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HomeMy Public PortalAbout07-17-2012 unfunded pension liability TOWN OF 1630 WATERTOWN Office of the Torun Manager Administration Building 149 Main Street Watertown,MA 02472 Plione:617-972-6465 Michael J. Driscoll Fax:617-972-6404 Town Manager wwtv.watertown-ma.gov town merCkvatertowu-uia.¢ov To: Honorable Town Council From: Michael J. Driscoll, Town Manager Date: July 12, 2012 RE: Agenda Item—Establishment of Unfunded Pension Liability Paydown Stabilization Fund; and an Initial Transfer of Funds Thereto As you are aware, as indicated in the Fiscal Year 2013 Budget Message dated April 24, 2012, as of January 1, 2011 the Unfunded Pension Liability of the Retirement System is $58,504,501. For comparison purposes, as of January 1, 2008 the Unfunded Pension Liability was $43,511,304, therefore the Unfunded Pension Liability increased by$14,993,197 in the last three calendar years. Item IC of the Financial Policies section of the Council's Budget Policy Guidelines is related to Pension Liability and Other Post Employment Benefits and reads in part as follows: In order to achieve long term financial stability, meet the Town's obligations to its employees and retirees, and maintain favorable bond ratings, the Council, the Retirement Board and Town Manager will work to address the Town's unfunded pension liability and other post-employment benefits (OPEB). Given the size of the unfunded pension liability and the above mentioned Budget Policy Guideline, annual finding of an Unfunded Pension Liability Paydown account should be implemented and $250,000 was recommended in the Submitted Fiscal Year 2013 Budget and subsequently approved by the Honorable Town Council at the June 12, 2012 Town Council Meeting. In an effort to continue the annual appropriation of $250,000 to the Unfunded Pension Liability Paydown Account, I respectfully request the attached resolution establishing the Unfunded Pension Liability Paydown Stabilization Fund be placed on the July 17, 2012 Town Council Agenda. For background purposes on the establishment of Special Purpose Stabilization Funds, enclosed please find a copy of the August 2008 City and Town article and the Informational Guideline Release (IGR) 04-201 regarding Creation of Multiple Stabilization Funds from the Department of Revenue. Additionally, I respectfully request an initial transfer of funds to the Unfunded Pension Liability Paydown Stabilization Fund. Monies are available to be transferred from various health insurance accounts as a result of employees/retirees migrating to less expensive plans during open enrollment; positions not being filled during Fiscal Year 2012; and new hires predominantly selecting individual plans instead of family plans. Therefore, in order to begin the annual transfer of $250,000 from the Unfunded Pension Liability Paydown Stabilization Fund in Fiscal Year 2014 and continue through Fiscal Year 2016 in an effort to address the Town's unfunded pension liability, I respectfully request the attached transfer be considered at the July 17, 2012 Town Council Meeting. Thank you for your consideration in this matter. cc: Honorable School Committee Honorable Library Board of Trustees Watertown Contributory Retirement Board All Department Heads RESOLUTION# R-2012- WHEREAS, the Unfunded Pension Liability of the Watertown Contributory Retirement System is $58,504,501 as of January 1, 2011; and WHEREAS, the Unfunded Other Post Employment Benefits (OPEB) Liability is $154,097,543 as of July 1, 2011; and WHEREAS, Item IC of the Financial Policies section of the Council's Budget Policy Guidelines is related to Pension Liability and Other Post Employment Benefits and reads in part as follows: In order to achieve long term financial stability, meet the Town's obligations to its employees and retirees, and maintain favorable bond ratings, the Council, the Retirement Board and Town Manager will work to address the Town's unfunded pension liability and other post-employment benefits (OPEB); and WHEREAS, pursuant to the provisions of G.L. c. 40, § 513, the Town may establish a special purpose stabilization fund by a two-thirds vote of the Town Council. NOW THEREFORE, BE IT RESOLVED that the Town Council of the City known as the Town of Watertown hereby establishes the Unfunded Pension Liability Paydown Stabilization Fund in an effort to address the Town's unfunded pension liability and appropriates thereto the sum of$750,000 from various Fiscal Year 2012 Health Insurance accounts. Council Member I hereby certify that at a regular meeting of the Town Council for which a quorum was present, the above Resolution was adopted by a vote of for, against and present on July 17, 2012. Valerie Papas Mark S. Sideris Council Clerk Council President TRANSFER AMOUNT $750,000 FROM: FY 12 TOWN GROUP HEALTH INSURANCE $ 150,000 0191200-510180 FY 12 SCHOOL GROUP HEALTH INSURANCE $ 300,000 0191200-510181 FY 12 RETIREE GROUP HEALTH INSURANCE $ 300,000 0191200-510182 TO: FY 12 TRANSFER TO UNFUNDED PENSION LIAB. STABILIZATION FUND $ 750,000 0194000-596804 1 hereby certify to the availability, authority of funding source, mathematical accuracy and appropriate fiscal year. 711U112, DATE TOWN AUDIT , ■ Navleet K.Sal,Commissioner•Robert G.Nunes,Deputy Comissioner&Director of Municipal Affairs cit Yj ` I P, and __ A Publi�atio ,pf the tyl�ssagisclse(ts©sp�rimenL4f„ t_evenues dmton o J oc Seivfees Volume 21,No.7 August 2008 Special Purpose Stabilization Funds: 0MUMMOMMOM A Long-Term Planning Tool DLS Commentary Three proposals of interest to municipalities pushed doe Markarian,Director of Technical Assistance,Municipal Data Management through the legislature at the last and Technical Assistance Bureau moment of their two-year session: The 1945 statute that initially author- and retain interest earned. In the past, expanded intermunicipal agreements, ized cities and towns to establish a sta- municipalities would need state ap- a municipal spending commission, bilization fund restricted the use of any proval of special legislation to set up and broadband funds for unserved fund balance to capital expenditures. such a reserve. communities . . .. ..... ............2 In 1991,permitted uses were expanded A special purpose stabilization fund: Best Practices Wellesley uses a to Include any lawful purpose, but still dashboard to stay on track with financial funds could not be reserved for a spe- • Encourages a community to think planning efforts and keep all parties cific purpose. However with the adop- long-term. Programs to replace vehi- informed with real-time information . . .2 tion of legislative amendments to M.G.L. cles, maintain buildings and improve Ch.40§56 in 2003,municipalities can roads require an evaluation of all assets, Legal Somerville mayor takes the right now create multiple special purpose formulation of a replacement or repair to appoint all the way to the Mass- stabilization funds.Each of these funds schedule,and calculation of long-term achusetts Supreme Judicial Court can be assigned a different purpose projected costs. and wins .... ... .. ... .. ..........3 allowing municipalities to take advan- Helps a community save money. Focus A 10-year look at Proposition 2'/z Inge of a new management and fund- Rather than pay cash, if the $400,000 overrides.Are override approvals in flu- Ing option. purchase price of afire truck were bor- enced by community size,properly As a result, at a time when many cities rowed over 15 years,interest payments wealth and the number of public and towns are faulted for operating in could add around$150,000 to the total school children? .............. . . . .4 perpetual crisis mode,for allowing mu- cost,depending on Interest rates.Even The Community Preservation nicipal assets to deteriorate, and for If this additional cost would have a Act's reporting Form CP-2 gets an general short-sightedness, a special nominal tax rate impact, it can Instead update that promises to make the form purpose stabilization fund can be an be saved or expended elsewhere. easier to complete . .. .. . . ... . . ... 11 effective planning tool. Helps a community manage debt.A Mark your calendars for upcoming A fund might be established, for in- plan to accumulate cash over time and training classes. . . .... . .""" " ' 12 stance, to pay solely for the mainte- pay outright for a moderate-range cap- nance and repair of municipal build- ital expenditure helps preserve debt Prof ile Senior Deputy Commissioner ings. Another might be created to capacity for major, high-dollar pur- James Reynolds celebrates 30 years supplement state highway funds, re- chases or projects. An approach that with the Department of Revenue and ceived under Chapter 90,and to cover balances debt with pay-as-you-go talks about his work along the way. .. 13 the cost of an ongoing street improve- practices,and protects against unfore- Municipal Fiscal Calendar ment program. A special purpose sta- seen costs is viewed in a positive light September-October . .. .. .. .. . .. . 14 bilization fund might also be set up to by credit rating agencies. finance a government-wide vehicle re- placement program. For example, if a • Builds resident confidence in gov- community anticipated the need to ernment. Special purpose stabilization purchase a $400,000 fire truck in five funds directly address resident con- years, it could reserve $80,000 a year cerns and provide assurance that ¢�I@4'h rf+ Ptir itl� (it(i F ��I �y� �`I API, in a special purpose stabilization fund, continued on page 9 i � I r lil'tk City&Town•August 2008 Division of local services•www.mass.govldls 9 Special Purpose Stabilization Funds continued from page money appropriated for a particular a capital project stabilization fund in Ultimately,special purpose stabilization purpose will be used for that purpose FY2008 and town meeting votes to cre- funds are most effective as a revenue and will not be diverted. ate the fund and appropriate$100,000 source, or savings account, for antici- Creation of a special purpose stabiliza- to it. In FY2009, $102,500 (1.025 x pated expenditures. They work best tion fund, and an appropriation to that $100,000, 1.025 being 2.5 percent of when used to build moderate balances fund, requires two-thirds vote of a city the original override amount) is avail- and to pay mid-level expenditures that council, town meeting or district pru- able for"appropriation"and that entire the community will eventually have to dential(or similar)committee.The vote r,:,, a,k �,;1;, make, like building maintenance, road at, rl� must clearly define the purpose of each t repairs and vehicle purchases. fund established. Under the amended Building stabilization balances through law, creating and appropriating to a an override unquestionably Involves an' general stabilization fund now also re- increase to the tax levy,but special pur- quires two-thirds vote. pose stabilization funds provide an im- There are two options for building bat- portant response to residents concerns There in a special purpose stabiliz - about the absence of long-term plan- ning in municipal government. If consid- tion fund. One is the traditional appro- ered thoughtfully and Implemented pru- priation In a budget line-item, or in an dently,they offer a vehicle that can help article, from within the levy or from other general fund revenues.Balances a community think and act in a foreword can also be transferred In from other looking manner,and effectively plan for existing accounts. future costs. For more information, please see the A second new funding option is re- DOR Information Guideline Release ferred to as an override, but in fact, has characteristics of both a Proposi- (IGR)LS; we which is accessible from tion 2%override and exclusion.Like an the DLS wck on. Go to inkswww more) ov dls, click on Quick Links (more) override,additional tax revenue can be and then the Information Guideline Re- raised year-after-year without town- ' wide or city-wide referendum votes be- yond the year of inception. However, l like an exclusion under Proposition 2%, the levy limit increase need not be per- amount is"appropriated." For FY2010, manent.Solely through the action each $105,062 (1.025 x $102,500) is avail- year of the selectmen,or city council, it p r tR, ro can be continued, lowered or deferred able,but onlyavaila l is"appropriated." entirely and resumed in a later year. In The amount available in Fx $80, now any event,each year,the amount avail- becomes selectm$82,000en (1.025 x $make no able increases by 2.5 percent. but the selectmen choose to make no appropriation. The amount available In For example, let's say that the town's FY2012 is$82,000(1.025 x last appro- voters approve a$100,000 override for priation made, i.e.,$80,000). Informational Guideline Release (IGR) No. 04-201 January 2004 CREATION OF MULTIPLE STABILIZATION FUNDS, AND PROPOSITION 21/2 OVERRIDES FOR STABILIZATION FUNDS, Chapter 46§§14 and 50 and Chapter 140§§19 and 137 of the Acts of 2003 (Amending G.L.Ch.40§5B and Ch. 59§21C(g)) SUMMARY: These guidelines explain new legislation that gives cities, towns and districts the flexibility to create multiple stabilization funds for different purposes. The legislation amends G.L. Ch. 40 §5B, which previously provided for a single stabilization fund into which cities, towns and districts could appropriate monies to be reserved for future appropriation for any lawful purpose, Under the amendment, a community may now establish one or more stabilization funds for different purposes by a two-thirds vote of its legislative body. It may amend the purposes of those funds at a later time in the same manner. Appropriations both into and from the funds require a two-thirds vote of the legislative body. Previously, appropriations to the stabilization fund only required a majority vote. Interest earned on all stabilization funds remains with the funds. The interest provision had been inadvertently omitted when the statute was amended, but it was restored by a recent technical amendment and applies retroactively. Ch. 140§§19 and 137 of the Acts of 2003. In addition, a new paragraph has been included in G.L, Ch. 59 §21C(g), which authorizes a property tax levy limit override under Proposition 21/2. Under this new provision, a city or town that has an override approved by its voters for the purpose of making appropriations to any stabilization fund must now allocate or dedicate the additional levy capacity resulting from that override to the same purpose in subsequent years. Ordinarily, monies from an override are only earmarked for the stated purpose in the fiscal year the override is effective. Two-thirds of the selectmen, town council or city council, with the mayor's approval if required by law, must vote to "appropriate" the additional capacity for the same stabilization fund purpose each year after the override,takes effect. If "appropriated," the assessors must raise the amount in the tax rate and the municipality's levy limit is increased accordingly for that year. Voters may approve a change in the purpose for which the additional levy capacity can be used in future years, Approval of any change is by majority vote at a referendum. These changes became effective Iuly 31, 2003. They apply to any appropriation voted and levy limit override approved for a stabilization fund after that date. PROPERTY TAX BUREAU DANIEL J. MURPHY, CHIEF -2- GUIDELINES: I. MULTIPLE STABILIZATION FUNDS A. Creation of Funds Stabilization funds may be created for one or more different purposes. G.L. Ch. 40 §5B. A fund may be created for a broad category of spending purposes,e.g., any lawful purpose, capital budget purposes or purposes for which the community may borrow money. It may also be created for a specific purpose or project, e.g., acquire a new fine truck or undertake a particular school construction project. Creation of a fund requires a two-thirds vote of the legislative body of the city, town or district. The vote must clearlv define the purpose(s) of the fund. B. Pre-existing Fund Any pre-existing stabilization fund balance should continue to be treated as a reserve for any lawful purpose, i.e. a "general' stabilization fund. The city, town or district can reallocate or earmark all or part of that balance to any new stabilization funds it creates by a vote to transfer monies from that "general" stabilization fund to the newly created fund. See Section I-D below. C. Chanaina Fund Purvose The purpose of a stabilization fund may be changed at any later time by a two- thirds vote of the legislative body. For example, if a community had established a fund in order to reserve monies to acquire a new fire truck and a balance remains after the purchase, the legislative body could vote to change the purpose to meet some new savings objective. If a Proposition 2r/2.levy limit override was approved for the purpose of funding the particular stabilization fund, however, the city or town must also follow the referendum procedure explained in Section II-C below to be able to change the fund purpose and then continue using the additional levy capacity resulting from that override in future years. D. Avvrorriations and Transfers Appropriations into and from any stabilization fund require a two-thirds vote of the legislative body. -3- Monies may also be transferred from one stabilization fund to another by two- thirds vote. If the monies in the fund from which the transfer is made could not be appropriated directly for the purpose of the fund receiving the transfer, e.g., a transfer of $50,000 from a fund for a particular school construction project to a fund to construct a new senior center, the vote also serves as a change in purpose to the extent of the amount appropriated. E. Investment and Interest The treasurer may invest stabilization funds in national, savings or cooperative banks, Massachusetts trust companies, federal savings and loans associations located in Massachusetts or securities that are legal investments for savings banks under Massachusetts law. All interest earned on the investment of stabilization funds belongs to the funds. The treasurer may pool monies from all stabilization funds for investment purposes, but the accounting officer must account for them separately in the general ledger and allocate interest earned on the pooled monies proportionately to each stabilization fund. F. Limits on Funds 1. Annual Appropriations Total annual appropriations to all stabilization funds are limited to 10 percent of the prior year's tax levy. This includes "appropriations" of additional levy capacity resulting from Proposition 2r/2 overrides approved for the funds. See Section II-B below. The limit on total appropriations may be exceeded with approval of the Director of Accounts. 2. Balance The total of all stabilization fund balances cannot exceed 10 percent of a community's equalized valuation. II. STABILIZATION FUND OVERRIDES A. Presentation and Approval of Override Referendum Cities and towns may ask voters to approve a Proposition 2r/2 levy limit override referendum for the purpose of funding. any of the stabilization funds it establishes. -4- If approved, the additional levy capacity is earmarked for the same stabilization fund in the fiscal year the override is effective and subsequent years. G.L. Ch. 59 §21C(g). Therefore, the amount of any override for a stabilization fund must be clearly identified, preferably by presenting a separate override question for each stabilization fund being funded. For example: Shall the cif town of be allowed to assess an additional $100,000 in real estate and personal property taxes for the purposes of funding the municipal capital stabilization fund for the fiscal year beginning July 1, ? Shall the city/town of be allowed to assess an additional $100,000 in real estate and personal property taxes for the purposes of funding the school capital stabilization fund for the fiscal year beginning July 1,_? If the amount is included in an override for multiple purposes, however, the exact amount allocated to the particular stabilization fund must be stated. For example: Shall the city/town of be allowed to assess an additional $L000,000 in real estate and personal property taxes for the purposes of funding the town and school operating budgets, the municipal capital stabilization fund ($100,000) and the school capital stabilization fund ($100,000) for the fiscal year begirulhlg July 1,_? B. Appropriation of Override in Future Years 1. Annual Appropriation Procedure In the year the override is effective, the appropriation of the funds generated by the override to the particular fund is made by the usual appropriation procedure, i.e., a two-thirds vote of the legislative body, Each year thereafter,however, the selectmen, town council or city council, with the mayor's approval if required by law, must decide whether to "appropriate" any of the additional capacity resulting from the override for the same stabilization fund purpose. A two-thirds vote is required to make any"appropriation". -5- 2. Appropriation Amount All or some of the additional levy capacity may be "appropriated." In the first year after the override is effective, the additional levy capacity that may be appropriated is 102.5 percent of the override amount. In subsequent years, it is 102.5 percent of the amount of additional levy capacity appropriated in the last year it was appropriated. For example, a $100,000 override is approved for a school capital project stabilization fund for fiscal year 2005 and the legislative body appropriates the same amount from that year's tax levy for that purpose. In FY2006,$102,500 is available for "appropriation"by the selectmen, town council or city council,with the mayor's approval if required by law. That entire amount is "appropriated." In FY2007, $105,062 (1.025 x FY2006 appropriation of$102,500) is available, but only $80,000 is "appropriated," The amount available in FY2008 now becomes $82,000 (1.025 x FY2007 appropriation of$80,000). No appropriation is made hi FY2008, however. The amount available in FY2009 is $82,000 (1.025 x last appropriation made, i.e.,FY2007 appropriation of$80,000). 3. .Tax Rate The assessors must raise the amount "appropriated" in the tax rate. This "appropriation" is reported on_page two of the tax rate recapitulation under "Other Amounts to Be Raised" and documented by a certified copy of the "appropriation" vote, as explained in the annual tax rate recapitulation instructions issued by the Bureau of Accounts. 4. Lew Lit-nit Calculation The municipality s levy limit for any year is increased by the amount of additional levy capacity that is appropriated for the stabilization fund purpose. The new limit must still be within overall levy ceiling of 21/2 percent of the full and fair cash value of taxable property. C. Change in Override Purpose 1. Presenting Referendum The selectmen, town council or city council, with the mayor's approval if required by law, may ask the voters to approve a change in the purpose of the override. This change can result in the additional levy capacity being allocated to another stabilization fund or to any other municipal purpose. A two-thirds vote is required to place the referendum before the voters. -6- 2. Referendum Form The following question form should be used to present a referendum to change the override purpose: Shall the city/town of be allowed to change the purpose of a Proposition 21/2 override referendum approved at an election held on for the (capital stabilization fund) to the following new purpose(s): for the fiscal year beginning July 1,_? 3. Referendum Approval The referendum is approved if a majority of those voting on the question vote"yes." 4. Appropriation in Future Years If the purpose of the override is changed to another stabilization fund, or other purpose, the additional levy capacity would have to be "appropriated" to the new purpose each year or the levy limit would be reduced. See Section II-13 above.