MINUTES
SPECIAL JOINT MEETING OF THE
BOARD OF TRUSTEES OF THE CITY EMPLOYEES' RETIREMENT FUND
& THE BOARD OF TRUSTEES OF THE POLICE & FIREMEN'S PENSION FUND
June 11, 2012
A SPECIAL JOINT MEETING of the Board of Trustees of the Police & Firemen Pension Fund and the Board of Trustees of the City Employees Retirement Fund was held on Monday, June 11, 2012, in the City Hall Auditorium.
Those in attendance included Mayor Ryan J. Bingham, City Treasurer Arthur Mattiello, members of the Board of Trustees of the City Employees' Retirement Fund Gregg Cogswell, Marie Soliani, Elinor Carbone, Gerald Zordan and Delisse Locher, and members of the Board of Trustees of the Police & Firemen Pension Fund James Potter, Christopher Cook, Angelo LaMonica, Darlene Battle and Police Lt. Michael Emanuel.
Mr. Greg Stump of EFI Actuaries was also present.
Members of the Board of Trustees of the City Employees' Retirement Fund Paul Samele, Drake Waldron, Nancy Michna, Gail Sartori, Raymond Drew, John Schnyer, and Angelo Alduini were absent. Members of the Board of Trustees of the Police and Firemen's Pension Fund Richard Zaharek, Douglas Benedetto, Firefighter Edward Delisle, Fire Lt. Michael Soliani and Police Officer Oscar Segui were absent.
Mayor Bingham called the meeting to order at 6:16 p.m.
Presentation:
Mr. Stump gave a presentation on the background, current status of the pension funds, their outlook for the future, and upcoming GASB* changes.
He said the process works with money coming in from the City, money coming in from members, and money coming in from investments, with both benefits and expenses going out. Mr. Stump related pension funding to an analogy of a college funding target. At any point in time, he said, one should be able to look at it and see if they are on target. This target in terms of our pension funding goal is called the Actuarial Accrued Liability, a number that is rarely right on the line, and needs a make-up piece.
Mr. Stump said that EFI looks at the actuarial accrued liability every two years, and then looks at the assets to see how far off target they are. He said if benefits aren't changed, the cost does stay about the same as a percentage of pay but the catch-up contribution could bounce around a lot. This involves complicated language and complicated calculations, but the concept is relatively simple, he said.
Mr. Stump asked how we get off target, and answered that increased investment performance and employee terminations help plan funding. Retiree longevity, increased retirements, and increased disabilities hurt plan funding, he said.
Mr. Stump said the City's funding policy, a scheduled program of accumulating assets to fund the plan's benefits, includes assumptions, amortization, actuarial cost method, and asset smoothing. He said one extreme of a funding policy would be to always make sure you're on that target line, while another extreme would be to contribute a small amount for funding maintenance. Most plans are somewhere in between, he said, but the plan should be moving towards 100% funding, without contributions bouncing up and down a lot. He noted that funding ratios are temporary.
Looking at the basics of Torrington's funding policy, Mr. Stump proposed some changes that could be considered including changing the actuarial cost method from projected unit credit to an entry age normal cost method and changing amortization from 30 years open to closed amortization which would get the fund to its target a little faster. He further proposed changing economic assumptions using 8% with 3% inflation, to a lower return assumption and using other assumptions of various demographics.
Lt. Emanuel asked if 8% is a realistic assumption. Mr. Stump said they collect information from investment professionals and they tell us what the expected return is for each asset class and what the expected standard deviations are. Returns expectations may be high, he said, but they are going to bounce around.
Regarding the current state of funding, Mr. Stump showed the Boards a Funding Progress chart showing the Municipal Employees' plan at 80% of their target, and the Police and Firemen's plan around 60% of their goal. He noted that the market value and asset smoothing value should probably be a little closer to each other than they are.
In Mr. Stump's Contributions Required chart, he noted that the contributions are based on percentage of pay and are expected to go up, as payroll goes up. The asset smoothing is having the intended effect as there are no large fluctuations from year to year and there is an upward trend.
To illustrate where we are now in the Police and Firemen's Fund, Mr. Stump displayed a circle graph showing the funding target or total actuarial accrued liability. He said that 52% of the liability is the market value of assets on the Police & Fire plan. The deferred asset losses are the part of the investment experience that happened over the last four years that has not yet been recognized or brought into the loss calculation yet. The unfunded actuarial accrued liability is significant in this plan, he said, well over half of the total cost, amounting to about 2/3 of the City's cost. Mr. Stump said that over time we will see that get a little smaller and with closed amortization, it will get smaller faster.
In the City Employees' Fund, the assets are covering 68% on a market value basis, the deferred asset losses have about the same magnitude, and the unfunded actuarial accrued liability is one quarter of that pie, he said.
Mr. Stump said if we think about this information and where costs are going to go in the future, we can conclude that this year's losses follow two years of gains, which in turn followed prior years' losses. Those losses are about to be recognized and will cause an increase in contributions, he said. Mr. Stump said the UAAL** payment is likely to stay there with either an open or closed amortization. Funding improvement will be gradual but payments with level dollar at least cover the interest on UAAL, he said.
Mr. Stump said that another conclusion that can be made is that the City's contributions will increase if investment returns are lower than expected and the way to decrease the real cost of the plan is with different benefits. He said the actuary's job is to try to line up all the assumptions of the funding policies and funding methods with what we think is going to happen so we don't have that huge gap at some point in the future.
Mr. Stump reported that his preliminary recommendation will be to decrease expectations on the investment returns and create a short term increase of about 2% to 3% of pay. This is the best time to change the return assumption and the only advantage to being underfunded, he said.
Mr. Stump informed the Boards that GASB's implementation will occur in 2014 and will determine the rules for financial statements and accounting, but not for funding, which is a major source of confusion for public pension funds with one set of accounting numbers and one set of funding numbers. He said the GASB rules affect what has to be reported, not what has to be contributed, and noted the most significant changes from the current standards are cost recognition, discount rate, and actuarial cost method. He said accounting costs will increase and more details will be required for actuarial analysis and disclosures, and explained some of the new language changes from GASB.
Actuarial Cost Method
Torrington's current method is to use Projected Unit Credit, Mr. Stump said, but GASB will require all plans to use Entry Age Normal for what they report to GASB. He said he thinks it's a good idea to use this method for funding as well, because it might be less expensive.
Cost Recognition
Mr. Stump said that amortization won't be applicable to the new rules. The new rules will talk about deferred losses and deferred gains as well as use accrual accounting. This means that if someone is hired and you think they will work 20 years, you should have their benefit fully funded after 20 years. Instead of amortization, costs will be recognized over much shorter periods, he said.
Investment Gain/Loss Recognition
This will be the biggest change in terms of our pension expense, Mr. Stump said. We will be required to use MVA, Market Value Asset, for funding ratios, as GASB mandates that the plans recognize the experience in at least 1/5 of each year's expense. It's not asset smoothing, it's the actual expense, he said, and gave the example of a $5 million loss in a year that would require $1 million per year additional expense for five years.
Discount Rate
Mr. Stump said the current practice for GASB is that the discount rate should be the expected return, using that as the expense, while remaining able to finance all the current obligations. That means we have to run a projection, he said.
Mr. Stump gave a Project Timeline as follows: In July EFI will collect financial and member data, in August they will do a full biannual valuation for both plans, in September they will have all the numbers calculated and forwarded to Board Members, and in October they can do a presentation.
ADJOURNMENT
On a motion by Councilor Cogswell, seconded by Councilor Zordan, both Boards voted unanimously to adjourn at 7:04 p.m.
ATTEST: Joseph L. Quartiero, CMC
City Clerk
Respectfully Submitted,
Carol L. Anderson, CCTC
Asst. City Clerk
*GASB Governmental Accounting Standards Board
**UAAL Unfunded Actuarial Accrued Liability
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