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HomeMy WebLinkAbout2010-10-18 MinutesBoard Members Mayor Jordan Chairman Sondra E. Smith Secretary Marion Doss Position 1/Retired Pete Reagan Position 2/Retired Gene Warford Position 3/Retired Ronnie Wood Position 4/Retired Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 1 of 16 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension and Relief Fund Board of Trustees Pension Review Board A Special meeting of the Fayetteville Firemen's Pension and Relief Fund Board of Trustees, City Council, PRB, and Actuary Jody Carreiro was held at 4:30 PM on October 18, 2010 in Room 326 of the City Administration Building. Mayor Jordan called the meeting to order. Present: Fire Pension: Ronnie Wood, Pete Reagan, Marion Doss, Gene Warford, Sondra Smith and Mayor Jordan. City Council: Brenda Thiel, Adella Gray, Bobby Ferrell, Sarah Lewis, Kyle Cook, Shirley Lucas and Matthew Petty. Other Attendees: Kit Williams, City Attorney, Paul Becker, Finance & Internal Services Director, Jody Carreiro, Osborn, Carreiro & Associates, David Clark, Pension Review Board, Audience, and Press. A meeting to discuss the insolvency of the Fayetteville Firefighters Pension Fund. Special report from Jody Carreiro of Osborn, Carreiro & Associates Inc. Actuaries Consultants Analysts. Jody Carreiro, Osborn, Carreiro & Associates Inc.: We have been the actuaries for the Fire and Police Pension Review Board for 20 years. These analysis have been different, it's different because we have had to stretch our muscles to do some of these things. Some of the Pension Board members have seen this and some of it will be new. Mr. Carreiro presented a PowerPoint presentation regarding the actuarial report. A copy of his report and graphs is attached. Now that everyone has retired the liability should be trailing off. Between 2007 and 2008 you had the last big DROP payment out of the plan. The Pension Review Board decided they were 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 2 of 16 going to review and adjust the discount assumption for the liabilities on a routine basis. They did that based on the returns of the previous five years. This created a $3.8 million increase in liabilities from that change in assumptions. The discount factor going from 7% to 5% really increased those liabilities. There was a 23% increase in this last evaluation. What we are presenting to you is a cash flow simulation process. The evaluation is a snapshot in a particular year versus in this cash flow simulation it is year by year the expected income and expected benefits for every year during this projection period. With an evaluation we have liability assumptions, interest, discount, mortality, and other things like that. With this we have some added assumptions about what the asset income pieces are going to be. These assumptions are not guesses but they are not predictions either. They are not going to be accurate but they are going to give us the best idea of the direction that things are in. We hope it is right. Page 11 and page 12 of the report is 10 years of financial history. At the bottom of page I 1 is a line called non investment cash flow. Ignoring investment income is the income minus the expenses. That is important because we are in the phase of life of this plan that our non investment cash flow is an out flow. It is no longer net income because everyone is retired now. Ten years ago it was a small number and now it is up to about $800,000 every year. That is our benefit payments, which the benefit payments have increased over the past ten years, the benefit payments less the income items is going to be over $800,000 out flow every year. Page 12 shows where the assets were ten years ago they were over $12 million and now we are down to under $6 million. We want to be closer to ten years of benefits in our assets and we are down to right at four years, which is too low. The last ten years in the market have been brutal. Market returns have been around 2% over a ten year period. There has been ten years of under performance. The next several pages are the profiles. Page 15 shows you the age of all the retirees, page 17 and page 18 lists the plan provisions. Page 19 lists the benefit increases that this plan has received over the years. The base benefit in the law is 50% of pay. In 1996 that was increased from 50% to 65%, in 2001 the plan went from 65% to 90% of pay as a base benefit. In 2003 there was a three year temporary 3% COLA that was approved. In January 2007 you asked us if you could afford any other benefit increases and you could not at that time. The liability assumptions are on page 20 through page 22, mortality assumptions is the big thing here. We did a study on all the fire and police plans in the State and determined the table. The 1983 Group Annuity Mortality Table was closest to the mortality of the folks through the period that ended at the end of 2007. We will continue to review that every few years to see if it needs to be updated. We also project based on the mortality of the retirees with spouses. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 3 of 16 Pages 23 and page 24 is the asset projections assumptions. For each income piece we had to project how much income was going to be produced with that. The millage in the last several years has increased more than 2% per year. The 2% a year is a national real estate average. Since everyone is retired there is not any employer match any more. The premium tax is very difficult to understand. In 2010 the plan received about $123,000. It is based on a long complicated formula that allocates based on the cost of every old plan and every LOPFI plan and then a percent is applied to it, and then there is a second round to where hopefully you will get some more money. It has been hard to predict and it is not growing as fast as the needs of the pension plans. The pension plans on the LOPFI side and the old plan side both have growing cost. For this study we did not assume a discount rate, we assumed a portfolio. That portfolio is broken into six categories. Page 24 will show how much was allocated to those categories. The first thing in the results to look at is on page 3. There are several charts that we are going to go through. With the portfolio we did 2000 simulations over 30 years in six different categories. We arranged the results from worst to best. What the graph tells us is that right now your fund has about 91% chance of using up assets before the liabilities. You have a risk of ruin of 91%. That is not very good. We do not want to ever run out of money. We would like a risk of ruin to be 5% and no more than 10%. That means we have a lot more risk than we want to have. The next two graphs show what will happen if you are more conservative to take away some of the risk or more conservative to make more money. If you are more conservative it gets a little worse. Being more conservative does not give you enough earnings to increase anything. A more aggressive portfolio still has you running out of money in 12 years. It is fractionally better as far as the risk of ruin. It is just under 90%. If you can find a 15% CD you could earn your way out of this hole. They do not exist. A 15% portfolio is not going to happen. It would have to be a 15% risk free portfolio to earn our way out. If you add money to the plan over the next fifteen years you might make this plan solid or reduce our risk of ruin to 5%. It would take $325,000 per year for 15 years and $250,000 a year for 30 years. I don't think there is money to do that. The following are possible actions you can take: 1. Maintain the current direction. There is a high probably of running out of money if we do not do anything. 2. Additional City contributions. City probably does not have the money. 3. Consolidation with LOPFI. City makes up any difference. The City pays the unfunded liability. 4. Benefit reductions. The opinion is that is not probably possible. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 4 of 16 The benefits after 30 years are still $665,000. That is just less than half the benefits that are being paid out now. Some of your retirees are not very old and many of them have spouses. This plan pays benefits to the spouses as well. If the plan consolidates with LOPE the estimated costs go up every year. The LOPFI amortization when you consolidate is based on a 15 year amortization but it is a level percent of payroll so it grows by 4% per year. Mayor Jordan: Any comments or questions from the pension board? Pete Reagan thanked Jody Carreiro and David Clark for coming. You talked about the local millage on your report. I will direct this towards Paul. I don't know if our numbers are going to be up or down. I suspect that in my own personal piece of property the amount it was appraised for is down for 2010. Does that mean our part of the millage will be down? Paul Becker: From the projections on the assessed valuation I've seen it will not be down but it will not be up compared to last year. Next year I don't see a big decrease but we are not going to see much of an increase. Pete Reagan: Thank you. Jody on the fire insurance premium tax do you see any way to increase that solely for old funds that are in distress and then roll it over into LOPFI once they become able to stand on their own? Jody Carreiro: The current frame work to present to the legislature is that the old plans would get a portion of their calculated similar to now. Then there would be an extra portion based on unfunded, so the bigger your unfunded the more your portion would be. This second portion would be assuming the City did everything it could, now defining that is still in negotiations. The thing was the I mill but it may be a combination of 1 mill or a percent of a pay off of the unfunded. It maybe a deal where the City has to come up with a little extra money to get more extra money. The idea is the cities that are in need would be able to get some more. To be honest the proposal is that calculation would be based on base benefits. That wouldn't cover all your liability because you guys have a significant benefit increase. There will be a calculation based on base benefits and then that's the calculation that people will get help on. Pete Reagan: Do you think it is possible to pass an increase in the fire insurance premium tax? Do you think that is a viable alternative? Jody Carreiro: The proposal that's out there right now is a better distribution of money and a way to increase that pot faster. It is probably one of our best bets on doing that but frankly the Governor and DF&A are going to fight it tooth and nail because they need every penny they've got right now. Does it have a great chance, I don't know. I think there is a lot of support from both boards and they are building support from the Municipal League. Sondra was at the meeting where that committee voted to endorse it. I was almost surprised. We are beginning to come together. The Legislative Committee, whenever they meet again, will hear the same 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 5 of 16 presentation. If they get behind it too then we can sit down with the Governor and say there are a lot people behind this and here is a way to fix this problem long term. It's not going to bother your budget this year but it's going to cost more money in future years but this is a way you can fix this once and for all. That's the hope and direction. Whether it works I don't know. Pete Reagan: Assuming this passes can you put a dollar figure to that piece? Jody Carreiro: Not yet. Not until I know more of what some of these things mean and that's going to come from the discussion from other people. Paul Becker: Jody I have seen your preliminary numbers. I think the thing we should let everybody know is that is not going to solve this problem. Changing the distribution of premium taxes is not going to be large enough to resolve this problem. I feel a responsibility to let you know where we are. You have to understand the Council, Mayor and Administration are looking at approximately a $1.4 million short fall in the General Fund alone that we are going to have to come to grips with. We are either going to have to use reserves, cut capital, or cut operating expenses. It's a rather difficult time to have a discussion of coming up with additional funding. Jody Carreiro: I understand. Paul Becker: Especially when we are talking about, if I recall the numbers correctly, if we sent it to LOPFI your estimate is $163,000 the first year graduating to roughly $600,000 after 15 years or putting in $250,000 over a 30 year period. You have to understand in these discussions the Council is already grappling with a problem beyond this. City Attorney Kit Williams: I have attached an opinion letter to our budget every year for our auditors that says the City is not currently liable for any short fall in the pension fund. The pension fund is controlled by this Board. They are the ones that voted increases in it without the increase to 90% and a 3% COLA for five years we wouldn't have this kind of problem. The Mayor and City Clerk are also on the board but it's really the responsibility of the board and not the City, legally and in my opinion not even morally because there is nothing that the City Council can do to say you're spending to much money and you need to cut benefits. It's totally up to the board on that. This is their pension plan just like the police, they have their own independent board. It's not the City Council's responsibility legally or in my opinion morally. They have to decide as trustees. They have a fiduciary duty to every beneficiary out there to make sure this pension plan does not go bankrupt. We have a difference of opinion about some of the options. One option they did not discuss is an option I believe is the only true option available to this board and that is to reduce benefits. The benefits would not have to be reduced dramatically at this point in time. It would still be way over the 50% that the statute originally set this as but the Attorney General and this board disagrees with me. If the board decided to go forward like that someone or some pensioner might possibly sue the board and say no I am entitled to the full amount. A judge would then decide and basically we would have a true decision on it. My opinion is the board does have that inherent power. There are things within the statute that I believe give them the power and also there is the simple responsibility that they 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 6 of 16 have a fiduciary duty to preserve this pension plan. That gives them inherent rights to take whatever action is necessary within their power to make the plan last and not to have a 95% chance of this plan going broke. This is not a surprise. More than four years ago I told them I was concerned about the pension plan and that they needed to reduce benefits. They have heard this for more than four years from me and that was in August 2006 before any crash in the market. That is after a big run up in the stock market where our financial advisors for the pension plans had done wonderful. She earned them lots and lots of money and yet their fund was still going down and that's why I could see the hand writing on the wall. That's why I asked them to consider that. Alderman Ferrell: Kit, we talked about on any kind of benefit change that the Attorney General says he doesn't think that would be allowed. Did the Attorney General have to opine on any of these votes to increase benefits from 50% to 65% and 65% to 90%? City Attorney Kit Williams: No. Every time benefits were increased by this board it went through the State Pension Board and they had to approve it. To approve it they always used a cash flow method at least for the last few years because actuarially it would not have made it. They used those assumptions, it use to be 6% growth then it went up to 7% growth and now it is back down to 5% growth. They are using the assumptions that the investment portfolio would grow fairly aggressively and when that did not happen that is why things got in trouble. The pension board always followed the law. They only approved increases when they were approved to do so by the State. Sondra Smith: We proposed in two separate meetings a benefit reduction that the Mayor and I supported. In one meeting one other board member supported it but we did not have a majority vote to reduce the benefits. Alderman Ferrell: What kind of reduction did you propose? Mayor Jordan: Twenty percent wasn't it? Sondra Smith: Jody gave us a presentation at one of the meetings. In that presentation he stated it would take a 20% to 23% reduction. One motion was a 20% reduction. I believe the other one was 23% or what Jody thought it would take to gets us even. Mayor Jordan: Both votes failed. Paul Becker: Jody, people have asked me about the cash flow analysis. We could not pass the actuarial analysis test because that is based on a five years of actuarial soundness. Is the cash flow analysis a statutory analysis, or is that defined by statute? Jody Carreiro: The statute says the Pension Review Board can define actuarial soundness. For many years they defined actuarial soundness as if your assets over liabilities were over a certain 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 7 of 16 percent, whatever that was, and if your plan was making the calculated actuarial contributions. The calculated actuarial contributions, since everyone was eligible to retire in 2003 under these plans, they were quickly moving so that the amortization of any unfunded was over a fairly short period and rightfully so. The trouble with that is nobody can make that kind of a contribution. They weren't going to get it paid off in five years. The decision was made probably 15 years ago to use the cash flow method. The big thing about that was that millage and premium tax would continue after 2003. Those things would continue for quite some time and if we looked at the cash flows, what was coming in, and the expected benefit payments, and the plan was not expected to run out of money, then the board's definition of actuarial soundness was that the plan would then be sound. That is the method that was used for all of the benefit increases that this plan has had. Paul Becker: That was an administrative decision by the PRB. Jody Carreiro: That's correct. Sondra Smith: There is one thing in the report on page 19 that I would like to point out. In the changes in benefits, on November 20, 2003 it says extend the DROP to 10 years, that was approved by the pension board to go to the City Council but the City Council voted against that and that motion failed. We did not extend the DROP to 10 years. We only had a five year DROP. That DROP is finished. I don't know if everyone here understands what the DROP was. Alderman Ferrell: Would you explain that? Sondra Smith: I don't know as much about it as some of these gentlemen here do. They were allowed to go ahead and work for an additional five years and money was set aside in a lump sum distribution for those pensioners during those five years because they weren't drawing from the pension fund during that time. The way I understand it their dollar amount was frozen that they could draw when they went on the DROP. So if they got any pay increases during those five years they would stay at the same level they were at when they went on the DROP. Jody Carreiro: That's pretty good. Sondra Smith: But in doing that there was an additional $3.3 million paid out to 19 pensioners on the DROP plan. That may have made a little bit of difference too but you don't know whether they would have gone ahead and retired or continued working. Jody Carreiro: Sondra did call me to point that out. I took it off my slide but I couldn't take it out of the book. There are lots of issues here that we can talk about. The benefit increases and all that evidentially puts a huge weight on this but those were all approved with some type of interest rate assumption. The market has treated us poorly for 10 years which is not anyone in this rooms fault. You earn 2% for 10 years if your assumption is 5%, 6% or 7%, it doesn't matter you're way behind if you do that for 10 years. Whatever effect the DROP ultimately had its hard to quantify but again that was an affect that was in there. This was not intended to try to 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 8 of 16 dissect all the affects of why we got here but maybe to throw out some ideas to spawn some discussion so that maybe we can find some solutions of how to get to where we need to be. Alderman Petty: I looked back at the financial records provided for the fund and it seems that it's been obvious that this has not been actuarially sound for quit some time. I was wondering why benefits were raised so much in the first place? It doesn't seem like it was a responsible decision to begin with even when the market was gang buster the fund wasn't sound. Why has it taken so long to get to a point where we are talking about actions? Mayor Jordan: That was before my time. I don't think I have voted for a benefit increase since I have been here. What were the circumstances that you all raised it from 50% to 90%? Jody Carreiro: The fund was sound at the time every benefit increase was made or it would not have been made. It met the definition of soundness. Clearly since I did a lot of those actuarial reports I've sit around and said why, did we put in enough room for variance? Did we put in enough area that was there? I think based on what we knew at the time that each of those reports were done, what information we had, except for investment returns they have been pretty much been on track. I went back to some old cash flows and said where does it say we are in 2010. If I add what happened in the market from that point to 2010 it explains what the difference is. The plan was always sound and as your attorney has said they followed the proper steps each time the benefit was done. Sondra Smith: If they had asked for the benefit increase on an actuarial soundness study would they have still gotten those benefit increases or was it because they asked for them on a cash flow basis? Jody Carreiro: There were two definitions that were available, two ways to prove that you were actuarially sound. You could meet this assets over liabilities were over a certain percent or you could prove that this cash flow was going to meet my benefit out flows over the long term. Evidentially they didn't choose method number one, which says assets over liabilities had to meet a certain percentage, they chose method number two each time which said the income items as we knew them at that time were going to be greater than the benefit stream. Alderman Petty: From my understanding what you just described and from the presentation it sounds like obliviously mistaken projections were made about investment income. To me the fact is the board counted their chickens before they were hatched. That was something that was not right to do. Speaking for myself as a council member, if responsible decisions were being made by the board and benefits were at a responsible level, then I would be willing to step in as a City and help it reach solvency. Until we've seen a willingness to demonstrate action on the part of the board I'm not willing to do that. I hope today we can get this discussion started on how we are going to get these benefits lowered. I know the Attorney General and the City Attorney have a disagreement of opinion. Attorneys aren't judges and their opinions are wrong sometimes and it's up to a judge to figure that out. The Attorney General has been wrong before. I think this is a case where we need to go forward and we need to have the courage to do this so we can all do 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 9 of 16 our part. I'm not willing as a City Council member to take action on the part of the City until that is the case. Alderman Thiel: I agree with Matthew. I feel like the board can vote to reduce their benefits and it may be challenged and it may not be challenged. I think the Council would like to help but the pensioners should help too. Alderman Gray: I agree as well. The City does not have plenty of money. We've had to make some big cuts and we are going to make more cuts. I think we have to have everyone's help in making this balance and make it work. Alderman Ferrell: On June 6, 2001 the market was on fire. Some of the returns coming in were incredible. I'm not an actuary and there's a lot more to it than looking at this year. Understanding that I still go back to the organizational function which says there are fiduciary obligations by a pension board. The fiduciary obligation means you are compelled to take a look at the solvency of this. That is where we are now and we need to figure out a way to get it back. Alderman Lewis: Thank you for explaining some of this to me. I agree with Alderman Petty. I would have to ask myself, according to the probabilities in the current market, is this going to run out before I die. I have to ask myself if I would like for it to run out or if I would like it to last me longer. There is a chance that the market can turn around and if I leave some money in the market to come back up, then I can make more money. With the economy as slow as it is we are probably not going to see the bubble that we've seen in recent years that means I would want to stretch that out as long as I can. From a former grad students point of view I would want to be stretching every penny because across the board we are all trying to do that. We are all trying to squeeze out every bit of the City budget and our personal budgets. I would really like to see an effort to reduce those benefits and really look at the numbers, to see what that means for the individuals and how long would it be before there would be a reconsideration of that. It could be revisited if the market turns around. Even with this plan there are only three little bullet points that look at a reduction of benefits and it doesn't include all of the different reasons. Alderman Lucas: I agree with what the Council members have said. When people retire from a company they usually have a choice of taking a big pay out that begins in 10 years or ends in 20 years or they take less and hope it lasts as long as they do. There is a board that decides this and decides how much you should get with your expected life expectancy. Like Bobby said it was the fiduciary duty of the board to make sure this lasted this long. I would like to see them work at doing that. Alderman Cook: What is the LOPFI payout benefit? What is their percentage compared to this plans payout? David Clark: LOPFI has a maximum benefit payout of 100% if the person works 34 years and one month under benefit program one. We don't have anyone there because this system is at 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 10 of 16 year 28 in its existence. That was a legislative change that occurred in 2009. It use to be a max of 85% if you were under program two or 80% if you were under program one. On the discussion about the fiduciary responsibilities of the local board and how the benefit increase works, I'm not sure everybody fully understands how the benefit increase process occurs. The local board has to pass a resolution to be able to enact any type of benefit increase proposal. That takes six of seven board members signatures and your benefit increases had six of seven signatures. Two of those were your City official representatives which would have been your Mayor at the time. Mayor Jordan: David, I have not voted for an increase. David Clark: I said Mayor at the time. I understand that Mayor. These increases occurred before your time. I think everyone heard me correctly but it was before this Mayor was in office. The point being is that there was an employer representation on these benefits increases that occurred. Six fiduciaries signed the resolutions and it was processed through PRB. PRB did a cash flow analysis and said whether or not the fund could afford the increases and then pushed it back with the approval letter that it was up to that same board to go ahead and act on the benefit increases at that time. That is the reason why the PRB has said that there is a statuary provision 24-11-102 that says a local board can do a benefit increase. There is not a 24-11-102 and a half that says you can decrease benefits. There is a section that talks about prorating benefits in the year that the pension fund runs out of assets. That's the reason the Attorney General has come back and said, and the PRB agrees, that there is not a statutory provision to reduce benefits. Clearly there is some wisdom behind that, because of where the pension fund is at, but wisdom and what the state law allows at this time are not necessarily in alignment. That's the reason why PRB has tried to be very cautious in this report to not spend time on reducing benefits. If we got on board and said you need to reduce benefits that is going to interject the PRB into possibly a lawsuit that we don't want to be a party to. If you guys go through the benefit reduction process you have to question yourself whether or not this board is following state law. That's up to board to make that decision that's not up to me or the actuary. There is not a provision to actually roll benefits back on the local plan. It only indicates where the fund runs out of assets in that one year. City Attorney Kit Williams: Actually that's not what the statute says. It says should the fund provided for in this subchapter be insufficient to make full payment of the amount of pensions to all persons entitled there to, not in that year, then the fund shall be prorated among those entitled by proper authority as made to be deemed just and equitable. It does not say you have to wait for the fund to hit the ground and die. It says if it shall be insufficient to make full payment of all money to the pension of all persons entitled there to. We just heard from Jody Carreiro that's where the fund is now. David Clark: No it's not. The fund is not there. He said the report shows that it is 10 years out or perhaps 11 years out. So no sir that is not correct. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 11 of 16 Kit Williams: It does not say you have to wait until the last year. It says if it becomes insufficient and I think we have seen it is insufficient at this point in time. If it is not going to able to survive and pay full benefits the statute says they will be prorated. The difference between the Attorney General and myself is that they think the fund must be driven into the ground before this board can reduce benefits. My belief is they have a fiduciary duty and they can keep this fund from being driven into the ground. Mayor Jordan: David we could end up in court by letting this thing run into the ground. David Clark: Yes sir. Mayor Jordan: I don't want this to go into the ground. I don't want these people without some kind of pension around here. David Clark: I don't think they do either. Mayor Jordan: We say we can't reduce benefits because we could end up in court but I can assure you when this thing runs into the ground some of these folks out here may take us to court and I don't blame them. It is our job to keep the thing a float. I agree with Shirley Lucas, you can take a big lump sum or you can reduce the benefits and keep it going and then reconsider it later and if things get better you can add back to it. David Clark: I agree with that way of thinking. That common sense mind set, which is really what we are taking about here, is not in alignment with current state law. That is the position of PRB. Alderman Gray: Jody, have you done any kind of calculation as to what kind of a reduction it would take? Can you give us an idea of what some of our pensioners and widows are getting and what it would mean to their monthly check? Jody Carreiro: We did those calculations last year. They would be a little different now but there is a report that states what that reduction would mean. That's certainly calculations that are pretty straight forward to do. We have a profile page that we looked at earlier that showed how old everybody was and what their benefits were. Kit Williams: Sondra do you have the monthly payment list? Sondra Smith: Yes. Alderman Ferrell: I worked for a big company and when you elected to retire you had options. You could elect to take an annuity or then in the case of your death you could elect to have a survivor's annuity which your survivor would get a discounted annuity. Is this the same deal? 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 12 of 16 Jody Carreiro: The state law in Arkansas, for the fire and police funds, is that their member gets a benefit and without having to take a reduction their spouse, that's defined in the law, keeps the same benefit. It is what's considered a very generous joint and survivor type annuity. Typically especially in the company setting you'll take $95 instead of $100 to get a 50% benefit for your wife. There is no reduction in state law and the spouse gets 100% of what the member was getting. Kit Williams: That was the old plan but with the new plan in LOPFI they have to take a reduction if they want to cover their spouse. David Clark: That's correct. Kit Williams: How big of a reduction is that? David Clark: If they do one of the "A" options there's hardly any reduction. If they do the `B" option, which is a continuing life time payment to the spouse its 50% of the life time benefit to the member or 75% of the value benefit goes to the survivor if they choose `B" 75. It is a pretty significant reduction but it also goes against the age difference of the member verses the surviving spouse. Kit Williams: That is all of our current employees for police and fire that are working under this plan. David Clark: That's right, yes. Marion Doss: I think that is spousal benefits until they remarry. It's not forever. Jody Carreiro: That's true it does have a remarriage provision. Pete Reagan: Do you know what the current rate is for LOPFI employees for the Fayetteville Fire Department? David Clark: Employer contribution? Pete Reagan: Yes. David Clark: I don't know off the top of my head. Paul Becker: For fire? Pete Reagan: Yes. Paul Becker: I think it's a little over 23% if I remember correctly. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 13 of 16 Pete Reagan: The City is paying 23% of payroll on every employee in the Fayetteville Fire Department for their pension fund. Paul Becker: If my recollection is correct, yes. Kit Williams: That is set by law, right? David Clark: In effect it is because it's an annual evaluation process. Pete Reagan: For the City Council members and the public that is watching the maximum that the City ever paid into the old fire pension fund and the old police fund was 6% of payroll. That did not start until 1983. Before that the City paid 1% of payroll into the fund. Also we talked about the minimum benefit that was set by state law was 50%, that's the minimum. Nothing can happen to that. I also want everyone to understand this fund has no COLA built into it. I think the LOPFI fund has a 3% compounded COLA built into it. The members of the old fund are not covered under social security. This is all that was offered to us when we hired on. We don't pay social security. We are not involved in the social security fund. This is our pension with no built in COLA. Sondra Smith: Are the LOPFI benefits for the widows as generous as this plan? David Clark: No, significantly different and it is because of the actuary reduction. If the member chooses one of the continuing lifetime benefits, it's not automatic that they have a lifetime benefit. Sondra Smith: You're really comparing apples to oranges when you are comparing the old plan to the LOPFI plan. David Clark: I tend to agree but you are still comparing fire fighters and police officers. Paul Becker: We are talking about benefits for the current LOPFI. The salary is averaged over a five year period? David Clark: Three years, the last ten years of employment we grab the highest 36 consecutive months within that 10 year period. Paul Becker: If I recall the old plan did not average. Pete Reagan: Base salary at retirement. Paul Becker: If we are going to talk comparison about the plans we also have to consider that. Sondra Smith: Does the LOPFI plan have the DROP? 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 14 of 16 David Clark: It does but it has a different DROP structure. It has a five year just like this plan does but if the person has 28 years of service 75% of their benefit goes into a DROP account as opposed to a 100% benefit. If they have something less than 28 years of service than it is 72% of their benefit goes into their DROP account. Kit Williams: Would that have to be approved by the City Council? David Clark: No, that is a product of state law. LOPE already has the DROP so your current firefighters could go into DROP once they reach eligibility if they choose to do so. Sondra Smith: I've been on this pension board since 2003 and I have been concerned ever since then. At one point in time I asked the question about if we raise benefits can we ever reduce them, it was my understanding we can. We can when the plan goes bankrupt basically. I did not vote for these two large increases because I wasn't here then, but I would not have voted for benefit increases knowing that you can never reduce them if you needed to. There was probably people that sat on that board at that point in time, other Mayors and City Clerk's that if they had know that benefits can not be reduced they probably wouldn't have voted for the benefit increases either. That's an assumption but I know I wouldn't have, knowing that in bad times we couldn't reduce the benefits. Kit Williams: I think you can before it goes bankrupt. Pete Reagan: I think that's the reason they have courts so lawyers can argue. Kit Williams: So we can have decisions made. Sondra Smith: We had a question about how much they are currently drawing and what a 20% reduction would be. We have several folks that are drawing under $150 a month if they were a volunteer or a spouse of a volunteer. The majority of the pensioners draw anywhere from around $1,600 a month to $5,000, there are a few that a drawing under a $1,000 per month but not very many. Most of them that are drawing under $150 a month are retired volunteers. Carl Springston: You have a retired assistant chief drawing less than $500 a month. Sondra Smith: There are a few drawing under $1000 but not very many. I can run those percentages if you would like them. Mayor Jordan: What does the board want to do? Do you want to wait? Pete Reagan: My opinion is we need to wait and see what the proposal is from Municipal League. They are going to endorse a proposal and see what the numbers look like before anything is done. I've said all along the courts are made for attorneys to argue in. We've got our attorney who says we can reduce benefits and the Attorney General of the State of Arkansas who 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 15 of 16 says we can't. We have a session coming up. I've said all along I don't want to rush into this. We have been doing this for a year and a half now. Mayor Jordan: So we will wait. Pete Reagan: I would like to thank Jody and David for taking time out of their schedules to come up here and educate us on this. Mayor Jordan: Is that the agreement of the board? Marion Doss: How long are we talking about waiting for this change? Pete Reagan: The session starts in January and runs until they get done. Kit Williams: According to Paul it's still not going to be enough even if they pass it. Pete Reagan: I understand but if there's more money coming into the fund we need to look at that. Kit Williams: I will note that judges cannot make a decision unless there is a case in front of them. We can't bring a case in front of a judge at this point in time because there is no case in controversy. In order for there to be a case in controversy this board would have to take affirmative action to at least attempt to reduce the benefits. Then one of the beneficiaries out here could say, Attorney General they did something wrong and why don't you sue them for that. Then the Attorney General and I could go up in front of a judge and let the judge determine what the law is. If I am wrong there is not much down side for this. You have money in the pension fund to pay everyone back what they should have been getting because I was wrong and they should have got 100% instead of 70%. However if I'm right and you have figured out a way to fulfill your fiduciary duties and not let this fund go bankrupt, then you will have done that and a judge will say you have that power. If you continue to take no action then I don't know how it will ever get before a court until it is too late and all the money is gone. Mayor Jordan: Again I will ask the board for a recommendation. Do you all want to wait? Pete Reagan: Yes, that's my recommendation. Gene Warford: I second it. Marion Doss: I will say I am in favor. I would like to see when we find out about this some kind of a compromise. I would like to see consolidation. I don't know how the other board members feel about that, this is my personal opinion. I think that's the only hope to get this problem away from the City. 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316 Special Meeting Minutes October 18, 2010 City Council Firemen's Pension Board of Trustees Pension Review Board Page 16 of 16 Mayor Jordan: My opinion would be if that is what you want to do we can wait until after April, it's your pension. I will go along with that if you want to do that. Mayor Jordan thanked the City Council members, board members, retires, and Jody and David for coming. Meeting Adjourned at 6:00 PM 113 West Mountain 72701 (479) 575-8323 TDD (Telecommunications Device for the Deaf) (479) 521-1316