Form revised: May 6, 2011
2012 BUDGET LEGISLATION FISCAL NOTE
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Department: |
Contact Person/Phone: |
CBO Analyst/Phone: |
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Legislative |
John McCoy 5-0768 |
Greg Hill 4-8049 |
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Legislation Title: A RESOLUTION affirming the City’s intent to fully fund its required contributions to the Seattle City Employees’ Retirement System (SCERS).
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Summary of the Legislation: This resolution affirms the City’s commitment to pay all actuarially required amounts into SCERS, the City’s defined benefit pension system for non-uniformed employees. It clarifies how the City intends to meet its obligations to pay actuarially required amounts per Seattle Municipal Code section 4.36.110.C, specifying a five-year smoothed asset valuation method, a 30-year amortization period, and other key actuarial assumptions.
Background: In 2008, SCERS, like most public pension plans, suffered significant financial losses to its investment portfolio, due to the market crises and resulting recession. The losses created a long-term imbalance in funding, though there is no danger that SCERS will run out of money to pay benefits in the short to medium term since it still has more than $1.8 billion in assets remaining. Like many public employers, the City of Seattle raised contribution rates for itself and for employees in 2011 and 2012 to improve SCERS’ financial position and begin the process of amortizing the system’s unfunded liabilities.
The SCERS Board of Administration reviewed its actuarial assumptions and methods in 2011 and adopted the policy of smoothing out investment performance over five years, which is the most common practice in public pension plans. Previously, SCERS marked its assets to market each year for funding purposes. Smoothing has the benefit of mitigating purely transitory volatility in asset prices. It also generates a natural, gradual multi-year path for contribution changes in response to significant changes to asset values. The Board also adopted new economic and demographic assumptions, which affected its estimates of system liabilities and required contributions slightly.
The City had previously employed an ad hoc system of gradualism in making contribution rate changes, rising from 16.06% of regular payroll in 2009 to 18.06% in 2010 and 20.06% in 2011. The City always intended for its contribution rate to rise still further in subsequent years, based on updated actuarial estimates and future investment performance. This resolution sets a more structured gradualism policy that meshes with the Board’s recent policy actions. Specifically, the City will base its contribution rate on a five-year smoothed asset valuation and a 30-year amortization period. The resolution also affirms that the 2012 Budget will appropriate a total of 21.04% of regular payroll for SCERS (10.03% from employees and 11.01% from the City), which is higher than the rate previously legislated and equal to the required contribution rate for 2012. Further increases to the contribution rate are expected in 2013 and 2014, as the effects of 2008 are fully phased into the asset valuation. This resolution commits the City to fully fund those higher contributions in future budgets.
Please check one of the following:
____ This legislation does not have any financial implications.
_X _ This legislation has financial implications.
See Attachment 2 for expenditure projections.
Other Implications:
a)
Does the legislation have indirect financial implications, or
long-term implications?
Yes. See Attachment 2.
b)
What is the financial cost of not implementing this
legislation? Costs would depend on what actions the City took absent this
contribution policy. An ad hoc gradualism policy for contribution
increases may have roughly the same costs. Failure to raise contribution rates
would result in higher contribution rates later. Rating agencies may also see
the failure to raise rates further as a sign of financial stress and downgrade
the City’s credit rating, leading to higher debt-service costs.
c)
Does this legislation affect any departments besides the
originating department?
Yes. All City departments with employees who are in SCERS are affected by these
costs.
d) What are the possible alternatives to the legislation that could achieve the same or similar objectives? The City could continue its ad hoc contribution gradualism policy, but there would not be a specific actuarial basis for the contribution rate in any given year, and that policy may be more difficult to explain to outside evaluators, such as bond rating agencies. Alternately, the City could immediately raise contributions to the ultimate 30-year amortization rate, but this would require additional budget cuts, revenue increases, or both.
e) Is the legislation subject to public hearing requirements? No
f) Other Issues:
Please list attachments to the fiscal note below:
Attachment 1 – October 12, 2012 Cost Update Letter from Milliman Actuaries
Attachment 2 – Fiscal Impact of Increased Retirement Contributions
Fiscal Impact of Increased Retirement Contributions
Under the proposed funding policy, the actuarially required contributions to the Seattle City Employees’ Retirement System (SCERS) are slated to increase to 23.41% of regular (non-overtime) payroll by 2014 before declining slightly (see Attachment 1, p. 3). At an employee contribution of 10.03%, that leaves a City share as shown in the first shaded column of the table below.
Table 1 – Employer Contributions per Current Policy and
Per Updated 2011 Actuarial Projections
Raising the City’s contributions above the previously legislated rate of 10.03% will cost an additional $20.6 million in annual City appropriations to SCERS by 2014. This cost is split between the City’s General Subfund and its other funds such as Seattle City Light and Seattle Public Utilities, which have large shares of SCERS membership. Contributions, once raised, will remain in place indefinitely, as these rates are designed to amortize SCERS’ unfunded liabilities over 30 years.
Estimation Note: The covered payroll series in the above analysis is estimated from part-year 2011 actuals and then trended forward by payroll growth in the 2012 Proposed Budget. After that, the series is consistent with SCERS’ actuarial assumptions for wage and membership growth. Because of this, it may not agree with City Budget Office projections for these same years. As noted in Attachment 1, these rates will vary with investment performance. Returns above the 7.75% assumption will tend to lower the required contribution rate, while returns below that level will tend to raise it.