Finance Committee Minutes
VILLAGE OF NORTH AURORA
FINANCE COMMITTEE MEETING MINUTES
JULY 10, 2017
CALL TO ORDER
Trustee Curtis called the meeting to order.
In attendance: Trustee Laura Curtis, Trustee Mike Lowery, Trustee Tao Martinez, Finance Director Bill Hannah, Village Administrator Steve Bosco.
AUDIENCE COMMENTS - None
APPROVAL OF MINUTES
1. Approval of the Finance Committee Minutes dated 12/12/2016
Motion for approval made by Trustee Lowery and seconded by Trustee Martinez. All in favor. Motion approved.
1. Discussion of Upcoming Police Pension Valuation
Finance Director Bill Hannah stated that the Village is required to provide pension benefits for all of its sworn police officers. The Village currently has 29 active sworn officers and 15 other retirees or other beneficiaries who are not eligible to draw on their pension yet. These benefits only cover sworn police officers. Other Village employees at Public Works and Village Hall are covered by IMRF. Benefits the Village is required to pay varies based on hire date. Tier 1 employees began service before January 1st, 2011 and Tier 2 began after January 1st 2011. In order to contribute to their benefits, all sworn officers are required to contribute 9.91% of their salary. This is dictated by state statute and cannot be changed. The rest is contributed by the Village, mostly through the tax levy. Back in 2011, the state changed the requirements of how pension liabilities are to be funded. The Village has until 2040 to fund up to 90% of pension liabilities. The Village Board decided it wanted to fund 100%. This has been in place for the last 6 years. In order to figure out how much money the Village has to contribute to the pension fund, an actuarial evaluation is done each year. The last actuary in 2016 showed an amount of $24.5 million in accrued liabilities and $14.7 million in actuarial assets. This equated to an unfunded pension liability of $9.7 million. The Village needs to contribute $956,000 in its police pension tax levy. That meant that the Village had a decrease in general fund property tax dollars that remained in the General Fund last year because the police pension funding requirements increased significantly.
The actuary from Foster & Foster identified two assumptions:
1. Currently, the salary increase assumption is 5.0%. This is the assumption upon which an officer’s pay will increase every year. Our actuary recommends converting this to a table where officers receive higher salary percentage increases early in their career, and decrease over time. The table is based on the DOI’s experience study in 2012 where salary increase percentages would start at 11% then grade down to 4% over time. The next effect of this change would be a slight decrease in the Village’s actuarial liability and contribution requirement.
2. Currently, payroll growth rate assumption is 5%. This is the assumption that reflects the payroll growth rate for the entire sworn police department. Since the amortization is based on a level percentage of payroll, that means lower payments are made in the early years of the remaining amortization period versus the out years, resulting in significant back-loading in the contribution. At 5%, the payment starts out at $484,027 but increases to $1,561,036 in 2040. At a 3% assumption however, the payment starts out at $592,705 and ends at $1,204,847. Essentially paying more now to pay less in the future.
3. The actuary recommends that a 3% payroll growth factor be used for the assumption, which would have the effect of about a $100,000 increase in the total village contribution next fiscal year for the Police Pension Fund (for the 2017 tax levy to be received in FY 2018-19). Another viable and acceptable option would be to decrease the payroll growth assumption next year to say 4.0%, then 3.0% the following fiscal year. This would spread the impact out over two years to a fiscal year when greater budgetary flexibility exists due to the expiration of a sales tax rebate agreement during FY 2019-20.
Trustee Curtis asked Steve Bosco if the Village can be proactive so that the police force is not growing faster than the Village’s needs. Bosco said the Village has only hired one new officer in the last 4 years. Trustee Lowery asked what percentage of the force was hired after 2011. Hannah said there were 5 or 6 officer hired after that year.
Trustee Lowery said that the bulk of the police force is within 20 years of retirement and inquired as to whether this would be addressed. Hannah said there is a sizeable number of officers in their early to mid-40s who may have 15 to 20 years of service and will be eligible to retire in the next 5 to 10 years.
How retirement for police works:
After 30 years an officer maxes out and must be 50 years old in order to collect benefits
At 20 years of service, an officer can receive 50% of their pension.
Hannah stated that in 2 years the Village will finish paying off one of its sales tax rebate agreements. The Village will then have several hundred thousand dollars freed up in the General Fund budget that the Village could use, at least partially, to accelerate some of the pension payments.
There are 2 options the Board should consider:
1. Choose to lower payroll growth from 5% to 4% next year and then go from 4% to 3% the following year. This would be a $50,000 to $60,000 adjustment each year, or;
2. Choose to go from 5% to 3% for the upcoming valuations, make our adjustments, and go with that from here on out.
Trustee Lowery asked how lowering the projected salary increases from 5% to 3% creates a situation where the village pays more in dollars. Hannah explained that if you are paying off your unfunded liability and your payment is always the same percentage as your payroll, if your payroll is growing 5% a year, you will need to start off at a lower amortization payment to be proportional with your payroll as you go through the years.
Hannah said he would be in favor of either option.
The Committee suggested going from 5% to 3% for the upcoming valuations instead of paying it off over 2 years.
OLD BUSINESS - None
Bosco said he recently received information from the Illinois Department of Labor. The Village is supposed to adopt the prevailing wages which were recently updated. Bosco said he would be bringing this to the Board for approval at the next meeting.
TRUSTEE COMMENTS - None
Motion to adjourn made by Trustee Lowery and seconded by Trustee Martinez. All in favor. Motion approved.
Lori J. Murray