don't believe it's a failure. I think in some instances it's more neutral. I wouldn't --
The retirement age has gone down two years and the purpose of the program is to keep 43 3/25/08 - WHOLE - BILL 080022, etc. experienced employees longer. Is that success? (Witness approached witness table.)
Rob Dubow, Finance Director. The retirement age that we're talking about that went down is retirement age for pension purposes, which means the date at which they go into the pension plan, not the date they leave City employment. So if they stay in the DROP plan for anything more than two years, they're actually staying a little longer. If they stay for the full four years, they're staying longer than they would have if they hadn't been in the DROP. So merely looking at that retirement date for pension purposes doesn't answer the question you were trying to get to, which is are people actually staying longer before they leave. 44 3/25/08 - WHOLE - BILL 080022, etc.
Sure. How much of the 700 million during the period sort of from 1999 to now that has gone out in extra payments were DROP payments?
Were DROP payments at the end of people leaving. In other words, how much has gone out of the fund in DROP payments?
How much had been DROP payments? We would have to get back to you -- we'll get back to you on that.
From the time DROP was inputted to today in terms of extra payments -- payments that would not have gone out of the fund if we had not had a DROP program. And can you tell me what the cash flows would be over the period if we had no DROP program since 1999 and provide that to the Chair, please?
There aren't 45 3/25/08 - WHOLE - BILL 080022, etc. additional payments because of the DROP program. It's a timing issue. Any payment that someone is going to get is part of the pension that they've earned. It's just a matter of when they get it.
Would you agree that if DROP causes a change in behavior where people are retiring when they otherwise would and that it actually costs the program money because they get up-front payments versus all those payments over time and that they have to live a really long time in order to sort of have that be a neutral decision for them essentially?
I mean, this gets to kind of the philosophical question of whether DROP changed behavior and -- I guess take a step back. One of the things that we're doing right now is having our actuary do an analysis of what's happened and how those cash flows look, and then we would layer over kind of assumptions about 46 3/25/08 - WHOLE - BILL 080022, etc. behavior on that. I don't want to pre-judge his results since he's an actuary and he knows how to do this analysis better than I do. So I think when we get that report back, we can give you a better answer to what you're trying to figure out.
That's great. Would you please provide the Chair with information about the assumption that the actuary is making with respect to whether or not behavior changed? Because that basically determines the outcome of that study.
Right. I think the latest conversation we've had with him is he's going to give us -- he's going to show us what this would look like if -- what the cash flow change was and give us the ability to determine if you -- what the cash flow was, what the change in retirement age was, and then we'll be able to say, Okay, if all of this is because of the DROP, this is how much 47 3/25/08 - WHOLE - BILL 080022, etc. DROP would cost. If none of it was because of DROP, this is how much it would cost, and then it's probably somewhere in the middle. But what he's been telling us is, he can't give us a definitive answer on behavior, and that will be something that we'll have to kind of hash through. He can give us what the range of impacts of behavior are.
And I assume we're going to look at the average retirement age for, say, the Midatlantic region over the same period to see if that's increased or decreased in general.
Yes. That makes sense, yes. We didn't talk to him about that, but we will, because that makes sense.
Thank you, Madam Chair. Those are all the questions 48 3/25/08 - WHOLE - BILL 080022, etc. I have for now. If other people have questions, I may have a few in a minute. Thank you.
You're welcome. Are there any other questions from members of the Committee? (No response.)
Thank you very much. The next department to testify is the Sinking Fund Commission. (Witness approached witness table.)
Good morning, Madam President and members of City Council. I am Carl Coin, Executive Director of the Sinking Fund Commission, and I am here to testify on behalf of the Commission on 49 3/25/08 - WHOLE - BILL 080022, etc. our Fiscal Year 2009 Operating Budget request. The Sinking Fund Commission budget supports the Mayor's public safety initiative through the timely payment of debt service for capital projects at Police, Fire and Prison facilities. It promotes jobs and economic development by financing projects, including the stadium construction and improvements to Philadelphia's airports. It promotes healthy and sustainable communities by funding water and sewer infrastructure improvements and renovations to health centers, transit facilities and neighborhood parks. It promotes customer service and a high-performing government through projects that enhance energy efficiency and allows for improvements to community facilities, including recreation centers and libraries. 8 million. The 50 3/25/08 - WHOLE - BILL 080022, etc. 1 million for debt service and other debt-related expenditures. The Class 200 request provides for payments on leases for facilities such as the Municipal Services Building, the One Parkway Building and certain correctional facilities. This line item also provides for lease payments on the stadiums as well as the Neighborhood Transformation Initiative borrowings and the Cultural and Commercial Corridor program. 4 million increase, mostly due to a rise in the estimated obligations for the 2003 Justice Lease Revenue Bonds. 2 million and provides for the General Fund's portion of the interest and principal payments on the City's general obligation bonds. These 51 3/25/08 - WHOLE - BILL 080022, etc. 4 million from the Fiscal Year 2008 estimated obligations, mostly due to provisions for a new general obligation series to be issued in 2008. In order to meet the City's annual temporary imbalance between the payment of obligations at the beginning of the fiscal year and the receipt of taxes and other revenues early in the calendar year, it is expected that the City will issue tax revenue anticipation notes early in July 2008. These notes would mature prior to June 30, 2009. 1 percent on these short-term notes, estimated to be for 275 million. The Sinking Fund reserve payments, Class 704, provide payments of guarantees on economic development bonds of quasi-governmental entities. 3 million 52 3/25/08 - WHOLE - BILL 080022, etc. in this line item provides for payments on the Philadelphia Parking Authority Series 1999A bonds. 3 million, all in Class 700, for payments of debt service on water and sewer revenue bonds and general obligation bonds. 3 million decrease in the Water Fund request from Fiscal Year 2008. The Commission request from the Aviation Fund for Fiscal Year 2009, 114 million, all Class 700, is to provide for payments of regularly scheduled Airport revenue bonds. The increase of 17 million over Fiscal Year 2008 estimate is due to the provision for a year's debt service on new Airport borrowings in 2008 to fund improvements at the Airport. The total amount of these borrowings will be 285 million. The Commission's 2009 request of $5 million in the Car Rental Tax Fund 53 3/25/08 - WHOLE - BILL 080022, etc. is to provide for lease revenue bond payments on the sports stadiums from the vehicle rental tax revenues. This concludes the written portion of my testimony. I would be glad to answer any questions that Council may have relative to the 2009 Operating Budget. Thank you.
Thank you. For the record, can you tell us what are the projected borrowings by the City in FY2009?
The projected borrowings, there will be a general obligation borrowing of 184 million and a temporary revenue anticipation note of 275 million.
I'm sorry. What is the projected amount to be borrowed for TRANS?
What 54 3/25/08 - WHOLE - BILL 080022, etc. is the projected interest cost of the TRANS?
The cash flow for FY09 reflects a pension payment of $347.1 million in August 2008; is that correct?
How does the pension payment impact the size of the TRANs borrowing?
Well, we need to borrow enough money in order to cover that pension payment, along with the other revenues that are received. So if we don't borrow enough, we may not be able to cover those pension -- that pension payment. Along with the other revenues that the City combined with the TRAN amount, we would be able to pay that amount, the pension.
So in fact, as I understand you're saying, is that the $275 million that we're 55 3/25/08 - WHOLE - BILL 080022, etc. borrowing in the TRANs may not be enough money to cover for everything? (Witness approached witness table.)
Madam President, good morning. Steve Agostini, Budget Director. I believe that our plan is, we were moving forward to your questions, which I think are very pertinent. Depending on when we would issue the pension obligation bond will have an impact on exactly the size of both the TRANs and the payment that would be required to the system. In our planning estimates currently, we don't anticipate that we would have to make that payment if we are indeed doing the pension obligation bond before the end of the calendar year. However, if for some reason we are unable to complete the deal before then, then we would have to have a re-estimate of the size of our tax and revenue anticipation note so that we 56 3/25/08 - WHOLE - BILL 080022, etc. could make up for our cash flow needs in the beginning part of the year before revenues are actually received, as well as make the payment to the system. And in part, one of the reasons we want to make the system payment early is so that we would not incur interest penalties for not making the payment on a timely basis.
Thank you, Steve. Steve, you might as well wait there, please. If the City proceeds with the proposed pension obligation bond, shouldn't the amount of the TRANs be reduced?
Madam President, I think -- that's a very fair question. I think that we need to go back and look at cash flows at that point in time when we have a plan in front of us to move forward with the pension obligation bond. It's conceivable that we will not need a tax and revenue anticipation note of that 57 3/25/08 - WHOLE - BILL 080022, etc. size that Mr. Coin just mentioned to you, because we will not need to make that very large payment in the first year. That is an option before us.
Thank you. Thank you, Steve. The Chair at this time recognizes Councilman Goode.
And is any of that for the purchase of goods and services from non-governmental entities?
And none of that was for purchase of goods and services from non-governmental entities?
And was any of that for the purchase of goods and services from non-governmental entities?
Okay. Were 59 3/25/08 - WHOLE - BILL 080022, etc. you told that as part of the budget process you should submit information on the purchase of goods and services and the participation of disadvantaged businesses in that?
I don't remember being told that, or if I was, if I did, it wouldn't apply.
That's supposed to be a request made to every department and agency.
Madam President, Councilmember, you are correct, that request was indeed made. If it is not here, we will bring that forward to you as soon as we can.
And in the last fiscal year for which we have information, which is Fiscal Year '07, the Sinking Fund is listed as zero percent participation, but not because zero dollars were spent. The information says at least $4,500 were spent. 60 3/25/08 - WHOLE - BILL 080022, etc.
There is a miscellaneous purchase order that we have with our disseminating agent that --
So it was the purchase of goods and services from a non-governmental entity?
Thank you. Are there any other questions from members of the Committee? (No response.)
We will now hear from the City Planning Commission. (Witnesses approached witness table.)
Good morning. Please identify yourself for the record and proceed with your 61 3/25/08 - WHOLE - BILL 080022, etc. testimony.
Good morning. My name is Gary Jastrzab. I am the Acting Executive Director of the City Planning Commission. Good morning, Council President Verna and members of City Council. Thank you for the opportunity to appear before you today and present the City Planning Commission's proposed Operating Budget for Fiscal Year 2009. The City Planning Commission's proposed Operating Budget of $4,500,671 is comprised of three components: A General Fund request for $3,328,054, a Community Development Fund request for $172,097, and an appropriations request for $1,000,520 in the Grants Revenue Fund. This is $251,557 less than the Commission's Fiscal Year 2008 estimated obligations due to decreases in two of these components, $250,000 in the General Fund for the purchase of consultant and 62 3/25/08 - WHOLE - BILL 080022, etc. technical services due to the elimination of a one-time increase for comprehensive planning services and $11,236 in the Community Development Fund. These decreases are offset somewhat by a $9,679 increase in requested appropriation in the Grants Revenue Fund. In regard to grants, I'd like to mention that the Philadelphia City Planning Commission staff aggressively pursues opportunities for competitive planning grants in cooperation with the Mayor's Grants Office. Since 2002, the City has received grant awards 16 totalling $1,752,000 for transportation 17 and land use planning studies, more than 18 any other county in the greater 19 Philadelphia region. We have also lent 20 our support for many more similar grants awarded to non-governmental organizations. With this level of funding, the City Planning Commission staff will remain stable, supporting a total of 53 63 3/25/08 - WHOLE - BILL 080022, etc. positions: 49 General Fund positions, three Community Development Fund positions and one Grants Revenue Fund position. The City Planning Commission staff consists of planners, architects and urban designers supported by Geographic Information System, administrative and clerical personnel. The agency staff provides the City Planning Commission with information and recommendations on an increasingly wide range of planning and development-related issues and is often called upon to undertake special projects by the Mayor, Managing Director and City Council members. During the current fiscal year, we have also provided the staff support for the work of the new Zoning Code Commission created through a Home Rule Charter change in May 2007. Under the Charter, the City Planning Commission duties include the preparation of a comprehensive plan and 64 3/25/08 - WHOLE - BILL 080022, etc. its modifications, the Capital Program and Budget, proposed zoning ordinances and amendments, and regulations concerning the subdivision of land. The Commission is also charged with reviewing and making recommendations concerning the School District's proposed Capital Program. These duties directly address the City's Strategic Plan by creating a framework for public and private investment that promotes jobs and economic development, enables healthy and sustainable neighborhoods, and supports the capital facilities necessary to provide municipal services in the areas of public safety, education, community services, and an efficient and high-performing government. With regard to jobs and economic development, the City Planning Commission's objective is to create conditions that will support an increasing, diverse and upwardly mobile 65 3/25/08 - WHOLE - BILL 080022, etc. population. Progress towards these objectives can be measured through an analysis of population, immigration, employment and income trends. Similarly, creating healthy and sustainable neighborhoods has long been a continuing objective of the Commission. Improved housing affordability can be measured using an index of median sales prices and rents to median household income.
In addition, increasing walking, bicycling and transit use can be measured by cyclist and pedestrian counts and transit ridership data. Finally, providing improved access to neighborhood parks, recreation sites and other green open space can be measured by monitoring the service area coverage and capacity of these facilities to serve nearby residents. The City Planning Commission staff has always prided itself on the ability to provide fast and efficient services to individuals and community 66 3/25/08 - WHOLE - BILL 080022, etc. organizations seeking planning-related information, property owners seeking review of development plans, and City departments and City Council data requests. In this regard, we will continue to assist visitors to our office within five minutes of their arrival and respond to requests for more detailed information and map sale requests within three business days. Our department has contracted with 13 non-governmental entities in Fiscal Year 2008 totalling $765,753. 8 percent African-American, 13 percent women, and ten percent in multiple categories, such as Asian female-owned firms. This concludes my testimony. I appreciate the opportunity to appear before you this morning, and I would be happy to answer any questions that you may have.
Thank 67 3/25/08 - WHOLE - BILL 080022, etc. you very much. The Chair recognizes Councilman Jones.