2009-08-10_Agenda Packet--Dossier de l'ordre du jourCity of Saint John
Common Council Meeting
Monday, August 10, 2009
Committee of the Whole
1. Call to Order
5:00 p.m. 8th Floor Boardroom City Hall
1.1 Employment Matter 10.2(4)0)
Regular Meeting
1. Call to Order - Prayer
6:00 p.m. - 7:45 p.m. Council Chamber: Open to the Public
1. Morneau Sobeco Presentation: Financial Advisory Services to the Employee
Pension Plan (Meeting 45)
City of Saint John
Seance du conseil communal
Le lundi 10 aofit 2009
Comite plenier
1. Ouverture de la seance
17 h - Salle de conference, 8e Rage, h6tel de ville
1. 1 Question relative a 1'emploi - alinea 10.2(4)0)
Seance ordinaire
1. Call to Order - Prayer
18 h - 19 : 45h Salle du conseil
1.1 Morneau Sobeco: Regime de retraite des employes des services consultatifs
financiers
1
o
r' 4-The City of Saint John
August 6, 2009
Common Council of the City of Saint John
His Worship Mayor Ivan Court and Members of Common Council,
Swubject Committee of the Whole Closed Session
The Common Council meeting of August 10, 2009 contains the following item on the
agenda: 1.1 Employment Matter 10.2(4)0)
Section 10.2(4) of the Municipalities Act states: "If it is necessary at a meeting of council, or committee of
council, to discuss any of the following matters, the public may be excluded from the meeting for the
duration of the discussion
0) "labour and employment matters, including the negotiating of collective agreements"
Respectfully Submitted,
C
Jonathan Taylor,
Assistant Common Clerk
SAINT JQI-IN
R0. Box 1971 Saint John, NB Canada E2L 4L1 I www.saiintjohn.ca I C,P 1971 Saint John, N.-B, Canada E2L 4L1
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> The information provided in these slides is incomplete without
the discussion that accompanies the presentation
> The figures / costings contained in this presentation are based
on rough estimates only (detailed costing will produce different
results)
> The figures shown in this presentation are meant for illustrative
purposes only in order to help Council make decisions (this, in
turn, may facilitate the need for future enhanced precision)
> In order to allow a third party to better understand how these
rough estimates were calculated, we have included details of
our calculations in the Appendix
2
4
> Council decided that the cash funding requirement (versus defined benefit
accounting costs) is the appropriate measure of the cost of the pension plan
that is critical for Council at the present time
> Council decided to have a consultative meeting arranged with various
stakeholders utilizing an independent moderator other than Morneau
Sobeco (meeting to be held in the near future)
> While a portion of the presentation from Meeting #4 was discussed and
some decisions made, all of the material was not reviewed, there were still
complex issues to be addressed and many of the decisions needed for the
process to move forward remained outstanding (partially due to loss of
quorum)
> As such, the majority of this presentation remains essentially unchanged
from that presented at Meeting #4
3
5
> Project Review
> Outcomes for Today's Meeting
> Recap of Ana .ysis
> Discussions /Decisions
> CProcess
> Next Steps
4
6
> Resume discussions on outstanding Meeting #4
materia'-s
> Require decisions regarding key issues inc'-uding:
- Definition of "goalposts" for bearable costs for City
- Desired level of risk sharing among stakeholders and
mechanisms for tracking relative allocation
- Direction regarding desired attributes of go forward
plan design
5
7
> City Pension Ran current -y faces significant financia'.
cha .enges (-$150 mi::.ion unfunded iabi: ity)
> Wi_ this fix itsel through future investment gains?
- Would require -6.5% real return (above inflation)
compounded every year to be fully funded in 20 years)
- Historical experience of results following past similar
market events tells us that this is highly unlikely (has
happened twice in 9 significant market declines over
past 80 years)
> Conc. us ion -Investment returns a one wi not fix this
6
s
> It has been suggested that the issue is a creation of the actuary and it is not
really that significant
> What if the City could ignore the unfunded liability and simply matched
employee contributions (special approval required)?
- Based on a very simple model assuming:
• current plan cost paid by City match of employee contributions
• current negative cash flows of $8M / year grow by 7.5% annually
• plan experience produces no net gains or losses versus assumptions
- In 10 years time the plan is still over 50% funded; but
-M -o nave
= D _O__ --fiat) - s,O - =--s- 0 nave =
= = - = - = = - = =
> - i - _ - - _
> Conclusion - Can get a-way with ignoring issue for short term but this will
inevitably lead to disaster for all stakeholders
7
9
> Addressing problem requires "Real Deficit Solution":
- More money in (City):
• Under present legislative requirements, full funding of -$150 M
deficit by City would require contributions of 24% of payroll for 15
years (17% if over 25 years - special approval required)
• Would also require payment of employer share of current benefit
cost (-11% of pay in 2010)
• Total City cost -35% of payroll (28% if special approval granted)
- Under current plan terms, deficit is 100% City's responsibility
- We understand that these cost levels are not feasible for the City
> Conclusions:
- Sharing of deficit funding with members necessary (how to do?)
- Need to determine what level of cost is feasible for City
s
10
> More money in (Active Plan Members):
- What about increasing contributions by active plan members (such as
2% special funding currently in place)?
- Member contributions of 8.5% (10.5% to 05110) are quite high
- Benefits are also relatively generous (2.0% lifetime pension, etc)
- An additional 2% contribution rate by active plan members generates
-$1 million of additional contributions / year (total deficit cost 24%)
- Plan members must receive a minimum benefit equal to the value of
their contributions to plan plus interest limited net value to plan
- Council has confirmed that the pension plan is an important tool for
recruiting and retention; excessive member contribution rate will defeat
this purpose
> Conclusion - relatively little (if any) of the solution will come from higher
contributions to the plan made by active plan members
9
11
> Less Money out of plan
- This means paying less benefits to plan members than the
current plan terms would call for
- Some plan changes that have been proposed in past would create
benefit "cliffs" with significantly different amounts paid to
members who might be in very similar situations
- Other options would see immediate reductions in benefits
currently being paid
- We strongly recommend that any plan changes not follow either
of the above approaches
- Support of all stakeholders will be required in order to succeed
10
12
> Less money out of plan:
- Propose that changes to plan with respect to benefits earned to
date focus on temporarily suspending future increases in benefits
that current plan terms call for (growth in best average earnings
for active members, indexing of pensions for retirees)
- All changes will require legislative approval
• Freezing of best average allowed under PBA
• Suspension of indexing likely more problematic
- Because retirees make up over 50% of plan liabilities, if their
benefits are considered untouchable, balancing plan finances will
be very difficult to achieve (no City money for active members)
11
13
> Less money out of plan:
- Observe that when 2% indexing introduced 1 / 1 /95, inflation over
prior 20 years had been 6.1% (4.6% over prior 40 years); so 2%
indexing was likely expected to provide 30-40% of inflation
- Actual inflation since then has been -2% so actual benefit
provided has been close to 100% inflation protection
- Most significant change in 2006 valuation was reduced inflation
expectation (4.0% 2.5%) 2% indexing is -80% of inflation
- Indexing at 1% rate for benefits pre I/ 1 /93 paid for by plan
surplus after 1/1/97 valuation ($12.1 M)
> Retiree net inflation protection has been better than anticipated
12
14
> Less money out of p '.an (current active members):
-Recognize that current benefit provides very generous
income replacement in retirement (combined with CPP
and OAS net benefit can even exceed working income)
- Potential change in structure for future benefits may
allow reduction in contributions for both members and
City, saving costs while protecting net member value
- Details of redesign should include consultations with
both members and City staff to ensure future plan
design meets needs of all stakeholders
13
15
> Tracking Mechanism for Cost Sharing
- Concept of "Core" and "Target" plan designs
• Core = Minimum guaranteed benefit
• Target = Desired benefit provided subject to plan finances
- For benefits to date:
• Core = Existing benefit $ but no future increases
• Target = Existing benefit $ plus inflation protection
- Treat any shortfall versus Target benefit as a "contribution"
made by members to Plan's finances
- Assume City matches member contributions (cash from active
members plus shortfall versus Target benefit value)
14
16
> Cost sharing example (not actual values for City plan):
- Assume liabilities of $15 OM active and $1 OOM retirees
- Active members contribute $4M
- Assume target indexing of 3% for active and 1.5% for retirees
- If 0% indexing provided member "contributions" =
• 3% * $150M = $4.5M +
• 1.5% * $100M = $1.5M +
• $4.OM cash
- Total employee "contribution" of $10.OM in year
- Suppose City makes cash contributions of $8.OM
• City $2.0 M contribution "owing" grows with interest to next year
15
17
> In recent meetings, we suggested that a City may have
to be prepared to support contributions of -20% or
more of payro for severa years
> We suspect that it wi . be very difficu'l to address the
current funding crisis with .ess City funding than this
> Starting with a p '.an deficit of -$150M (the December
31, 2008 projected va.ue), amortizing 50% of this
($75M) wou: d require 12% of payro :for 15 years
> Assuming a 50-50 cost sharing of today's benefits,
tota City contributions are approximate .y 23% of pay
16
18
> While we are not suggesting -20% of pay should be the
"Normal" (expected) level of contributions, unfortunately this
may be the "Special" level of contributions that will be
necessary for an extended and indeterminable period of time
given the pension plan's current funding crisis
> Amortization contribution levels were determined using a 15
year period (as per the PBA)
> This 15 year period implies that the City should expect that this
contribution rate will continue for a relatively long time
> This time frame will vary depending on future investment
experience (either favourable or unfavourable)
17
19
> DECISION: What is the "Normal" (desired) level of
contributions that Council believes is appropriate for the City
during "Normal" (non-crisis) times?
> DECISION: What is the "Special" level of contributions
(required due to the large deficit currently in existence) that
Council believes that the City's budget can withstand in
dealing with this funding crisis?
18
20
> From prior meetings, it appears that the primary tool for
sharing increased costs of plan with members will be "less
money out"
- Need to design approach that is easily adaptable from year to
year without substantial special intervention
- Must not create benefit "cliffs" to preserve equity among groups
of plan members (avoid "have" / "have not" groups) or incenting
actions that would create experience losses for plan (i.e., an
unusually high number of early retirements)
- Must be transparent and fair allocation among plan members and
maintain 50-50 sharing with City
19
21
> DECISIONS:
- Is Council comfortable with the basic concepts of a
Target and a Core plan design?
- Does Council endorse the concept of members'
making additional "contributions" to amortize any
unfunded liability the plan has by receiving benefits
less than the Target level (i.e. temporarily suspending
indexing of benefits) and crediting the value of this in
the calculation of 50-50 cost sharing?
- Is there agreement on the Target versus Core concept?
20
22
BALANCING MECHANISM (Brief summary from Meeting #3)
> The Accumulated Net City Contributions Owed keeps track of
any variation from 50-50 cost sharing
> When a positive balance, plan members have contributed more
than the City to the plan and greater than matching funding
from the City is due to restore the balance
> When a negative balance, the City has contributed more than
plan members and can make less than matching contributions
> DECISION: Does Council endorse this type of concept to
track and balance the 50-50 cost sharing?
21
23
> Further direction from Counci'. wou d be he'.pfu'. so
that broader stakeho: der invo'vement wi be more
productive (origina'-'.y, the stakeho .der meeting was
supposed to occur prior to this meeting, but has since
been postponed to after this meeting)
> Fo .:owing Decision Points wi .provide key guidance
for ongoing work and, whi .e we wi . move forward on
the basis that these decisions are fthey shou .d not
be assumed comp ete y unchangeab .e shou .d future
circumstances warrant reconsideration
22
24
> "Normal" City Contribution Level: What is the "Normal"
(desired) level of contributions that Council believes is
appropriate for the City during "Normal" (non-crisis) times?
> "Special" City Contribution Level: What is the "Special"
level of contributions (required due to the large deficit
currently in existence) that Council believes that the City's
budget can withstand in dealing with this funding crisis?
> Target Plan versus Core Plan: Is Council comfortable with
the basic concepts of a Target and a Core plan design? Note
that this is a fundamental plan design change
23
25
> Target Plan versus Core Plan: Does Council endorse the
concept of members' making additional "contributions" to
amortize any unfunded liability the plan has by receiving
benefits less than the Target level (i.e. temporarily suspending
indexing of benefits) and crediting the value of this in the
calculation of 50-50 cost sharing?
> Balancing Mechanism: Does Council endorse the Balancing
Mechanism concept as illustrated to track and balance the 50-
50 cost sharing?
> Indexing of Pensions: Is a temporary suspension of indexing
a potential avenue for consideration? Could alternative options
be considered (i.e. 30% of CPI)?
24
26
> Have estimated impact of proposed suspension of indexing on plan
finances using 2006 actuarial basis (see later comments)
> If future indexing not guaranteed, plan is almost fully funded - in
table below City contribution driven by matching of employee
contributions)
Funded
EE % of
EE
ER % of
Position
pay
benefits
pay
Current Plan
(150)
9%
0
35%
Target Plan
(138)
6%
0
28%
Core Plan
(20)
6%
14%
20%*
Core Plan +
(127)
8%
10%
24%
indexing at 2%
27
> City indicated that the plan is not to be part of the bargaining
process or union members
> Since both active and retired members will be greatly affected,
especially if indexing is temporarily suspended, feedback must
be sought
> Union representatives will also need to be part of the process
> If further decisions reached on preceding issues, would help
the consultative process with stakeholders be more productive
> At Meeting #4, Council decided to have a consultative meeting
arranged with various stakeholders utilizing an independent
moderator other than Morneau Sobeco (meeting to be held in
the near future)
26
28
> Assuming that consultative process begins, Council needs to
turn attention towards longer term structures
> Direction under consideration (50-50 cost sharing with benefits
varying based on funded position) differs significantly from
current terms (City responsible for 100% of deficits)
- Do current governance structures meet needs under new terms?
- What are the appropriate roles of City Council and the Board of
Trustees under this new design?
- Who is responsible for measuring and monitoring risk (see
following discussions re Actuarial Basis, Investment Strategy
and Funding /Benefit Policy)?
- How will this transition be managed?
27
29
> Actuarial valuations do not determine what a plan's actual
costs are, they simply serve as a yardstick to measure if the
plan is on track to prudently provide for promised benefits to
plan members when they retire
> Most recent valuation incorporated changes to valuation basis
to more accurately reflect current realities (i.e. lower inflation)
> One of most critical assumptions is real rate of investment
return after fees of 4.15% (2007 Investment Policy Goal was
3.85% after fees, which would actually be more consistent with
assuming a 3.40% real rate of investment return after fees)
> The plan has utilized an aggressive (but not inappropriate)
valuation basis, producing relatively modest levels of current
costs and accrued liabilities relative to benefits promised
28
30
> Given the size of the pension plan compared to payroll and the
resulting risks, we suggest that City consider building a margin
of conservatism into the valuations to help mitigate the impact
of volatility of returns
> This could involve both asset strategies as well as increased
conservatism in assumptions
> Conservatism in assumptions would help the City and plan
members reduce the risk of future adverse situations further
diminishing the health of the plan
> IMPORTANT: Future economic downturns will most likely
occur - both the liability and asset side of the balance sheet
need to be prepared for this
29
31
> Whi e acceptab e at ast va uation, it is'.ike'.y that the
current actuaria: basis wi:. require further
strengthening at upcoming va .uation
> Conservative assumptions shown as "possib:.e"
present a more conservative position of the p. an and
offer more opportunity for experience gains to arise
than the current assumptions
> Gains he'.p bring funding'eve's up to Target in a more
consistent manner (more "good news" from year-to-
year)
30
32
> The following represents a possible set of assumptions that
reflect more conservative rates based on the nature of the Core
Plan and the use of future experience gains to reinstate benefit
levels to Target (this change would increase current plan
liabilities by -18% or $75M)
Assumptions used for approximation
Current
Discount Rate
I nflation
Salary
Real Return
6.75%
2.50%
3.00%
4.15%
Possible
5.50%
2.00%
2.50%
3.43%
31
33
> Asset & Investment Strategy is a critically important decision
that is a primary determinant of a plan's risk profile
> Investment Policy needs to reflect tolerance of funding parties
> In past 3 years the allocation to fixed income assets has been
reduced from 45% of the portfolio to 25% and three new asset
classes have been introduced (10% Real Estate, 10% Hedge
Funds and 5% Private Debt)
> Would be prudent to confirm that this strategy is consistent
with revised plan terms and approach by detailed modeling
analysis through Asset Liability Study
32
34
> Benefit and Funding Po icy wou .d out ine funding
and benefit'.eve-.s that wou d depend on the financia'
strength of the P: an
> Benefit and Funding Po icy wou .d out ine what
contributions /benefit changes may be required
depending on whether the Ran is in ba'ance or not
and how these shou .d be imp'.emented
> Depending on the terms of the new arrangement,
drafting of a Benefit and Funding Po .icy may not be
up to Counci'- a'-one (50-50 sharing with members)
33
35
> Begin CProcess with stakeho_ders to
secure their input and support for direction
> Assess p'-an governance structures and a__ocation of
responsibi .ities against requirements of new p an
design
> Perform detai'.ed financia'. ana ysis to more accurate_y
measure impact of proposed strategies and how far
they go to accomp_ish desired outcomes
34
36
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> ASSUMED ACTIVE MEMBERSHIP FOR ALL
COSTINGS:
Assumed Membership Data
Age 45
2009 Salary $587000
FAE3 Now $557000
Years of Service 16
37
39
> ASSUMPTIONS USED FOR CURRENT BASIS:
Assumptions used for approximation
Discount Rate
6.75%
Inflation
2.50%
Salary
3.00%
Retirement
58
Overall 1.6/2=
1.8%
Position: $400m
Liab (48%
Active), $250m Assets
Cost Methods:
Current Plan: Projected
Unit Credit (Service Prorate)
Target Plan: Projected Unit Credit
(Benefit Prorate)
Core Plan: Unit Credit
Frozen Plan: Projected
Unit Credit
(Benefit Prorate)
38
40
> Changes made to Current Assumptions to reflect
Possib_e Assumptions:
Assumptions used for approximation
Current
Discount Rate
of ation
Sa ary
Rea Return
6.75%
2.50%
3.00%
4.15%
Possib e
5.50%
2.00%
2.50%
3.43%
39
41
> FOR PURPOSES OF THIS PRESENTATION, WE
ASSUMED THE FOLLOWING CORE PROVISIONS:
- Pre-2010 Service: Freeze best three year average earnings as at
December 31, 2009 (no indexing)
- All Service: Suspend indexing of pensions
- Post- 2009 Service: Change pension formula from 2% to 1.6% /
2%
- Post-2009 Service: Change from best three year average
earnings to career average earnings (no indexing)
- Post-2009 Service: Change unreduced retirement from 85 points
to age 65
40
42
> FOR PURPOSES OF THIS PRESENTATION, WE
ASSUMED THE FOLLOWING TARGET PROVISIONS:
- Pre-2010 Service: Target indexation of frozen best three year
average earnings as at December 31, 2009 using CPI
- All Service: Target indexation of pension
- Post- 2009 Service: Change pension formula from 2% to 1.6% /
2%
-Post-2009 Service: Change from best three year average
earnings to career average earnings (target indexing using CPI)
- Post-2009 Service: Change unreduced retirement from 85 points
to age 65
41
43
FUNDING POSITION / COSTS: INDEXING AS AFFORDABLE
Current
Target
Core
Ret AL
$
208
$
208
$
177
Active AL
$
192
$
180
$
93
Total AL
$
400
$
388
$
270
Assets
$
(250)
$
(250)
$
(250)
Deficit
$
150
$
138
$
20
NC
20%
12%
6%
Amort
24%
22%
3%
Total
44%
34%
9%
E'ee
-9%
-6%
-6%
Net
35%
28%
3%
42
44
FUNDING POSITION / COSTS: INDEXING AT 2% GUARANTEED
Current
Tarqet
Core
Ret AL
$
208
$
208
$
208
Active AL
$
192
$
180
$
169
Total AL
$
400
$
388
$
377
Assets
$
(250)
$
(250)
$
(250)
Deficit
$
150
$
138
$
127
NC
20%
12%
6%
Amort
24%
22%
20%
Total
44%
34%
26%
E'ee
-9%
-6%
-6%
Net
35%
28%
20%
43
45
FUNDING POSITION / COSTS - INDEXING AS AFFORDABLE
Current
Possible
Assumptions
Assumptions
Tarqet
Core
Ret AL
$
208
$
233
$
233
$
196
Active AL
$
192
$
244
$
229
$
140
Total AL
$
400
$
477
$
462
$
336
Assets
$
(250)
$
(250)
$
(250)
$
(250)
Deficit
$
150
$
227
$
212
$
86
NC
20%
26%
15%
9%
Amort
24%
35%
33%
13%
Total
44%
61%
48%
22%
E' ee
-9%
-9%
-8%
-8%
Net
35%
52%
40%
14%-
44
46
FUNDING POSITION / COSTS - INDEXING AT 2% GUARANTEED
Current
Possible
Assumptions
Assumptions
Tarqet
Core
Ret AL
$
208
$
233
$
233
$
233
Active AL
$
192
$
244
$
229
$
229
Total AL
$
400
$
477
$
462
$
462
Assets
$
(250)
$
(250)
$
(250)
$
(250)
Deficit
$
150
$
227
$
212
$
212
NC
20%
26%
15%
9%
Amort
24%
35%
33%
33%
Total
44%
61%
48%
42%
E' ee
-9%
-9%
-8%
-8%
Net
35%
52%
40%
34%-
45
47