So other than -- I mean, you could have very well picked four other things, or you could have picked ten things.
I mean, what is the relevance of in the whole scheme of things to the enactment of the pension obligation fund?
It is the illustrative of what costs to your employee that you would be able to spend on things that are before us today. And it could be other things. It is up to Council and the budget process. So the avoiding costs is -- the avoid of cost is --
Somewhere in the course of putting this package together, someone had to make decisions on what was going to go on the page and it was decided that these four things might be of some interest to somebody --
-- as the kind of things that you could find that if you did the 373 11/30/98 - WHOLE - BILL NO. 980789 pension obligation fund save X amount of dollars, and you could put your money in these things or you could put them in something else, but you guys decided to put these four things down on a piece of paper.
With regard to the last line on , the cost of limited bonus for retirees, can you explain that for the record? And can you shed any light on the larger issue of cost of living adjustments or COLA, and what impact or relationship this bill has to that, if any.
The bill would allow us to do something of that nature if we chose to, if we collectively chose to do it. What we had proposed is retirees go out --
If we had chose to do -- if we collectively chose to do some type of a co-op, cost of living adjustment for people that had been retired. If you had been retired for ten or 15 years, your pension is based on a salary, because inflation is lower and it is fixed. So the only 374 11/30/98 - WHOLE - BILL NO. 980789 relief you get is on any pension or Social Security. We recognize that particularly when you get to a pension that is now going to be less at the smaller liability, then you may be able to -- you may want to address that, and that is what this referred to. Now, as you know, we will be discussing this at great length at approximately this time next week, I think it is the 7th or the 8th, where there are various proposals that have been presented. And I hope by the time we are done, there will be one we can agree on.
Now, your proposal here, there are no documents on this.
I believe there is a -- there is a legislation that has been introduced.
No. I am talking about your item here, the cost of living bonus. I mean, you consider that that's a distinction between a one-time bonus versus a call that is ongoing --
Not necessarily. An adjustment. And adjustment that in most pension funds in the public sector, particularly when you have gone under the liabilities, their ad hoc 375 11/30/98 - WHOLE - BILL NO. 980789 adjustments that are done either every few years or whatever the issues comes.
But even in that situation, the adjustment goes on from that point forward.
They can get $25 more a month or until the next one happens or doesn't happen.
And this particular proposal, it is essentially a "one time, you get the cash, go on with your life"?
Now, has the administration done any work on what I will call a more traditional or truer call notwithstanding the bills that have been introduced? Has the administration done any work on that particular issue?
We are continuing to explore internally contributing in terms of our 376 11/30/98 - WHOLE - BILL NO. 980789 options. The one proposal that you have seen that we will be discussing early next week has a billion dollar price tag, it is one billion two over ten years. It's our view that the money is not there for that. Is there something that you can give for relief to pensioners that is appropriate; is there a mechanism that is an appropriate benefit (unintelligible) between now and then we can find them.
Now, we received new authorization from the Commonwealth to issue these pension obligation bonds?
And this debt apparently does not effect the general -- the generally referred to debt ceiling of the city.
That is correct. Because you are transferring one liability to another.
I understand. How do you decide on the $1.2 billion figure? You have a $2.7 billion unfunded liability. How did you come to this one?
There is not an empiric 377 11/30/98 - WHOLE - BILL NO. 980789 answer to that. We are, in fact, advanced to $1 million --
Yeah. The narrative will try to explain. We had originally suggested a $1 billion pension fund. But as we were working on this, there were those, and they were on the Council's technical staff side, that thought we could do more. Because there is an ever-so-slight market risk, what if we don't, the pension fund doesn't earn more than the interest rate on bonds, because for us it is uncharted? We thought that a billion and a quarter was a proved number. That takes us into our pension, so it would be approximately 72 percent funded. Actuaries will tell you, as our actuaries have, that after 70 percent you are in a substantially better position than if you are only 50 percent funded. So the answer to your question is, if we felt comfortable with a billion and a quarter, if this works, as we believe it will, the City can go back and fill the remaining liability 378 11/30/98 - WHOLE - BILL NO. 980789 with another issue from the future. 2.7 billion --
There was a two-year window on excluded. It does not count toward your debt scheme. Presumably you could redo --
So we have to come back relative -- when is the two-year dead line over?
When does the window open and when does the window close?
The answer is October 2000 the window closes. The window may be reopened, but right now the legislation is the year 2000.
So between now and October of 2000, your testimony is we would have 379 11/30/98 - WHOLE - BILL NO. 980789 until all issues on pension obligation bonds related to unfunded liability?
Under the current state legislation, you can go back and state the increase -- okay. The number was wrong. It is December 31st, 2002. Okay? I just added two years. It is December 31st, 2002.
Yeah. You could extend that through state legislation if you wanted to fill for a meeting liability. Now, there is a theory that having that liability gives us some flexibility, because as you know, the bond payment must be paid by the date specific of a calendar year. A pension obligation, you can slide the payments of this thing -- I mean, the city is in financial difficulties; it deferred those payments. Paying interest to the fund, it deferred those payments. So it is what is considered a soft obligation even though -- as long as it is paid within the year, you have some flexibility on when you have to pay it. That could be of some value to us again 380 11/30/98 - WHOLE - BILL NO. 980789 if we found financial difficulties.
So if you only do one of these, it will be the 1.2 billion, and you get 72 percent funded, at what point in time is your estimate that we get to virtually full funding of our liability?
I've had that and I don't have it with me. We would never quite get to 100 percent, and you may not.
My name is Kenneth Kent. I am at Mercer Incorporated, and I am the actuary for the retirement system. There are two answers. If you continue to maintain the same funded policy that you currently have, if you get fully funded, your own funding goes to zero. At the same point in time, the difference before and after the proceeds come 381 11/30/98 - WHOLE - BILL NO. 980789 into the fund is in the amount of annual payment, not in the period of time over which you are paying. However, there is state legislation that says that once you become 70 percent funded, instead of funding your unfunded according what Act 205 initially put into place and which has various different pieces to it that are spread over time, you can go into a rolling ten-year funding, which says what is my unfunded, spread it over the next ten years. Next year you redetermine the unfunded and spread it again. So at some point in time you probably revert to that method and under that method you do not necessarily get to the point where there is a zero unfunded. But it will go down significantly.
Okay. Thank you. Mr. Hayllar, my last few questions. Where does Philadelphia rank against the top ten to 15 cities of the country on our level underfunded liability versus those other cities?
We are probably way below. In Pennsylvania it is very common to have unfunded liabilities of considerably large size less 382 11/30/98 - WHOLE - BILL NO. 980789 so in other parts of the country. So I would suspect that we are in the lower end of the pension being funded.
And lastly, just to establish for the record, it is your testimony that the passage of the pension obligation bond bill 8 should have passed, and the receipt of the proceeds is not in any way, shape or form directly related to the offering either of this bonus, possibility of bonus that you outline on , or consideration of the one or two or three cold bills that we may have discussion on next week.
That's correct. This allows you to avoid costs. This allows to you spend money in the future that you wouldn't otherwise have, that you avoided those increases. How that is spent, it's up to council and administration at that time.
Let me reiterate the other point: Every dollar of this goes into a pension fund where it cannot come out for any other than pension benefits.
Thank you. 383 11/30/98 - WHOLE - BILL NO. 980789 Thank you, Madam Chair.
Mr. Hayllar, what is the impact of the pension fund and the City's Debt Service Requirement if the State takes over the judicial system?
That is a great question. We believe -- John Nixon, who is outside counsel for the pension fund is here. And he has opined that money that is in the pension fund can be used only exclusively for the beneficiaries. We don't believe that this money can be moved to the State under that IRS ruling. How the stay -- as the State take the court employees and moves them, it has to resolve the pension issue. And there have been suggestions where we think they have run afoul with the IRS and the money has to be -- it's our pension money. One solution that the State hasn't advanced that had, is that court employee that are in the city funds become state employees but that they would remain participants in our fund. And the new employees would go to the state fund. To me, that makes the most sense. 384 11/30/98 - WHOLE - BILL NO. 980789 Once again, that is not necessarily what people are talking about. The absolute answer to your question is, we don't know at this time.
How will the City distribute the Debt Service Payments of a Pension Obligation Bond to the various city funds?
Okay. We have talked about a number of mechanisms, but particularly the water and Aviation funds since they, too, will benefit. They will have to pay their share probably during the annual accounting that takes place between the funds for services rendered by the city to the Aviation fund, to the Water Fund. The easiest way would be to count forward. At that point, they would make their share of the debt service at that time. That is not necessarily the only way it is done, but I think it is the easiest way.
Well, are there any special approvals required from the airline since the Aviation fund will participate in the 385 11/30/98 - WHOLE - BILL NO. 980789 pension obligation fund?
I am going to turn around and make sure when I say we don't believe so, to make sure I am absolutely correct. Because I know I addressed that issue. What do you know, I was right. Mr. Rucci (ph) of the law department informs me that it is an operating experience and we do not believe their longstanding approvals.
Thank you. What are the projected savings to the City over the 30 year in terms of this bond? How much of a savings will go to the general fund?
I wish I -- 254, 254 million -- the vast majority of that savings goes to the general fund. And that is on the present value basis, I believe.
How quickly do you anticipate that the money managers will be 386 11/30/98 - WHOLE - BILL NO. 980789 able to invest these funds?
That is a question that should be directed to Sandra Parker, the Chief Investment Officer for the Pension Fund. She is fully aware of this obligation.
Sandra Parker, Chief Investment Officer of the Pension Fund. It will take probably about six months to get fully funded; however, we do have an interim plan, and that is that we will be fully invested in the appropriate asset classes by using what we call a liquidity fund. And it consists of using commingled index funds so that we won't be out of the market at any time.
Our intention is to get the money to work as quickly as possible. (President Street returns to the chair.)
Thank you. My 387 11/30/98 - WHOLE - BILL NO. 980789 question is what to do with the separate fund on --
That's a little better. I could see the look on Councilman Cohen's face. I couldn't hear.
I am intrigued by the separate fund that you referred to on of your testimony applied, that actively permits small businesses, minority and women businesses to participate in the City's bond work. If I understand it, the City is going to carve out a fund between 80 and 100 million to be allocated to both with -- our present pool would not be able to participate since our rules require that the City's fund deny people greater than percent of the total business -- 25
We also require a five-year additional track record which the new fund, of course, doesn't have.
Right. I am very excited about it. Have any other cities tried it? What has been their experience?
I am not aware of any that has tried it in exactly the fashion that we are talking about doing it. But there are a number of examples throughout the United States where local governments have set aside pools of money to help facilitate small businesses or minority-owned businesses. Actually, there is an interesting project going on right now with the State of California. The huge the megaphone, the, you know, 100-something-billion-dollar fund where they are doing something like this as well.
Well, I applaud you for it. We have been talking about the deed to cut down contracts so that small and new companies could have an opportunity to bid and be 389 11/30/98 - WHOLE - BILL NO. 980789 successful and, therefore, earn the resume points that go to saying I do business with the Board of the City of Philadelphia. I applaud you for this today. Thank you, Mr. Chairman. I have no 7 other questions.
Thank you very much. The Chair recognizes Councilman Tasco.
Thank you. Back to . I totaled for the five-year period a total of $134,966,000 of what it costs to be paid out by the general fund this is the cost that you say is to the general fund?
So the savings that the general fund is not paying into the pension fund?
Yes. The general fund is about 86 percent of the total payment.
Councilwoman Verna asked you what the sale was over 30 years, and you said 254 million?
Could you 390 11/30/98 - WHOLE - BILL NO. 980789 explain to me, please?
If you look at the graph I just gave you, after the year 2020, with this debt service, we will be paid more than what we would have been paying under the current funding plan, because at 2020 or 2019, our requirement had dropped from 500 -- well over $550 million a year to just the normal cost, the cost of your current employees, which would be, say, around 50 to $70 million a year. So you have this big savings. So after the year 2020, we would be paying more than we would under the current plan. Of course, our problem is, we will never get to 2020 with this huge spike of payments. So you are paying more in the far end but at a level and livable amount than you are reducing your payments in the early years of the 20th Century. That's why the PD savings over the life of the issue -- because you pay more at the end and less at the beginning.
So the items outlined on , the suggested distribution could be anything. 391 11/30/98 - WHOLE - BILL NO. 980789
Yes. Yes, that's correct. We were trying to demonstrate the things that perplexed the budget office now. These are things that can be funded now; it could be something else.
But suppose we don't do this, do you still have to pay these costs in the end?
You certainly have to pay the $102 billion police arbitration cost over five years; that is the embedded cost. So what will happen is, Council will continue to be confronted with the issue of trying to reduce the cost of services or reducing services or ultimately raising fees and taxes. These are very unattractive options. The pension bond by extending out this liability and by reducing the increased costs to the currently (unintelligible) allows us to avoid that.
This is five years. There is no nothing magic about it; this is five 392 11/30/98 - WHOLE - BILL NO. 980789 years, it is a five-year plan. In the year 2005, instead of paying something like 300 million, we would pay something like 260 million. That is not a savings from what we pay, now but that is a voided increase that we will be able to take care of. we are doing a very rare thing here, something that wasn't done generations ago. We are think being the future.
In terms of trying to find a way to give annual pensions cause, have we looked at other cities that ran (unintelligible) from your bases and see how we can do it at some point in time?
We are wrestling with that now. I would caution you that an annual increase is very, very difficult because of the mammoth expense involved. But we had made a suggestion. What I am told most cities do is when they are able to, they make an ad hoc adjustment either in the base or one time bonus, but it is not -- it is not projected necessarily into a firm plan simply because of what that will do to the funding requirements and pension; it will drive them right up again. 393 11/30/98 - WHOLE - BILL NO. 980789 But we will have a hearing, I believe, on the 7th of December, by no small coincidence that will be Pearl Harbor Day, on this issue.
I have one more question. Even though this is a savings to the general fund, what would keep us from putting the savings back into the pension fund to further reduce the -- (unintelligible)?
You could do that if you wanted to. I would probably suggest that you have other expenses of the City which might be a higher priority to you in other safety realms and so forth. When we do this, we have made such a profound improvement in the condition of our pension that, you know, it is not to say that we 394 11/30/98 - WHOLE - BILL NO. 980789 can rest, but we will have made profound improvement, 50 percent funded to 72, 73 percent funded. That will be a major step forward.
Thank you, Mr. President. Certainly we have heard references to other bills related to this issue for which we will have dealings on December the 7th. I am requesting that we then be able to consider, even if we don't finish this today, that we not consider any of this, since this is all related until we've had a chance to hear all of there. So I am making that recommendation. There is a chair -- we have gotten all councilmembers since we have other pension bills as well that were all -- (unintelligible.) We have two other pension bills on the 7th, and so we are requesting that we consider all of those, take no action until we've had hearings on all of -- on all bills so that everybody is clear on where we are.
I don't believe that 395 11/30/98 - WHOLE - BILL NO. 980789 Council can conclude the process before the 7th; however, you will be able to do virtually nothing without this bill. This is the bill that gives us the relief in the future.
Then how does this bill relate to the other bills that we have to hear? How will they affect it?
It avoids -- right now what other designated committed increased cost in the general fund. How Council deals with that is a matter Council of the Administration will decide. But without that avoided cost increase, you are not going to be able to do much of anything. Also, I don't believe the process allows you to take action until the 10th of December anyway.
Well, the process will allow us to vote on this a week before we vote on the other ones, because we won't hear those until next week, and we are here on this today.
Councilwoman, no 25 matter what happens, we would report -- just fill 396 11/30/98 - WHOLE - BILL NO. 980789 out today. It wouldn't come up on the second meeting the final passes calendar until after public hearings on the bills that you mentioned. So in any event, there could be no action, no 6 final action taken on this bill, before the bill 7 you are talking about on this for a public hearing. And we have a public hearing on it.
Yes, we have it scheduled. I just wanted everybody to get a full picture of all of it. It is all very complicated. And it is difficult enough to try to follow it without having to rehear some other related issues and not know where it all comes in. That is essentially -- we want to (unintelligible) for our city. We want to make it as painless as possible for all of us to keep up with what is going on and to make sure that we are trying to do the best for citizens. Thank you.
Thank you very much. The Chair recognizes Councilman Cohen. 397 11/30/98 - WHOLE - BILL NO. 980789
Thank you, Mr. President. On , the first item is F.O.P. Arbitration, 102,841,000. When was that arbitration?
It was the salary -- it was the arbitration on the remaining -- their salary for the remaining two years of contract.
Their salary? The pension fund doesn't have anything to do with the salary.
No, no, no. All this is meant to do is to illustrate having avoided those costs you are now committed to make to the pension plan, having avoided them, what that money might be used to do. One thing clearly is because the increase that the police officers received is embedded into the --
It is also (unintelligible.) 398 11/30/98 - WHOLE - BILL NO. 980789
No, no, no, no. Excuse me. Their contract left open the last two years, there was no annual -- there was no pay increase. They came back after two years of the contract and arbitrated just the salary increase for the final two years, I believe it was, of the contract. That's what this was, and that was done earlier this year.
Thank you. Just for clarification, this may be maybe semantics, but, some of the terminology I think that Mr. Hayllar is using creates some level of confusion. In response to Councilman Cohen's question, he gives the impression that there was some four-year contract, and this is the balance of two years of that contract. I thought the 399 11/30/98 - WHOLE - BILL NO. 980789 situation was that the F.O.P., unlike some of the other unions, did not take a four-year contract in 1996 but took a two-year contract in '96, and that the recent arbitration that Mr. Hayllar is referring to is nothing more than another two-year contract. It is not the balance of some other contract or some other negotiation. They took two and two instead of the straight four; now isn't that correct?
So when you keep saying the other two years for the billion of the contract, you're giving the impression that it was a four-year contract and that something didn't get done in the first two. It is two separate contracts.
And cost of the contract was paid out of the general fund?
What was the 400 11/30/98 - WHOLE - BILL NO. 980789 relevancy of putting it on dealing with it --
Because it is one of the costs that we are confronted with having to pay that you would now be able to pay if did the pension funds and freed up this increasing payment that you otherwise had to make to the pension fund.
Do you mean the City was in the position where it couldn't pay the police officers even though we had $169 million surplus?
Well, that's an annual surplus; that was only one time. But the City would have had to pay for that ongoing. And this frees up funds so Council doesn't have to make the consideration of what bills to cut, whether you have to raise a fee or a tax. This frees up funds in the future and allows that to be accommodate.
I am just trying to understand. Couldn't you have said Class I salaries, whatever that figure comes to?
Sure. You can put 401 11/30/98 - WHOLE - BILL NO. 980789 anything on the list that you are trying to show that the extent of the savings over five years that permitted by doing the pension fund.
Then can I assume that the total savings will be the four items listed? Just back them up on ?
Perhaps over the first five years, over the entire life of the issue of the present value savings of 254 million. But if you look at the graph I gave you, the difference between --
The first five years, which is covered on , the savings would be 134 million, 135 million basically.
Out of what doesn't have to pay for unfunded obligations.
Did anybody 402 11/30/98 - WHOLE - BILL NO. 980789 compute -- this is -- I have to say really a clever thing; in common, mayors usual complain that the last mayor left them scrap for funds. But, Mr. President, you or whoever becomes the mayor don't have to worry, because this won't affect the mayor for years. 8
Well, it won't 11 benefit the mayor beginning in the middle of 12 2020? 13
That is correct. It 14 will be fun to be the finance director in the 15 year to 2020. 16
Assuming a mayor 17 gets elected in real fact for eight years, 18 because I think every mayor has succeeded in 19 getting reelected since the new charter came in, 20 would mean that the time it hit hard would be 20 years down the road.
Well, it wouldn't hit hard, because at that point you have a fixed managing expense, you know what it is, and you are able to make it -- it is the continuing 403 11/30/98 - WHOLE - BILL NO. 980789 growth that we currently pay that is causing us so much stress. As you can see, starting in the year 2011, that is a fairly level payment. It also does not take into consideration any inflationary growth in the budget. So as a percent of budget, it may, in fact, be a smaller number; you don't know. But it is a much more manageable issue.
Well, looking at the chart, has anybody computed the amount of millions of dollars --
-- of the red part that it will be spent against the savings --
You have the total? 404 11/30/98 - WHOLE - BILL NO. 980789
Well, the entire present value savings, 254. Those years after 2020, I have that number. I will provide that to you.
I am asking for, I think, a simple question. In the years where the red line is below the green line -- do I have the right colors? Red and green?
You want to know the increased costs from the year 2020 to 2029?
No. No. I want to know how much you save in annual payments between the year 2000, the charter begins with until the middle of 2020 --
-- where the red line is under the blue line. And then I want the other amount from the period from 2020 to 2029, where instead of paying only a little over 100 million to 150 million in that period, it would 405 11/30/98 - WHOLE - BILL NO. 980789 seem the chart indicates that there are payments of 350 million for each one of those years. The red line seems to be pretty level around the 350 million.
Which means in the last eight, nine years, ten years, whatever that covers, the City would be paying 200 -- 200, maybe 225 million more each year.
However -- yeah. I understand the comparison you are making. The other way of looking at it is saying, that in 2020 you paid 550 million than goes down to less than 350 million.
I understand that. But I think each of us would like to at it the way we look at it. It gives us something to go on.
Each councilmember may have a different way of evaluating.
It will be very important to me. 406 11/30/98 - WHOLE - BILL NO. 980789
Having that rather than making a rough computation. Now, the pension fund to the city, somewhere in your statements you indicate that there are 30,000 employees who are currently receive pension benefits.
What are the City agencies that are covered by our city pension fund? The City of Philadelphia?
The city employees, the Water Fund, which is the Water Department, the Aviation Department --
How many does the City of Philadelphia have currently receiving -- retirees from the City of Philadelphia, how many of them are currently receiving payments?
There are about 32,000 retirees and beneficiaries and survivors that receive benefits each month. They are from --