MINUTES OF THE SARASOTA CITY COMMISSION WORKSHOP MEETING OF SEPTEMBER 5, 2012 PRESENT: Mayor Suzanne Atwell, presiding, Vice Mayor Willie Shaw (arrived at 2:07 p.m.), Commissioners Paul Caragiulo, Shannon Snyder, and Terry Turner, City Manager Thomas Barwin, City Attorney Robert Fournier, and City Auditor and Clerk Pamela Nadalini ABSENT: None Mayor Atwell called the meeting to order at 2:00 p.m. 1. PRESENTATION AND DISCUSSION RE: HISTORICAL TRENDS AND THE ASSUMED RATE OF RETURN FOR THE FIREFIGHTERS PENSION PLAN (AGENDA ITEM 1.1) Robert Sugarman, Attorney, Sugarman & Susskind, P.A., Charlie Mulfinger, Managing Director, Graystone Consulting, and Brad Armstrong, Actuary, Gabriel, Roeder, Smith & Company came before the Commission. Mr. Sugarman stated that the workshop is intended to provide a historical perspective as well as an understanding of the current City Pension Plans; that pensions and the associated costs are significant budget items for the City; that the Commission recently modified the Police Officers' and General Employees' Pensions Plans to help balance the budget; that Sugarman and Susskind, P.A., has represented the Firefighters' Pension Plan (Plan) for 20 years and is paid on a monthly retainer which has not changed in 9 years; that the Plan is a Defined Benefit Plan and is a closed plan as no new employees will be added to the Plan; that the Plan was established by City ordinance and is governed by five members of the Firefighters' Board of Trustees (Trustees); that a lifetime benefit is paid in monthly installments. Vice Mayor Shaw arrived at 2:07 p.m. Mr. Sugarman stated that members can retire and receive a benefit at age 50 with at least 10 years of service or after 25 years of service; that the monthly benefit is approximately 3% of the three highest average years' pay times the number of years of service or a reduced benefit with a survivor benefit; that the Plan has 20 members who are still working and 157 retirees; that Firefighters are not covered by Social Security Benefits; that the Pian is funded by workers, the State premium tax monies imposed on insurance carriers which take a credit for the tax, investment earnings, and contributions from the City and the County as established in the Interlocal Agreement; that employer contributions vary according to the actuarial experience of the Plan; that the Trustees have adopted investment guidelines to decrease the investment volatility to produce a more consistent return; that no pension fund has met the actuarial or historical averages over the past 10 years; that the State Constitution requires pension costs be kept current; that nationally 62 percent of public sector Defined Benefit Plan earnings are comprised of investment earnings; that the Firefighters' Pension Plan is unique as the Plan has been a closed plan since 1996 when City Firefighters became County Firefighters; that State law gave Firefighters a choice to stay in the City's plan or join the Florida Retirement System (FRS) as long as working; that the youngest working Firefighter will be eligible to retire in 2014; that a closed plan affects investment policy, which will be more conservative as decreasing membership contributions will be received and increasing payouts will occur; that payments will slowly decrease. Mr. Mulfinger referred to and displayed on the Chamber monitors a document entitled Investment Consulting Education - Asset Allocation Presentation" included in the Agenda backup material throughout the presentation and stated that the focus is: historical returns of asset classes historical variability of returns from asset classes historical correlations between asset classes Workshop re: Pension Plans -1- 09/05/12 Mr. Mulfinger referred to charts of risk and return measures including standard deviation, the annualized rates of return for different asset classes for the period December 31, 1925, through December 31, 2011, and referred to the following charts: value versus growth comparison smal! versus large capitalization comparison domestic versus international comparison Mr. Mulfinger referred to a chart entitled the Risk-Return Staircase and stated that predicting investment return is impossible which is reason for diversification; that the risk goes up as the potential for return goes up; that the investments should be a blend of stocks and bonds to reduce volatility; that investment policy is driven by: return expectations risk tolerance asset class preferences and allocation constraints time horizon to meet objectives economic forecast for capital markets Mr. Mulfinger stated that growth will slow in the future; that the focus is forward-looking; that the horizon is 20 plus years; that investors can determine: portfolio optimization efficient frontier of optimal portfolios expected returns.at given levels of expected risk probability of achieving expected returns Mr. Mulfinger stated that additional alternatives should be considered; that the llustrative performance of various investment strategies was presented to the Trustees of the Firefighters' and General Employees' Pension Plans; that the pension plans consider strategic and tactical actions; and displayed on the overhead monitors examples of different asset allocations. Mr. Sugarman stated that the Trustees approve an actuarial valuation each year; that the Actuary advises the Trustees on the actuarial valuation for the pension plans; that the closed- Firefighters' Pension Plan cannot take the same risk as an open plan. Mr. Armstrong stated that the actuaries do not offer investment, legal, or tax advice; that the assumed investment return determines the amount employers contribute but not the cost of the plan; that the lowering of the assumed investment rate of return means more local employer contribution to the pension plan; that pension plans prefer more funds sooner to protect the long-term interest of the beneficiaries; that the assumed investment rate of return does not dictate investment policy; that the risk tolerance of the Trustees with the advice of orofessionals determines investment policy; that the Trustees have strengthened the mortality and the rate of return assumptions; that the Plan has a conservative retirement assumption; that cash flows will peak in the next 10 years for the Firefighters' Pension Plan; that pension plan reserves have been created; that a portion of the City's contribution requirement includes investment fees; that the actuaries do everything possible to manage volatility while protecting the beneficiaries of the trust. Mr. Sugarman that the City pension staff is excellent; that the Trustees are the highest example of altruism and public service and are actively engaged and knowledgeable; that generally, the Plan is the Firefighters' most valuable asset and is expertly managed. The Commission recessed at 3:12 p.m. and reconvened at 3:24 p.m. Commissioner Turner referred to the chart entitled "Return Expectations and Risk Tolerance for Asset Classes included in the presentation in the backup Agenda material and stated that the assumed rates of Workshop re: Pension Plans -2- 09/05/12 returns for the different asset classes are those of Graystone Consulting; that a different firm would provide different assumed rates of returns; that history could shift over time; that the analyses are excellent with the various classes of assets; that the concern is the City could be underestimating the liability and underfunding the pension plans; that the City should be more proactive in moving toward the current financial situation globally and in the county; that two of the City's pension plans are closed; that the. consultants should be more proactive and consider more recent financial history in advising the pension Trustees; that the City will have to pay more if lower rates of return are realized; that shorter historical and forecasting periods should be considered; that quicker adjustments should be made. Mr. Mulfinger stated that the uncertainties being faced globally and in the country are concerns; that asset allocation studies are generally done over longer-term expected returns. Commissioner Turner stated that the analysis is perfect for asset allocation; however, the analysis is not the entire picture for setting the assumed rates of return and the need to fund the pension plans; that the City should be more fiscally prudent. Mr. Mulfinger stated that the Trustees have been diligent about lowering the assumed rates of return and lowering the rate over time. Commissioner Turner stated that the analysis is not fine regarding the extent to which the City funds the pension portfolio and reports the liability to the taxpayers; that the issue is how to fund the pension plans for City employees and retirees. Commissioner Snyder stated that the City does not have the time for gradual adjustment; that the City has an engaged community; that the concern is being able to pay pensions to current and future retirees. In response to a question from Commissioner Caragiulo asking if the City could contribute extra money to the pension funds, Mr. Armstrong stated that extra contributions could be set up as a reserve or could be applied against the unfunded liability; that dollar-cost averaging could be utilized if lower assumed rates of return is utilized; that the Commission has raised the sense of urgency. Mr. Sugarman stated that one jurisdiction decided to increase the funding ratio of the pension plans and adopted an ordinance to fund the pension plans to a greater extent; that the funds could be invested to lower the pénsion unfunded liability. In response to a question from City Manager Barwin concerning the amount in the Firefighters' Pension Plan and the amount to fully fund the Plan, Mr. Armstrong stated that approximately $90 million is in the fund now; that $55 million would be required under the current assumptions; that at a 6% rate of return, approximately $89 million would be required to fully fund the Plan. In response to a question from Commissioner Turner concerning the difference between the risk the City is considering and the risk in asset allocation, Mr. Mulfinger stated that the difference is understood. In response to a comment from Commissioner Turner indicating that the two closed funds, i.e., the Firefighters' and the General Employees' Pension Plans, should have lower portfolio assumptions, Mr. Armstrong agreed; and stated that the Firefighters' Pension Fund is the lowest portfolio assumption as the rate of return is gross and not net of investment fees as is the case with the other two pension plans; that the General Employees' Pension Plan just closed. In response to a question from Commissioner Turner as to if a Resolution recommending a 7% net assumed rate of return would be helpful and legal, Mr. Armstrong stated that the answer to both questions is yes and Mr. Sugarman stated that the Trustees are willing to listen to all advice, particularly advice from partners. 2. PRESENTATION AND DISCUSSION RE: HISTORICAL TRENDS AND THE ASSUMED RATE OF RETURN FOR THE GENERAL EMPLOYEES' PENSION PLAN (AGENDA ITEM 1.2) Workshop re: Pension Plans -3- 09/05/12 Scott Christiansen, Attorney, Christiansen & Dehner, P.A., Lee Dehner, Attorney, Christiansen & Dehner, P.A., Charlie Mulfinger, Managing Director, Graystone Consulting, and Steve Palmquist and Pete Strong, Actuaries, Gabriel, Roeder, Smith & Company (GRS), came before the Commission. Mr. Christiansen stated that the General Employees' Pension Plan (Plan) has seven members of the Board of Trustees; that no State funding is received; that the Plan was closed as of December 2011; that the current members had current pension benefits in the Defined Benefit Plan frozen with several options for future pension benefits; that the pension benefits going forward were reduced; that all new employees will go into the Defined Contribution Plan; that the investment return assumption is the focus of the current meeting; that the investment horizon is longer than for the Firefighters' Pension Plan providing for a greater ability to recover from a downturn in the market; that the Trustees have been systematically reduicing the assumed rate of return from 8.5 to 8.3 to 8.0%. Mr. Mulfinger stated that as a closed plan, the asset allocation has become more conservative to reduce the volatility. Mr. Palmquist stated that GRS has worked for the two pension plans, i.e., the General Employees' and Police Officers' Pension Plans for over 20 years; that having worked with such a professional City Staff in Pension Plans Administrator Benita Saldutti is a pleasure; that alternative changes to the Plan were considered; that the City contributes 25.5% of payroll to the pension fund for the Plan for fiscal year (FY) 2012/13 which is approximately $5.4 million; that the Plan has a current funded ratio of 75% which is approximately in the middle of funded ratios for public pension plans; that Federal law will require a change in the calculation for the funded ratio in two years; resulting in more volatility; that the funded ratio under. the new calculation would be approximately 66%; that City's cost as a percent of payroll will increase over the next four or five years and then level off and decrease gradually over time; that investment losses have not yet been recognized; that the immediate future should be considered; that the past 11 years have been terrible; that funded ratios have been declining throughout the country; that being more conservative in the near term makes sense; that getting more money in the pension fund whether by reducing the assumed rate of return or putting more money than the minimum requirement in the pension plan also makes sense; that for example, one jurisdiction in the State Florida will decide shortly whether to float a $300 million pension obligation bond and deposit the funds in the pension plans; that the unfunded liability of the Plan is $40.3 million as of the last evaluation date; that eliminating the unfunded liability would reduce the annual cost of the Plan by $3.5 to 4 million. Mr. Strong stated that the impact of a chânge to a 7% assumed rate of return would increase the unfunded liability by approximately $18.5 million to $58.8 million; that changing to a 6% assumed rate of return would increase the unfunded liability by approximately $40.6 million to $80,9 million. In response to a question by Commissioner Caragiulo regarding bonding and joining the Florida Retirement System (FRS), Mr. Palmquist stated that employees would receive no credit from FRS for past service; that a payment for FRS's unfunded liability would be required if current or new employees were moved to FRS. In response to a question from Commissioner Turner asking if any additional information should be added to the discussion regarding the Firefighters' Pension Plan, Mr. Palmquist stated that reducing the assumed rate of return sooner rather than later makes sense; that the two major reasons for not reducing the assumed rate of return are: 1) the City's cost will go up and 2) benefits could possibly go down. In response to a question from Commissioner Snyder concerning mortality rates for the Plan, Mr. Palmquist stated that the youngest General Employees are in the twenties and cannot retire with full retirement benefits until 65 years of age; Mr. Christiansen stated that a Resolution with the Commission's thoughts would be beneficial with the understanding the Trustees have the fiduciary responsibility and the ultimate legal responsibility to make the decision; that the City could decide to put additional money in the pension fund of the Plan. Mr. Palmquist stated that two choices are available: 1) reduce the unfunded liability thereby reducing future payments on the unfunded liability or 2) plaçe additional funds in reserve and utilize the funds in future years at the time costs are increasing which is the plan FRS used beginning in approximately 2009. In response to a question from Commissioner Turner concerning the 8% assumed rate of return, Mr. Palmquist stated that the assumed rate of return is net of investment fees. Workshop re: Pension Plans -4- 09/05/12 In response to a question from City Manager Barwin concerning the number of retirees, Mr. Palmquist stated that 374 active employees, 385 retirees and beneficiaries, 15 disability retirees, and 13 vested terminated former employees are in the Plan prior to the election concerning the Defined Contribution Benefit Plan. in response to a question from Commissioner Snyder concerning future election to the Defined Contribution Benefit Plan, City Auditor and Clerk Nadalini stated that the Plan could be opened for another election by employees which would require an ordinance. Commissioner Turner stated that making the option available on a continuous basis is supported. Mr. Mulfinger stated that reducing the rate to make the Plan more secure initially, makes the Plan look worse. The following people spoke: Michael Taylor, City Staff member and Plan Trustee for almost 19 years with approximately half of which as Chair, indicating the presentations were educational, during the 19 years approximately a 7.66% return on investment was realized based on sound advice of managers which minimized the impact of the obligation, the Trustees have discussed the assumed rate of return and other factors, a sudden change would have a negative impact on the City, the City has the ability to pre-fund the Plan; educating existing members of the benefit of increasing members' contributions would be helpful, the Trustees have been proactive to adjusting the factors affecting the Plan, Public Works employees do not get the recognition deserved, the Commission is requested to keep the Public Works employees in mind. Mayor Atwell noted Commission consensus to allow additional time. Mr. Taylor stated that the City Staff has increased the contribution from 5 to 6%, benefits were increased due to the positive investment return, the discussion the situation is different now is legitimate, employees should be included in the opportunity to participate in the discussion 3. PRESENTATION AND DISCUSSION RE: HISTORICAL TRENDS AND THE ASSUMED RATE OF RETURN FOR THE POLICE OFFICERS' PENSION PLAN (AGENDA ITEM 1.3) Lee Dehner, Attorney, Christiansen & Dehner, P.A. (Christiansen), Larry Cole, Senior Consultant, Burgess Chambers & Associates, Inc., and Steve Palmquist and Pete Strong, Actuaries, Gabriel, Roeder, Smith & Company came before the Commission. Christiansen has represented the Police Officers' Pension Plan (Plan) since 1979; that the Plan is under the auspices of Chapter 185 rather than Chapter 175 as is the Firefighters' Pension Plan; that the differences from the Firefighters' Pension Plan are the Police Officers' Pension Plan: 1) is not a closed plan and 2) contributions are not received from the County as Police Officers are City employees.Mr. Cole stated that the Commission is commended for taking the time to consider the Plan as the Commission is trying to assure the plan will be viable in the future; that the assumed rate of return should not tie the Commission's hands; that 7.75% is a reasonable expectation over the long term; that not lowéring the assumed rate of return would provide the City more flexibility; that lowering the rate or increasing the funding is a safety net the Commission can decide; that stocks have done approximately a 17% return over the past three years; that the Plan has had an 11.5% return; that the return is between 14 and 15% for FY 2011/12 to date; that any lowering of the rate of return should be for the right reasons; that more risk in equities may be necessary to get the returns; the bonds may now be more risky than bonds; that bonds can have a negative rate of return; that additional funding through lowering the assumed rate of return which is mandatory or through increasing the contribution which is voluntary makes sense; that the major challenge during the past 10 years is managing the risk and volatility. Mr. Paimquist stated that the State Division of Retirement changed its interpretation of the manner in which the State funds under Chapter 185, State Statutes, are distributed and accounted for in an August 14, 2012, letter; that GRS is still trying to understand the ramifications of the new interpretation; that Workshop re: Pension Plans -5- 09/05/12 Police Officers may be able to regain the State funds if jeopardized under previous interpretations by the State Division of Retirement. In response to a question from Commissioner Turner concerning action, the State Division of Retirement should be contacted for a determination and Mr. Dehner stated that the Trustees should send a letter to the State Division of Retirement. Commissioner Caragiulo stated that the letter from the State Division of Retirement dated the week of August 23, 2012, conçerns involuntarily imposed contracts; that a wide variety of interpretations were heard at the Florida League of Cities (FLC) Conference at the time the letters came out. Mr. Palmquist stated that the State Division of Retirement will make a determination for each locality based on the facts presented. A motion was made by Commissioner Snyder, seconded by Commissioner Caragiulo, and passed by a 5- 0 vote to extend the meeting beyond 5:00 p.m. Mr. Palmquist stated that required City for the Plan for FY 2012/13 is 56% of payroll which is a 10% of payroll reduction due to the new benefits imposed; that the unfunded liability is $38 million; that the Plan is 80.4% funded; that the Plan is in a very risky position from the perspective of Plan assets compared to the Plan payroll; that the ratio is 14:1 or 15:1 which is extraordinarily high. Mr. Strong stated that each 1% move in the assets is 15% of payroll. In response to a question. from Commissioner Caragiulo concerning the affect of the ratio of active employees to retirees, Mr. Palmquist stated that the Plan is very mature; that the cost of the Plan will be very volatile as a result. Mr. Strong stated that the unfunded liability was calculated at 7% based upon the Plan prior to the changes and is: a $21 million increase at 7% and an additional $34 million at 6 percent; that the current unfunded liability is $38 million; that the total unfunded liability at 6% is approximately $93 million. Commissioner Caragiulo stated that the reduction in cost of the Plan is $1.0 million if the State funds are not received and $1.6 million if the State funds are received. Mayor Atwell stated that more participation in the Defined Contribution Benefit Plan should. be encouraged; that education is key. 4. ADJOURN (AGENDA ITEM I) There being no further business, Mayor Atwell adjourned the Pension Workshop meeting of the City Commission of September 5, 2012, at 5:06 p.m. Workshop re: Pension Plans -6- 09/05/12