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June 2, 2008 MinutesCITY OF DENTON CITY COUNCIL MINUTES June 2, 2008 After determining that a quorum was present, the City Council convened in a Special Called Work Session on Monday, June 2, 2008 at 11:30 a.m. in the Council Work Session Room. PRESENT: Mayor McNeill; Mayor Pro Tem Kamp; Deputy Mayor Pro Tem Mulroy; Council Members Heggins, Moreno, Thomson, and Watts. ABSENT: None 1. The Council received a report, held a discussion and gave staff direction regarding the Texas Municipal Retirement System (TMRS). Brian Langley, Director of Finance, presented information on the TMRS System which included TMRS basics, dispelling TMRS funding "myths/rumors", TMRS changes and associated funding impacts, options for addressing funding issues, and staff recommendation and next steps. TMRS Basics -TMRS was a hybrid pension plan with some defined benefit and defined contribution plan characteristics. Over 800 cities in Texas were members. The system was as a whole 82% funded under current actuarial methods with net assets of $13.5 billion and prior to 2007 was invested 100% in bonds. Denton TMRS plan -The Denton employee deposit rate was 7% of compensation. The matching ratio was 2:1 (City to employee). There were 308 retirees in the Denton plan with 1,331 members. The average age of contributing members was 42.8 years and average length of service for members was 12.2 years. TMRS Myths and Rumors -TMRS was not "going broke". The System was recommending changes to ensure that member benefits continued to be soundly funded over the long term. TMRS was not suffering from a "shortfall". All benefits earned in TMRS were secure with future benefits needing to be funded with an appropriate actuarial method. Changes in benefits were a local decision and were not mandated by the State. Langley noted background information on the city's contribution rate. In early 2007, the TMRS Executive Director began considering a number of issues to explain the increasing unfunded accrued actuarial liability (UAAL) which included investment allocation, actuarial method used, amortization period of UAAL, and impact of Updated Service Credits (USC) and Cost of Living Adjustments (COLA). After reviewing these issues, several important changes were made on how TMRS calculated required city contributions. Investment Allocation -TMRS had historically been 100% invested in bonds. The lower interest rate environment necessitated higher contributions or better returns in the future. In 2008 TMRS began diversifying into equities with a goal of a 12% equity portfolio by year end and an ultimate goal of approximately 60% equities. A gradual investment strategy would minimize the risk of short term market downturns and market fluctuations. Actuarial Method Used -TMRS previously used the Unit Credit actuarial cost method which did not recognize any future benefit cost increases, backloaded costs and increased the UAAL and contribution rate. The new projected Unit Credit actuarial cost method would alleviate these City of Denton City Council Minutes June 2, 2008 Page 2 issues as it captured costs associated with annually repeating USC and COLAs. The new method would add significant cost to the contribution rate for cities. Amortization Period of UAAL -Historically, TMRS had used a 25 year "rolling" amortization period that reset the amortization period each year. The UAAL was never fully eliminated with this approach. In 2009, cities will use a 25 year "closed" amortization period that would provide level contributions over a fixed period of time and reduce UAAL. Impact of USC and COLAs - The COLA was designed to maintain retirement income at a reasonable level of 70% of the Consumer Price Index. The USC was designed to adjust retirement income to correspond with the most recent pay rates. COLAs and USCs had added approximately $2 million per year to the City of Denton's UAAL. Funding Impact -The current TMRS rate for Denton was 13.28%. The full rate for 2009 was 18.06% (using a 30 year closed amortization period). A 25 year period could be used if requested by the City. This would be effective as of January 1, 2009. If phased in over 8 years, the rate for 2009 would be 14.06% and would require additional CAFR disclosures. The full rate in 2016 would be higher than 18.06% due to deferral of UAAL amortization. The increase in the 2016 full rate might be mitigated by growth in payroll and workforce. The estimated impact of growth was 1% for 10 year period. UAAL would increase the cost from $39 million to approximately $68 million. The funding ratio would be approximately 62.8% with the current ratio of 73 % and should improve over the amortization period. General Fund bud . et impact -The financial impact for a full rate increase was $2.4 million for the entire City in fiscal year 2008-09. That full rate was implemented in the Utility budget in case the Council decided to pay the full rate. Contributions Rate Limits -The statutory requirement limited the City of Denton contribution rate to 13.5%. If Council decided to pay the higher contribution rate, it would be required to pass an ordinance to increase the contribution rate with either a 15.5% maximum rate which would require another ordinance with the next few years according to the phase-in plan or an ordinance with no maximum rate. The ordinance would have to be passed prior to January 1, 2009. Options -Pay the full contribution rate in 2009; phase in the contribution rate over as many as 8 years, provide aone-time payment to TMRS to reduce recurring contributions; or change the benefit structure to reduce the contribution rate. Staff Recommendation/Next Steps -Maintain the existing benefits structure for retirees and employees. Implement the new TMRS phase in rate over 8 years -14.06% beginning January 1, 2009 with the cost possibly being mitigated by growth of community and staff. Pass an ordinance to remove the statutory contribution limit of 13.5% with a no maximum ordinance, reassess the actuarial data each year, modify the funding approach if the situation dictated, and begin meeting with employees to discuss TMRS issues and funding strategy. Issues discussed by Council included how the 13.5% contribution limit first got started, the percentage of employee's salaries being used for TMRS/health benefits, how community growth would help with the cost for TMRS, and the cost associated with an extension of the rate. City of Denton City Council Minutes June 2, 2008 Page 3 Council consensus was to proceed with the staff recommendations and the phase in option with the understanding that the period could be shortened if needed. With no further business, the meeting was adj ourned at 12:40 p.m. PERRY R. MCNEILL MAYOR CITY OF DENTON, TEXAS JENNIFER WALTERS CITY SECRETARY CITY OF DENTON, TEXAS