2009-05-27_Agenda Packet--Dossier de l'ordre du jourCity of Saint John
Common Council Meeting
Wednesday, May 27, 2009
Committee of the Whole
1. Call to Order
4:00 P.M. Council Chamber Open to the Public
1.1 Morneau Sobeco Presentation: Financial Advisory Services to Common
Council Re the Employee Pension Plan
City of Saint John
Seance du conseil communal
Le Mercredi 27 Mai, 2009
Lieu : Salle du conseil communal
Comite plenier
1. Ouverture de la seance
16 h - Salle du conseil communal
1.1 Morneau Sobeco: Regime de retraite des employes des services consultatifs
financiers
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> ObJ0ectives for Today's Meeting
- Establish basic logistics for project
- Outline high level project plan
- Clarify "Definition of Success" for project
- Establish common understanding of current situation
- Select tentative directions for future analysis
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> Recap of Last Meeting
> Our Ro= e
> Overview of the Plan's Financia- State
> Meeting Format
> Submission by Union
> Moving Forward
> Next Meeting
> Questions?
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goa_s > Very pre_iminary discussion of Terms of Engagement
(time was very
What is the
- What is the
What is the
11ri11~CU)
process?
problem?
definition of success?
v.1 nn on appropriate committee
e
arrangements for this project
and meeting
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> What is the appropriate committee for this project?
- Decision 1: Work with entire Counci- or sub-
group
-Decision 2: Discussions -1e-d in open session or
c-osed session
> Decisions Made: Motions passed that working
group wou_d include entire Counci'. using open
session format
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> Morneau Sobeco's ro_e is not to advocate any
particu~ar resu'-t, but rather to act as a know-edgeab. e
faciltator
> However, if Counci'. indicates that they wish to move
one way, but their subsequent actions indicate they
are moving a different way, we wil: point this out to
Counci'.
a_so provide input as to feasibi'-ity of c zoices
being considered
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> This is NOT Morneau Sobeco's project and it is NOT
Morneau Sobeco's ro_e to decide the fina'- outcome
> The fina'- outcome wi: - be based on decisions made by
Counci'- supported by Morneau Sobeco's input
> U_timate accountabi-ity and responsibi_ity for the P_an
has been, and remains, with Council
> Since our time equa= s an expense, we wi-_ encourage
Counci" to focus on the issues in a time'. .y fashion
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> Pension plan finances are basically very simple
- Contributions go into the fund during employees' working
careers (Cash in)
- These contributions earn investment income in the pension fund
- Benefits are paid to members and their beneficiaries (Cash out)
> A plan is considered fully funded if the accumulation of
contributions plus investment income earned to date plus that
assumed will be earned in the future is projected to be
sufficient to pay pensions earned for service to the current date
> The only way to change the financial position of a pension plan
is to change one of the above 3 items
s
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> The only TRUE way to handle a deficit is as follows (the
"Real Deficit Solution"):
- Increase the cash flow going in: (i.e. increase in
contributions)
- Increase the investment return earned by the fund:
this would be a simple and painless solution but,
unfortunately, we cannot control investment returns.
- Decrease the cash flow going out: (i.e. benefit
reductions)
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> December 31, 2008 Financial Position (estimates only):
- Actuarial Liability*: $433.2 million (8 x Payroll)
- Assets: $286.5 million
- Going Concern Funding Deficit: $146.7 million (2.7 x
Payroll)
- Funding Ratio : 66%
- Current Service Cost*: 20.32% of payroll, or
approximately $11 million per annum (based on estimated
2009 payroll of $55 million)
* Based on a projection of December 31, 2006 funding valuation results without changes
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12
Year
Real Return
Next 4 years
Next 20 years
2008
-19.
53%
N/A
N/A
1990
-12.
25%
9.97%/- _ - - =
6.
51
1981
-15.
66%
13.94%/
1974
-26.
25%
7.07%/- -
7.
21%/
-
1973
-11.
14%
-3.28%/- 1
1947
-11.
71%
6.77%
6.83%
1940
-10.
46%
6.32%
5.81%
1937
-11.
90%
-0.89%
4.23%
1931
-11.
63%
16.73%
5.36%
1930 -12.22% 9.38% 4.65%
Yellow = negative real return, Green = 18 years experience (not 20) 12
*Second figure in red assumes 3% real bond returns recent 50 years
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> Assuming no gains or losses occur, amortizing a $146.7
million deficit over 15 years costs -$16 million per annum
> This represents approximately 30% of current payroll
> When combined with current service cost, the total cost of
pension plan per annum would be -50% of payroll (41 % after
subtracting an employee contribution of 9% of payroll)
> The estimated employer contribution requirement of 41 % of
payroll starting in 2010 is likely unmanageable
> Conclusion: the funding gap cannot be closed by simply
increasing employer contributions
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- Increase the investment return would be a painless solution
returns cannot be controlled. Previous slides show but
provide some marginal gain but it is improbable that this may
solution and it would be imprudent to bet the future of the Plan on it
- Decrease the cash flow Lloine out through benefit reduction
unpleasant and unpopular, we submit that it will be ne s" while
consider some plan changes in order to stabilize plan finances and
secure its future for members and the City
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> On that somber note, we need to decide on how we
want to operate the meeting format
> We have determined a'-ready that the who'. .e Counci'-
wi'-'- meet in open sessions
> Now need to dea'- with meeting format:
- How do we reach decisions?
- What is the decision making mechanism?
- How much time should be spent on each issue?
- How do we ensure broad, equitable participation?
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> W'---iat s_ZOU d t--ie decision Ma)dng M-)e?
-Consensus?
-Unanimity or Majority?
--f majority, 2/3rd vote? Ot'--ier?
-Must ensure fu'--'-- consideration of a'---'-- aspects
of eac-1 issue prior to a decision
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> What should the Rules of Engagement be?
- Morneau Sobeco to act as facilitators
- No resolution until discussion on topic is complete
- Formal or informal meetings?
- Structured discussions versus informal discussions?
- Perhaps structured meetings with informal discussions
could best meet Council's requirements?
> These operating guidelines can be amended as the project
moves forward to ensure that they are supportive of
achieving your desired goals
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> Memorandum of Agreement in March 2007
- No reduction or enhancement of benefits for
period to December 31, 2009
-Endorse so. vency exemption app. ication (such
exemption has since been approved)
- Increase emp-oyee contributions by 2% unti-
funding shortfa:. is e: iminated (or three years if
shorter -which, of course, we now know won't be
shorter than three years)
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> In the slide titled "Potential Long Term Solutions" presented
by the union groups to Council on April 27, 2009, proposals
listed included:
- Using letter(s) of credit in lieu of contributions to amortize
deficit*
- Securing exemption from amortizing the deficit*
- Securing an extension of amortization period to greater than 15
years*
- Secure approval to pay interest only on deficit*
- Smooth asset and liability changes to reduce reported deficit
* The first four changes proposed above ivould require formal exemptions to the PBA,
which may or may not be granted
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> Need to measure these proposed so_utions to see how
they fit with the "Rea_ Deficit Sprevious:y
discussed
> Recap: The "Rea.. Deficit So'- ution" is to "increase
the cash flow going in", "increase investment returns"
and/or "decrease the cash flow going out"
> When _ooking at the effect on cash flows, we assumed
a "Base Line" of current service cost p_us 15 year
amortization of funding deficit as per the PBA
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> Using this comparison to "Base Line", a-- five
proposa: s reduce the cash flow going in over the next
15 years (often significant: y) and do not change the
cash flow going out
> CNone of the five proposa-s are "Rea_
Deficit Sbut rather si*mp'-y de'-ay the
recognition of the prob-em
> We propose that continuing to de-ay action on the
prob_em wi: -not serve the : ong-term interests of t Ze
City of Saint John or the p_an's stakeho, ders we.
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> Problem De what problems are we trying to
Definition: Exactly
fix?
Superficially, the problem is simple - too little money going
- the pension plan and / or too much money being paid out of the
pension plan atic of a deeper
- We that this problem is symptomlex
CCoy
underlying issue that is much more comp
1 "fix" to the current crisis (cut
- we believe that a simple, tactical it to address
these benefits, increase those contributions) will fa
the real root causes and likely result in future crises arising
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em we recommend that
c_etermine the root problem and address it rather
Council When
toms
look at the associated symp
than simply
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> Focusing on the symptoms will lead to short term solutions which will not fix the long term issues
tility in the future and
> There will be investment vola that wi ll happen
another financial crisis is something
nother potential problem
> Future surplus levels is a > Instead of solving the current
symptoms, suggest that we c.eal with the real problem
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> Simply cutting benefits / increasing move1thelCity of Saint John further
enacting enhanced policies will no
ahead in dealing with the long term problem
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> If in agreement on the "prob_em" definition, this _eads
to the further in-depth discussions of the:
- Success definition
l issues? (Council to provide input)
- Other fundamenta
> This shou_d set the ru-es for both current and future
Counci'-s with respect to their oversight of the P'-an
and the Pension Board
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accomplish here?
of the pension plan (attract and retain, y
- What is the purpose ke
uisance, or?)
art of compensation, relic of the past, a n
p
- What price is the City prepared to pay to achieve this purpose?
ns regarding benefits and costs be made?
- How should decisio
- What cture should
l aspects of the current governance stru
critical
~ Eliminated?
be maintained? Revised? Elimm
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> Plan is a major asset/liability
should be intimately
> Council
the finances of the City
of the City
is is a huge piece of
involved as this
to estab
> Does Council agree that their role is
wide the Pension Board`?
policies tog ~ In the end, will we be
> What does success mean to the City?
satisfied with:
- What has happened?
What conclusions reached?
sult`?
How we feel about the end re
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> Current pace of 2 hour meetings once every month
wi-- significant-y increase the time_ ine for this project
> Origina'- proposa_ to Counci'. had out: fined the need for
severa- ha'..f-day meetings
> Must decide pace at w Zich we want to have this
project finished
> Advisab-e to set the date /time for next meeting now
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> Depending on success definition and problem definition, topics
to be covered in future sessions likely to include:
- Pension funding standards
- Legislative standards
- Governance structure and execution
- Plan design
- Benefit policy
- Funding policy
- Actuarial assessments
- Plan investments
- Plan documentation
- Plan administration
- Employee and stakeholder communications
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> Any questions?
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