watertown ma 11-05-24 budget finance office committee report

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Town of Watertown Town Council Committee of the Budget & Fiscal Oversight

Report: May 24, 2010

The Committee convened on May 23, 2011 at 7:10 pm in the Town Council chambers. Present at the meeting were Vincent Piccirilli, chair; Angie Kounelis, vice-chair; Cecilia Lenk, secretary. Also present were Town Manager Michael Driscoll, Town Auditor Thomas Tracy, Watertown Contributory Retirement Board member John Loughran, Retirement Board actuary Dan Sherman, and Retirement Board attorney Thomas Gibson. Council President Mark Sideris, Councilor Anthony Palomba and several residents were also present. Retirement Board Chairman Thomas Thibaut Jr. and Member Domenic Arone advised the Chair that they would be unable to attend because they were out-of-town on retirement board business. The purpose of the meeting was to address questions and provide information to the Committee and residents of the Town on the retirement benefits, including pensions, health insurance and other post-retirement employee benefits (OPEB). The meeting was informational only. Pension Benefits Mr. Tracy provided the following overview regarding the pension benefits for Town and School employees:

Public pensions in Massachusetts are governed by MGL Chapter 32. Public employees do not pay into the federal Social Security system nor receive its

benefits. Following the stock market downturn in 2008, state legislation extended the schedule to

fully fund public pensions to 2040. Watertown is scheduled to have its pension system fully funded by 2022.

The Public Employee Retirement Administration Commission (PERAC) sets the Town’s funding schedule. In FY2011, the Town’s extended its schedule from 2017 to 2022 and the FY2011 required appropriation was $8,608,733 (2.85% of this is Watertown Housing Authority’s).

Mr. Sherman reviewed the actuarial evaluation of the pension system (see attached Watertown-funding schedule issues report), including:

As of January 1, 2011 there are 1,055 participants (increase of 1% since January 1, 2010) in the Town’s pension system, including:

- Active employees 502 - increase of 5.7% - Retirees and beneficiaries 343 – decrease of 2.0% - Inactives (former employees who left the Town’s employment before being

vested in the retirement plan and are owed a refund of their contribution) 146 – decrease of 6.4%

- Disabled 64 – no change. The Town’s retirement system includes all the Town’s public employees, excluding

teachers, plus the staff of the Watertown Housing Authority (2.85% by payroll). Teachers are members of the Massachusetts Teachers’ Retirement System (MTRS), and

are not included in these numbers. Instead, the state pays about $8M per year for Watertown teacher retirements, not the Town.

Watertown uses a 5 yr smoothing to calculate actuarial value versus market value.

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As of January 1, 1011, Watertown’s unfunded pension liability is $58.5M. This is a decrease in the liability of about $6M over 2010 and is the result of two major factors:

- Half from no raises for employees over the last 2 years which kept payroll level - Half from gains in investments

Mr. Sherman stated that under state law, the appropriation in future years must stay at or above the prior year’s appropriation, and, having realized a $6M gain last year, discussed the opportunity the Town has for modifying its funding schedule by adding years to reduce future payments. These options all increase the total cost to taxpayers, and the least expensive option is to remain with the existing funding schedule. Mr. Tracy noted that Watertown is currently “ahead of the game” in terms of reducing its unfunded liability and Mr. Driscoll stated that the most financially responsible action is to remain with the existing schedule. COLA changes will be discussed at a future meeting with the Retirement Board. Mr. Gibson presented the Pension Reform Initiatives report to the Committee (see attached), including:

Pensions are considered a contract with employees and (with a few exceptions) pension changes are not retroactive, so changes affect new employees only.

Because the State regulates public pensions, there is very little a municipality can do on its own to reduce its long-term financial obligations. Mr. Gibson indicated that ongoing dialog with our state legislators is the key to reform.

Earlier changes to the law requires contributions of 9% and an extra 2% over $30K for new employees, which means eventually the pension system will be more than 90% funded by employee contributions for Type 1 (non-police, non-fire) employees.

Health Insurance Benefits Mr. Tracy discussed the health insurance benefits provided to current and retired public employees. These are governed by MGL Chapter 32B and union contracts. Similar to pensions, these restrict what can be done to reduce costs. Noting the Town joined the Commonwealth’s Group Insurance Commission (GIC) on 7/1/09, he provided the following data:

In April 2011, there were 1374 subscribers; 843 were non-Medicare, 392 individual plans and 451 family plans.

33% of subscribers were Town employees, 44% School employees, and 24% non-Medicare retirees.

As determined through collective bargaining, the Town pays 80% of costs for the PPO and HMO plans, employees contribute 20%, with the exception of the more expensive indemnity plans (60:40) and some grandfathered retired teachers (90:10).

Retired teachers were already in the GIC as part of the MTRS, so they were grandfathered in at the old rate if retired before 7/1/09.

The two most popular plans chosen are Harvard Pilgrim Independence (28% of subscribers) and Tufts Navigator (48%). The full FY2012 monthly cost of these for family plans is $1593 for Harvard Pilgrim, $1440 for Tufts (employees pay 20%).

Plan design including co-pays and deductibles are governed by the GIC.

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Watertown increased the percentages employees pay for their plans through collective bargaining when the Town joined the GIC. The GIC agreement is for 6 years and expires 6/30/15.

Watertown requires retirees over 65 to join Medicare, and reimburses the Part B premium at 60%.

Specific information for Watertown’s plan can be found at the GIC web site at www.mass.gov/gic .

Mr. Driscoll noted that because of our participation in the GIC the FY2012 budgeted health care costs are currently $72K less than in FY2009. Other Post-Employment Benefits (OPEB) Mr. Tracy reviewed our OPEB situation. We currently have an unfunded liability, as of July 1, 2009, of $118M, which is primarily health care for retirees. The State has no requirements in place for municipalities to fund this. The Town has put $1,016,697 in an OPEB stabilization fund since FY2006, but this does not show up as an OPEB asset because it is not in a restricted trust fund. There is a requirement to do an OPEB study every two years and the next one for Watertown will be effective July 1, 2011. Compared to last report July 1, 2007, liability increased by $20M, from two factors: increase of health care costs in the range of 8% per year, and reduced assumptions on investment returns since 2008. The Town Council has been considering a home rule petition to set up an OPEB trust fund, but Mr. Sherman said changes to MGL Chapter 32B Section 20 were made to allow a trust fund to be set up directly, which Watertown should consider. Mr. Sherman indicated that the best strategy for handling the OPEB liability might be to address it after the pension liability is fully funded, as was noted in the Committee report dated October 13, 2009. He indicated that the Council should consider adding a small amount of funds into the OPEB trust fund each year as this action would be looked on favorably by rating agencies. In summary: While Watertown has an unfunded pension liability of $58M and an unfunded OPEB liability of $118M, the Town has taken steps to pay down both liabilities ahead of schedule, as compared to other Massachusetts cities & towns. Secondly, the Town has taken significant steps to get health insurance costs under control, by joining the GIC and increasing employee contributions, which will reduce the rate of growth for the OPEB liability. Finally, in its FY2012 Budget Priority Guidelines, the Town Council has instructed the Town Manager to work with the Retirement Board and our State representatives to seek additional steps to reduce the Town’s future pension and OPEB liabilities. The meeting ended at 9:10 pm. Report prepared by Cecilia Lenk

Watertown - Funding Schedule issues.

r FYEll Appropriation, 58,608,733, is the minimum for FYE12.

r The FYE12 appropriation, 58,955,000 is the minimum for FYE13.

o A new FYEI? appropriation is available.

o We can not have the following type schedule straight up. A work-around would be required:

FYEI2 = S8,965,000

FyE13 = 98,6G0,4G0

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Town of Watertown Contributory Retirement System

as ofJanuarY l'2011Primary Results ComParison

Change as a

Percent

January 1,2010 January!, lQ! | (Annualized) FY 2013

ActivesRetirees and BeneficiariesInactives (Refunds)DisabledTotal

Total Payroll

Average Annual SalaryAverage Past ServiceAvbrage Attained Age

Employee Normal Cost% ofPay'oll

Employer Normal Cost

% ofPayroll

Administrative Expense% ofPayroll

Total Normal Cost% ofPayroll

47s35015664

r,045

25,403,413

53,48112.047.0

s023$4(Wkad?t46

641,05s

25,004,201

49,80912.646.9

2,147,3708.6%

7,439,779s.8%

225,0000.9%

3,812,149ls.2%

s.'t%-2.0%-6.4%0.0%1.0%

-1.6%

-6.9%

2,180,1168.6%

1,456,008s.7%

225,0000.9%

3,861,724ls.2%

26,129,390

2,265,7238.'.7%

7,482,848s.7%

235,1250.9%

3,983,69615.2%

TrJo

Total Actuarial Accrued Liability

Assets - Market ValueAssets - Actuarial Value

Funded Ratio

Total Unfunded Accrued Liability

Expected Unfunded Accrued Liability

(Gain)/Loss

Asset (Gain)/LossLiability (Gain)/Loss

Salary IncreasesNew ParticipantsActive - RetirementsActive - TerminationsActive - MortalityActive - DisabilitiesInactive - Mortality and data adjustmentsActives miscoded as inactives in the 2010 valuation

Other, including data, contribution interest,purchased service

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P:Ucld\wnlcdo$ nvrll l\P0ll Wrlctus n ViluiaLs ll m0 COU rlsllJuilinE A)l

1 55,963,135

81,302,54289,432,797

s7.3%

66,530,338

t59,248,369

93,207,602100,743,868

63.3%

58,504,501

64,721,797

(6,217,296)

(3,136,639)(3,080,6s7)(s,18e,061)

169,724t,43t,107

329,751(8,71s)

894,88s(1,690,449)4,919,389

982,701

2.r%

14.6%12.6%

10.3%

-12.1%

i]0,v1l

fr,,L,\

{{,

6t

)

,.r \5'4i

$, 0}?t it'

Town of Watertown Contributory Retirement Systemas of

January 1,2071Analysis of F unding Alternatives

FY 2012

Employer Appropriations under current funding scheduleAs a percent ofpay

OptionA-NotAvailableEmployer Normal CostTotal Unfunded Accrued Liabilities

Prior unfunded accrued liability1 1 years remaining as ofJanuary 1,2011 (2022)8.000% interest and 4.5%o increasing payments

Unfunded liabil ity for current (gain s)/losses15 years remaining as ofJanuary 1,2011 (2026)8.000% interest and 4.5Yo increasr'ng payments

Total Required Employer Appropriationswith interest adjustment for the complete contribution on July l.As a percent ofpay

If Fy 201 2 appropriation unchanged:

Option BEmployer Normal CostTotal Unfunded Accrued Liabilities

Total unfunded accrued liability10 years remaining as ofJanuary 1,2011 (2021)8.000% interest and, 4.5To increasing payments


$58,504,501

64,721,797

(6,217,296)

$5 8,5 04,5 01

58,504,s01

$8,965,00035.9%

$1,664,719

6,899,872

(st6;t40)

8,047,9lt

$9,335,89837.3%

$l ,717 ,973

7,210,367

(s39,993)

8,388,346

FY 2013

^.Cllr'bAtA

(<t u

fJ--T363!ossl33.4% 33.4%

a-T,e65,oon

$1,664,779 $1,7r7,973

If FY 2 0 I 2 appropriation unchanged:

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January trzOllAnalysis of Funding Alternatives

FY 2012

$8,965,0003s.9%

$1,664,779

FY 2013

$9,335,89837.3%

$t,717,973

with interest adjustment for the complete contribution on July 1.

As a percent ofpay

If Fy 2012 appropriation unchanged:

Option D

EmployerNormal Cost

Total Unfunded Accrued Liabilities

Initial unfunded accrued liability12 years remaining as ofJanuary 1,2011 (2023)

8.000% interest and 1.0%o increasing payments

Total Required Employer Appropriationswith interest adjustment for the complete contribution on July 1.

As a percent ofpay

If FY 2 0 I 2 appropriation unchanged:

-8,s6n 41 f--n,r8sltF1

35.4% 34.4%

$58,504,501

58,504,501

$58,504,501

58,504,501

8419,059 8,654,678

l--@ -B,ee4,r$1

3s.0%

4'l) r, ,o

6,862,996

8,527,775

6,931,626

8,649,s99

reeAs,nil @

; #n J,7


Option C



Initial unfunded accrued IiabilityI I years remaining as ofJanuary l,20ll (2022)

8.000% interest and 2.7 0% increasing payments

(-{,

Total Required Employer Appropriations

6,754,280 6,936,645

34/%

$1,664,779 $t,7 t7 ,973

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Town of Watertown Contributory Retirement System Page 4

Actuarial Value of Assets

The actuarial value of assets is determined by projecting the market value of assets as of the beginning of the priorplan year with the assumed rate of retum during that year (8.0%) and accounting for deposits and disbursements withinterest at the assumed rate of retum. An adjustment is then applied to recognize the difference between the actual

investment retum and expected return over a five year period. This preliminary actuarial value is not allowed todiffer from the market value of assets by more than l0%. The calculation of the actuarial value of assets as ofJanuary l, 207I is presented in Table V.

Table V

(1) Market value at January 1,2010(2) 2010 Contributions

(3) 2010 Payments

(4) Net interest adjustment at8.0% on (1), (2), and (3) to December 31, 2010

(5) Expected market value on January 1,2011(l)+(2)+(3)+(4)

(6) Actual market value on January 1,2011(7) 2010 (Gain) /Loss(8) 80% of 2010 (Gain) /Loss(9) 2009 (Gain) / Loss

(10) 60%.of 2009 (Gain) /Loss(11) 2008 (Gain) / Loss

(I2) 40% of 2008 (Gain) /Loss(13) 2007 (Gain) /Loss(14) 20% of2007 (Gain) /Loss

Actuarial value on January l,20ll, (6) + (8) + (10) + (12) + (14)

(15) but not less than 90%onor greater than 1 10% of(6)

(16) Ratio of actuarial value to market value

(17) Market Value Return for 2009

(18) Actuarial Value Retum for 2009

(19) Market Value Return for 2010

(20) Actuarial Value Retum for 2010

Januarv 1. 201 I$81,302,542

$11,841,029

($10,860,444)

$6,543,427

$88,826,555

$93,207,602($4,381,048)

($3,504,838)

($4,013,491)

($2,408,095)

932,877,440

s13,150,976

$1,491,1l1

$298,222

$1 00,743,868

108.09%

-26.2%

-19.8%

13.6%

13.6%

Town of Watertown Contributory Retirement System

Asset Values

100

90

80

70

60

50

40

30

20

U)

o-FIe6

Actuarial

-

Market

"sp ^Es "S "s" "S "F$ "$ "N,* "S "$ ^,s)

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Town of Watertown Contributory Retirement Systemas ofJanuary l,20ll

Primary Results Comparison - COLA Base at $14,000

Change as a

Percent

January 1, 2010 January 1, 201 1 (Annualized) FY 2013

ActivesRetirees and BeneficiariesInactives (Refunds)DisabledTotal

Total Payroll

Average Annual SalaryAverage Past ServiceAverage Attained Age

475350156

641,045

25,403,473

53,48112.047.0

50234314664

1,055

25,004,201

49,80912.646.9

s.7%-2.0%-6.4%0.0%1.0%

-t.6%

-6.9%

26,129,390

Employee Normal Cost% ofPayroll

Employer Normal Cost% ofPayroll

Administrative ExpenseYo ofPayroll

Total Normal Cost% of Pay'oll

2,1 80,1 I 6

8.6%

1,456,0085.7%

225,0000.9%

3,867,72415.2%

2,147,3708.6%

1,469,252s.9%

225,00009%

3,841,622ts.4%

-1.5%

0.9%

0.0%

-05%

2,265,7238.7%

7,513,647's.8%

235,1250.9%

4,074,495154%

Total Actuarial Accrued Liability

Assets - Market ValueAssets - Actuarial Value

Funded Ratio

Total Unfunded Accrued Liability

Expected Unfunded Accrued Liability

Impact of $14,000 COLA

Employer Normal CostUnfunded Accrued Liability

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P:UcrilWaldarrnvall I\P0ll httu$n Vdhdon_S 14.m0 COU lslFud;ng Alt

155,963,135

87,302,54289,432,797

s7.3%

66,530,338

160,604,947

93,207,602100,743,868

62.7%

59,861,079

64,721,797

3.0%

14.6%12.6%

9.4%

-10.0%

{t,@ t'

{l,AlLlBefore After Percent Change

@ =@E Lo%

58,504,501 59,861,079 23%

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02t09t1r


January l,20llAnalysis of Funding Alternatives - COLA Base at $14,000

FY 2012 FY 2013


OptionA-NotAvailableEmployer Normal CostTotal Unfunded Accrued Liabilities

Prior unfunded accrued liability11 years remaining as ofJanuary 1,2011 (2022)8.000% interest and 4.5Yo increasing payments

Unfunded liability for current (gain s)/losses1 5 years remaining as of January 1,2011 (2026)8.000% interest and 4.5%o increasing payments


If FY 2012 appropriation ttnchanged:

Option BEmployer Normal CostTotal Unfunded Accrued Liabilities

Total unfunded accrued liability10 years remaining as ofJanuary 1,2011 (2021)8.000% intercst and 4.5%o increasing payments

Total Required Employer Appropriationswith interest adjustment for the complete contribution on July l.As a percent of pay

If FY 20 I 2 appropriation mtch anged:

f J,JtT;sila3il[-J,.s-?t-,^sml34.0% 34.0%

a s,%-lun --sWr7l$1,694,252 $1,748.772

$59,861,079

64,721,797

(4,860,71 8)

$59,861,079

59,86 r,079

$8,965,0003s.9%

$1,694,252

6,ggg,g72

(403,990)

8,1 90,134

6,911,711

9,605,963

$9,335,89837.3%

$1,748,772

7,210,367

(422,170)

8,s36,969

7,222,738

8,971,5 1 IlT4l-ss-d-l l- e6,lr1l

3s.8% 35.7%

-s,w,oon --eln-546iil

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JanuarY 1,2011Analysis of Funding Alternatives - COLA Base at $14'000

FY 2012

Employer Appropriations under current funding schedule

As a percent ofpay

Option C

EmployerNormal Cost


Initial unfunded accrued liability

1l years remaining as ofJanuary 1,2011 (2022)

8.000% interest and 2.70% increasing payments


As a percent ofpay

If FY 2 0 I 2 appropriatio n unchanged:

Option D



Initial unfunded accrued liability

l2 years remaining as ofJanuary 1,2011 (2023)

8.000% interest and 1.0%o increasing payments


As a percent ofpay

If Fy 2 0 I 2 appropriation unchanged :

8,605,147 8,846,262

l-BplrJTll l-j- e,tr3ios I

6,910,895 7,097,489

35.8% 3s.2%

a--Wrooil Wnl

sl,694,252 sL,748,772

7,022,133 7,092,3s4

$8,965,0003s9%

$1,694,252

FY 2013

$9,335,89837.3%

sl,748,772

$59,861,079

59,861,019

$59,861,079

59,861,079

8,716,385 8,841,126

l- ,Jsrj3 I fj-tsZg6sl36.2% 35.2%

a w6lon1

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Pension Reformlnitiatives

Watertown Retlrementhard

May?3',mll

Pension Reform Update

t ln the 2009 -20t0 session, the Legislature enacted manysubstantive reforms to the Massachusetts publicpension laws

* For the current }OLL -20L2 legislative session, furtherchanges have been proposed which, if adopted, willsignificantly change the retirement laws

$ Most, but not all, of these changes are prospective,impacting new members entering the retirement systemafter the effective date of the legislation

ChapterzLof the Acts of 2009

Effective July L,2009, this law:

T Eliminated termination retirement allowances for electedofficials

Eliminated one day for one year of service for electedofficia ls

S Required elected officials to serve at least ten years priorto becoming vested in the pension system

Chapter2L of the Acts of 2009

* Redefined the compensation to be used in pensionca lcu lations

* Prohibited creditable service for officials andemployees earning under 55,000

* Changed the retirement calculation for employeeswith dual service in separate pension systems

* Eliminated "working out of grade" disabilityca lcu lations

Chapter L31 of the Acts of 20L0

rcorporated as outside sections of the 2OtO State Budget Act,Chapter 131 of the Acts of 2010:

) Capped pensionable compensation (not overall earnings) fornew members entering the retirement system after Januaryt,2OLLto 640/o of the annual pension earnings limitationimposed under federal law

) Federal limitation, which is indexed annually, is currently setat 5245,000. Had the cap been in effect today, a maximumretirement benefit of 5125,440 would be established: 80%of 64% of s245,000 = s125,440

Chapter L3I of the Acts of 2010

* lncreased the interest rate to 3% on refunds ofretirement deductions for employees leaving theretirement system with less than 10 years of service

t Allowed for a local option to increase the minimumallowance paid to surviving spouses of disabled retireesfrom 56,000 to S9,ooo

* Sought to clarify the status of clothing and uniformallowances as pensionable compensation, and preventedmodifications of pensions already granted where clothingallowances had been included

Chapter L3L of the Acts of 20L0

$ Allowed employers' health insurance contributions foremployees retiring after January t,20It to beprorated among prior public employers

Chapter 188 of the Acts of 20L0

The Municipal Relief Act, effective July 27,2010:

I Extended the requirement for retirement systems to befully funded to 2O4O

$ Allowed a local option to increase the S1Z,OOO currentbase amount of the annual cost-of living adjustment forretirees

t Provided a 3 year Early Retirement lncentive program formunicipal employees (not widely adopted)

Governor Patrick's Proposa ls

House Bill No.35

* lncreases the Minimum Age of Retirement from 55 to60 for Group L Members (General) and from 45 to 50for Group 4 Employees (Public Safety)

* lncreases the Maximum Benefit Age to 67 for Group IEmployees and to 57 for Group 4 Employees

* lncreases from Highest 3 Years to 5 Years the AverageCompensation for Retirement Calculations

Governor Patrick's Proposa ls

House Bill No.35

* Prorates Benefits Based On Number of Years ln EachGroup (Would Apply to Existing Members)

I Limits Annual lncreases On Pensionable Compensationin the 2 Years preceding retirementtoT% + CPI

(Would Apply to Existing Members)

tr Eliminates Enhanced Termination RetirementAllowances (Would Apply to Existing Members)

watertown ma 11-05-24 budget finance office committee report

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