It’s a Finance Life for Me
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March 8, 2016
The California Society of Municipal Finance Officer’s conference this year was held in Anaheim at the Disneyland Hotel. About a mile or so away, hundreds of Disneyland guests rode the Pirates of the Caribbean ride, so fittingly, the conference’s organizers selected “It’s a Finance Life for Me?” as the conference theme. (While reading this column, listen to the famous song and substitute “Finance” for the word “Pirate’s”. Click here for audio.)
But instead of boarding pirate ships, waging epic cannon battles, and digging up buried treasure, we attended workshops on pensions, OPEB, and reading actuarial statements. Many of us shared stories about pension and OPEB reforms we had implemented. I would like to share mine with you today.
As part of a comprehensive labor cost reform package negotiated with our bargaining units, we closed our original defined benefit pension tier to new entrants and created two new tiers with lower benefits and costs. One was a tier for employees with previous experience in the state’s PERS; the other was an even lower tier for employees with no experience in the State’s PERS.
Over the next three years, this move alone saved the city over $120,000!
And we saved elsewhere too. Legacy employees still in the original defined pension tier agreed to pay the employer’s premium for the enhanced benefit of using one single highest year of compensation (instead of the typical three-year average compensation) when calculating the pension annuity for a retiree. This saved us $110,000.
Finally, the City adopted a Section 115 trust (similar to an OPEB irrevocable trust fund) to pre-fund pension liabilities. The benefits derived from this separate retirement funding trust included:
- Pension Rate Volatility Risk Mitigation – Annually budget and pre-fund the Section 115 trust with the employer unfunded actuarial liability (UAL) Contribution calculated at a 2.8% Investment Return Scenario instead of the assumed 7.5% Investment Return (Discount Rate)
- Pension Market Volatility Risk Mitigation – Use the Section 115 Trust to pay the actual annual UAL payment and invest the accumulated excess funds in lower yielding investments as a hedge against PERS’ 7.5% targeted investment return.
We also enacted the following OPEB reforms through negotiations with our bargaining units:
- Replace Defined Benefit (DB)-OPEB for current employees with three years or less service with Defined Contribution (DC)-OPEB.
- Offer a one-time option to all employees with more than three years of service to opt out of DB-OPEB and replace with DC-OPEB.
- Eliminate total medical benefits OPEB for all future employees.
These reforms resulted in a totally closed pool for medical retiree health care benefits for all labor groups and reduced the actuarially liability by $1,000,000 and the annual OPEB normal cost by $350,000.
The following graphs depict the dramatic impact of this OPEB reform:
Figure 1. Normal cost is eliminated within 30 years
Figure 2. Pay-Go portion is capped and is eliminated when everyone actuarially dies
Figure 3. AAL is eliminated at end of retirees’ life expectancy
The final night of the conference, park officials opened Disneyland after hours for just the Finance Directors at the conference! We took a break from GASB 68, drank some grog, and talked like pirates.
I’ll close this article with a paraphrased quote from the most famous pirate of all, Captain Jack Sparrow:
The only rules that really matter are these: what a Finance Director can do and what a Finance Director can’t do. For instance, you can accept that your father was a Finance Director and a good man or you can’t. But being a Finance Director is in your blood, boy, so you’ll have to square with that someday. And me, for example, I can let you drown in red ink, but I can’t bring this city into financial resiliency all by me onesies, savvy? So, can you sail under the command of a Finance Director’s desk, or can you not?
Charlie Francis is a municipal finance expert. He has more than forty years of local government financial management experience in both the public and private sector, including twenty years of experience as a Chief Financial Officer. Most recently, he served as the Director of Administrative Services and Treasurer for the City of Sausalito where he earned the unofficial title of “OpenGov super user”. He has also served as a finance manager for the Town of Colma, CA and as CFO and acting City Manager for the Cities of Indian Wells, CA and Tracy, CA.
Category: Government Finance