Mayor Miro Weinberger, City Councilors + Other Officials Announce Progress Stabilizing & Reforming the City’s Retirement System

FOR IMMEDIATE RELEASE

August 31, 2016
Contact:  Katie Vane
                  802.734.0617

 

Mayor Miro Weinberger, City Councilors + Other Officials Announce Progress Stabilizing & Reforming the City’s Retirement System
Series of changes have already resulted in two tax cuts; Projected to save taxpayers & ratepayers approximately $8 million dollars versus pre-reform models through 2020; System on more stable footing for future though challenges remain

 

Burlington, VT: Mayor Miro Weinberger was joined today by City Councilors, members of the City’s Retirement Committee, Burlington Employee Retirement System (BERS) Board, union representatives, and community members for an announcement that, after more than a decade of dramatic increases in City payments to the City’s retirement system even as its funded ratio fell, the system’s stakeholders have jointly implemented a set of reforms that have already resulted in significant savings for taxpayers and ratepayers and put the system on more stable footing. 

This outcome is the product of three years of work to increase trust among union representatives, non-union employees, the Administration, BERS Board, and City Council – each of whom have worked diligently to identify the root causes of the rising cost of the retirement system – and to implement appropriate steps to strengthen the system.  The reforms included employee benefit changes that were negotiated with all four public employee unions – the final contract was signed with the Burlington Police Officers Association on August 29 – as well as significant changes in the way the BERS Board administers the retirement fund and how it invests the system’s assets (detailed below).  The major accomplishments of the reforms to date include:

  • Following a period in which City payments into BERS rose from about $1 million a year to $9 million a year between fiscal year FY03 to FY15, City payments have remained essentially flat for three annual payments in a row, making possible modest municipal property tax cuts in each of the last two years.
     
  • City taxpayers and ratepayers are projected to save approximately $8 million in payments through 2020 relative to pre-reform projections.  A Burlington household owning a home with median home value of $231,500 will save approximately $140 as a result of these changes by the end of the current tax year in June, 2017, and is projected to save an additional total of $370 over the next three years (current and projected savings are illustrated in Exhibit A, City’s Annual Contribution Trend Line).
     
  • These projected City payment savings do not include investment fund expense reductions of approximately $600,000 annually.  Expense savings are significant because they represent funds that stay invested and enjoy compounding growth each subsequent year.  If these annual savings are sustained in future years and reinvested, the fund projects to increase by between $35 and $40 million over the next 30 years as a result of this change (see Exhibit B, Impact on Retirement Fund of Annual Expense Savings).
     
  • The system’s funded ratio has also improved, reversing the trend of the prior decade.  After dropping from 115 percent funded in FY00 to 69 percent in FY15, the retirement system is now funded at approximately 74 percent.  The improvement is significant, as the funding percentage is an important indicator of the system’s health – a system funding percentage below 80 percent is widely considered to have fallen below a concerning threshold.
     
  • Going forward, future City payment projections should be more in line with actual experience because the system is now using updated, modern projections about expected lifespans for system retirees.
     
  • City employees are now sharing the risk of inflation, rising benefit costs, and investment return rates for the first time.  Through contract negotiations, all four bargaining units agreed to employee risk-sharing provisions that call for automatic increases in employee contributions when the system fails to meet projections.  In FY17, the City payment would have been $109,503 higher without this provision.

“Our financial progress as a city continues,” said Mayor Miro Weinberger. “Through a broad, multi-pronged reform of the pension system, we have stopped the dramatic growth in City payments, achieved two years of immediate tax cuts, and put the system on more stable footing for the long term. This work took the patience and sustained effort of everyone involved over the last three years, and built on progress made in earlier reform efforts in 2006 and 2009.  I am grateful for the partnership of the City Council, the BERS board, our public employee unions and non-union employees, and the City’s outstanding senior management in this critical work.”

Background: At the Start of the New Administration in 2012, BERS Faced Serious Challenges

As a result of a variety of both national factors and issues unique to Burlington, BERS has experienced serious challenges since the beginning of the century.  The City attempted to address these challenges in collective bargaining rounds in 2006 and 2009, however at the beginning of the new administration in 2012, City payments were continuing to increase sharply and the plan’s funded ratio was dropping.     

In response, the City Administration held a summit with public employee representatives and national experts in November 2013, and created a Retirement Committee to review the situation and make recommendations on the path forward.  Thus began a year-long study resulting in a summary paper released in late 2014 (see Exhibit C, Retirement Committee Summary Paper).  Major findings of that report included:

  • The relative funding level of BERS had deteriorated more substantially than the national average from 2001 to 2013 (38 percent reduction in funding percentage versus 28 percent). 
     
  • Relative to employees, the City was bearing a disproportionate share of inflation, market and mortality risk.
     
  • BERS was out of line with national norms, resulting in the City paying approximately 80 percent of all pension contributions versus a national average of approximately 70 percent.
     
  • The BERS actuary was using a combination of factors that front-loaded taxpayer and ratepayer costs.
     
  • BERS was paying substantial active management investment fees and had underperformed relative to the market for a number of years.
     
  • The BERS actuary was using previous assumptions about life expectancy, making future funding shortfalls likely.
     

City Pursued and Implemented Three Broad Reform Strategies

Following the year of study, the Administration, City Council and BERS Board pursued three broad reform strategies: holding steady taxpayer contributions, increasing employee risk sharing, making changes to the BERS administration, and pursuing a new investment strategy:

Increased employee contribution + risk sharing – The City negotiated four-year contracts (FY15 through FY18) with all four public employee unions that included pension terms that increased employee contributions and risk-sharing.  All four contracts concluded without resorting to mediation or arbitration, including the Burlington Police Officers Association contract, which was signed on August 29, 2016.  Major provisions of the contracts included:

  • Increased contributions.  Over the course of the contract, public safety employee contributions rise from 10.8 percent to 11 percent, and all other employees will increase their contributions from 3 percent to 4.2 percent.  
  • Clear triggers for additional contributions.  In recognition of steep taxpayer and ratepayer payment increases from 2000 to 2015, all four bargaining units agreed that if the City’s FY17 and/or FY18 required contribution were to be more than $9M, then the employees would contribute more for that year.  In FY17 the contribution amount is over $9.1M, so employees will contribute an additional .2 percent of salary to make up the difference.  In FY18, if necessary, employees may contribute for the one year up to 2 percent of salary to address any additional needed contribution above the $9M. If that 2 percent is not enough, the City can reopen the financial sections of the union contracts so it can then negotiate the additional sum needed above 2 percent.
  • Retiree COLA limits.  The bargaining units agreed that employees who retire after the signing of the latest contracts’ Cost of Living Adjustments (COLA) will be based on actual COLA figures with a 2.75 percent cap.  This cap allows a more accurate actuarial projection of future costs than previous caps, which traditionally were as high as 5 or 6 percent.
  • Vesting changes.  BERS previously provided for partial vesting in the system after three years of employment with full vesting not until seven years, which increased the administrative complexity of the system. Now, employees are fully vested after five years, with no partial vesting for new employees, which is more consistent with national averages, and if employees remove their retirement investment before being fully vested, they will receive 2 percent interest versus the prior 5 percent.
  • Limited wage growth.  The recently approved four-year contracts with all four unions have pay raises for FY15 – FY18 that closely correlate to the current low inflation rate.  As the actuary assesses pay increases as part of the valuation and then the City contribution amount, reasonable pay increases effectively help to control future pension system costs.

Administrative changes – Working closely with the City’s actuary and the CAO, the BERS Board has made a number of important changes to the manner in which the retirement system is administered, including:

  • Revised life expectancy assumptions.  BERS instituted a mortality table that more accurately reflects lengthening lifespans. This more accurate figure reduces the likelihood of unanticipated benefit cost increases in the future.
  • More accurate projection of benefit costs.  Prior to FY15, the City’s actuary estimated retirement fund needs based on current employees only, using a method that did not take into account the true benefits of changes in the retirement system formulas previously negotiated with employees.  As a result, the substantial retirement benefit reductions for employees hired later than 2006, agreed to by the City and employee unions, were not fully incorporated into the actuarial model. The BERS Board and CAO worked with the City’s actuary to build a more accurate model and now its valuation and the City’s contribution levels are based on a conservative actuarial estimation that forecasts changes in staffing.

New investment strategy – The BERS Board, working closely with the Administration, rewrote its investment policy (see Exhibit D, Investment Policy Statement) and has made a number of significant changes to the way it invests its approximately $155 million of assets.  Significant changes included:  

  • Revised asset allocation to improve and make returns more predictable.  In reaction to the Retirement Committee finding that the portfolio managed for BERS had underperformed the market over a number of years, and following the new policy that BERS should “Use simple investment structures that the Trustees understand,” BERS has removed funds from “alternative” investment instruments like private equity and hedge funds and invested the entire portfolio in more traditional investment vehicles.  
  • Reduction in fees.  One of the benefits of the change in asset allocation is that it allows the entire portfolio to be invested in low-cost passive investment funds that predictably earn market returns at much lower costs.  At the beginning of 2016, the BERS Board moved the great majority of its assets into passive index funds managed by Mellon Capital, which will save the system approximately $600,000 annually in asset management fees.  As noted above, the impact of this savings and compounding reinvestment is substantial over a long time horizon.  This approach has been widespread for decades in the personal investment market, but has only recently become a focus for a number of public investment funds.  Links to articles that discuss this strategy can be found at the bottom of this release.  
  • 10-year smoothing.  While experts generally agree that stock market investments produce the highest returns over an extended timeframe, such investments can encounter large short-term losses and volatility.  Such volatility can put considerable pressure on taxpayers, ratepayers and employees, given the manner in which the City’s annual payment is calculated.  By moving from 5-year to 10-year smoothing of investment returns, BERS has reduced the impact of short-term volatility on the City and employees.
  • Long-term horizon.  The new BERS investment policy philosophy lists “Adhere to a long-term perspective” as its top principle.  BERS and the City are highly aware that returns produced by different investment strategies can vary greatly in the short-term and that performance is best evaluated over a long time period.

Future Challenges Remain for BERS

The reforms detailed above are projected to save taxpayers and ratepayers millions of dollars in the short-term and have improved the retirement system’s solvency and stability. While the City believes that BERS is now on improved footing and that the current public employee contracts create a solid framework for sharing costs and risks between employees and taxpayers, the system will continue to face challenges in the years ahead.  Some areas that are concerning and may require further attention and reforms include:

  • Funded ratio.  While the system’s funded ratio has improved from 69 percent to 74 percent, it is important that the ratio continue to rise in the years ahead.  Funded ratios below 80 percent are generally considered a cause for concern.
  • Assumed investment rate of return. BERS’s longstanding policy has been to assume an annual investment rate of return of 8 percent.  The Retirement Committee found this to be on the higher end of return assumptions in public retirement plans and there is concern that the plan’s actual annual growth will not consistently meet that target.  A reduction in this assumed rate of return would raise the annual contributions necessary to keep the system properly funded. This issue is being explored by the BERS Board and the Administration for potential future action.
  • Changing demographics.  One challenge of traditional pension plans is that they have tended to become more expensive over time as population demographics shift and as retirees enjoy longer lifespans.  The longevity assumptions in BERS will require ongoing review.

Jane Knodell, City Council President: "It is important to note that the City and its employees have stabilized the cost of its retirement benefit while remaining committed to a defined benefit plan.  This kind of plan provides greater income security to retirees in recognition of their faithful work over the years on behalf of Burlington's residents and businesses."

Karen Paul, City Councilor: “Today celebrates the culmination and realization of what can happen when there is truly an inclusive process on what has been a challenging subject over the past decade and a half. After other attempts that illuminated the concerns and offered a helpful base, the Retirement Committee's work was the first process where all parties - Unions, non-Union employees, the Administration, the Council and the BERS Committee - were at the table and everyone was listened to respectfully and thoughtfully. 

“It was from that place that a document was crafted that truly respects the perspectives of all, honors promises made to our valued employees and allows for a defined benefit plan that embraces a sense of shared responsibility toward the sustainability of this plan, hopefully for many years to come.  The four foundations of the plan have guided negotiations and signal a new day for our pension that I believe can make for lasting change for our community's continued financial stability and for our employees who contribute greatly to our City's successes."

Bob Rusten, Chief Administrative Officer: “It has been most gratifying to work with such a great team as represented by BERS Board, the Mayor and City Administration, Council and union and non-union employees, to analyze such a complex system and come up with solutions that are fair to taxpayers and employees, and that strengthen a good retirement system which supports retention and recruitment of staff.  That being said, we cannot rest on the work done so far, and I look forward to working with a similar, varied group of people to identify further ways to strengthen the system.”

Jeffrey Wimette, International Brotherhood of Electrical Workers (IBEW) Business Manager: “The creation and execution of the plan to stabilize the systematic problem with the City pension system was made possible through the collaborative efforts at all levels.  The abilities of the leadership teams to establish trust and respect among their respective groups codified the success for now.  This trust and respect must stand strong in order to address the ever changing future.”

Michael Curtin, Local 3044 President: “We are deeply appreciative of the Retirement Committee’s hard work, Mayor Weinberger’s leadership, the entire negotiating team, and the City Council for working with us to resolve our differences and move our city forward.  It was a long and difficult effort, but when two sides work collaboratively and collectively, a positive outcome can be had, as we see here today.  The union took steps through the collective bargaining process to help ensure the sustainability of the pension system, protecting the income and retirement savings for the city’s workers while not placing the burden on the taxpayers.”

Mike Flora, Retirement Committee participant: “Thank you to the Mayor for having the vision to address the concerns of the retirement system in a thoughtful way as it related to the City Employees.  The idea of forming the Retirement Committee reflected everyone’s desire to find a workable solution that struck a balance with the employees and taxpayers of Burlington. The Mayor charged the Committee to explore all options and come up with recommendations that were to be fair to all affected by the City pension system.

“Over the year of meetings, as a group we explored many paths, spoke to actuaries numerous times, consulted with a pension change expert and spoke to other municipalities. The Committee then put forth the recommendations and it was accepted to be part of contract negotiations with each collective bargaining unit. A thank you needs to go out to each non-union employee who put forth great ideas and each bargaining unit representative who was part of this Committee. They carried the recommendations back to their membership for negotiations. It appears in the final contract settlements that the Committee’s work was recognized and implemented.

“Finally, I would like to thank my fellow Committee members for coming together and having the willingness to address our retirement system. It was not an easy process, but together we secured for each City employee a peace of mind that their retirement remains intact.”

Jim Strouse, BERS Board Chair: “It has been immensely satisfying to see the Retirement Board come together in unity and accomplish these very important changes.  This bodes well for the future as we continue our search for further improvements in the City’s retirement system.”

Tom Torti, Lake Champlain Regional Chamber of Commerce Director: “The City’s commitment to fiscal stability is evident in its important effort to stabilize its retirement system, which in turn benefits City residents and businesses by providing future tax savings.  Individuals and businesses can now reinvest those savings into Burlington’s economy, and continue to grow our vibrant culture and make this city a great place to live and visit.”

* Articles discussing public pension fund investments in alternative investments and passive asset management:

Pension Funds Trail Individuals in Embracing Index Funds, New York Times

Pension Advisers Learn the Folly of Trying to Beat the Market, New York Times

Exhibit A: City’s Annual Contribution Trend Line

Exhibit B: Impact on Retirement Fund of Annual Expense Savings

Exhibit C: Retirement Committee Summary Paper

Exhibit D: Investment Policy Statement

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Press Release Date: 
08/31/2016
City Department: 
Mayor's Office