Town of Watertown

Town Council Committee of the Budget & Fiscal Oversight

Report: May 24, 2010

The Committee convened on May 23, 2011 at 7:10 pm in the Town Council chambers.
Present at the meeting were Vincent Piccirilli, chair; Angie Kounelis, vice-chair; Cecilia Lenk,
secretary. Also present were Town Manager Michael Driscoll, Town Auditor Thomas Tracy,
Watertown Contributory Retirement Board member John Loughran, Retirement Board actuary
Dan Sherman, and Retirement Board attorney Thomas Gibson. Council President Mark
Sideris, Councilor Anthony Palomba and several residents were also present. Retirement
Board Chairman Thomas Thibaut Jr. and Member Domenic Arone advised the Chair that they
would be unable to attend because they were out-of-town on retirement board business.

The purpose of the meeting was to address questions and provide information to the Committee
and residents of the Town on the retirement benefits, including pensions, health insurance and
other post-retirement employee benefits (OPEB). The meeting was informational only.

Pension Benefits

Mr. Tracy provided the following overview regarding the pension benefits for Town and
School employees:
 Public pensions in Massachusetts are governed by MGL Chapter 32.
 Public employees do not pay into the federal Social Security system nor receive its
benefits.
 Following the stock market downturn in 2008, state legislation extended the schedule to
fully fund public pensions to 2040. Watertown is scheduled to have its pension system
fully funded by 2022.
 The Public Employee Retirement Administration Commission (PERAC) sets the
Town’s funding schedule. In FY2011, the Town’s extended its schedule from 2017 to
2022 and the FY2011 required appropriation was $8,608,733 (2.85% of this is
Watertown Housing Authority’s).

Mr. Sherman reviewed the actuarial evaluation of the pension system (see attached Watertown-
funding schedule issues report), including:
 As of January 1, 2011 there are 1,055 participants (increase of 1% since January 1,
2010) in the Town’s pension system, including:
- Active employees 502 - increase of 5.7%
- Retirees and beneficiaries 343 – decrease of 2.0%
- Inactives (former employees who left the Town’s employment before being
vested in the retirement plan and are owed a refund of their contribution) 146 –
decrease of 6.4%
- Disabled 64 – no change.
 The Town’s retirement system includes all the Town’s public employees, excluding
teachers, plus the staff of the Watertown Housing Authority (2.85% by payroll).
 Teachers are members of the Massachusetts Teachers’ Retirement System (MTRS), and
are not included in these numbers. Instead, the state pays about $8M per year for
Watertown teacher retirements, not the Town.
 Watertown uses a 5 yr smoothing to calculate actuarial value versus market value.
Page 1 of 3
  As of January 1, 1011, Watertown’s unfunded pension liability is $58.5M. This is a
decrease in the liability of about $6M over 2010 and is the result of two major factors:
- Half from no raises for employees over the last 2 years which kept payroll level
- Half from gains in investments

Mr. Sherman stated that under state law, the appropriation in future years must stay at or above
the prior year’s appropriation, and, having realized a $6M gain last year, discussed the
opportunity the Town has for modifying its funding schedule by adding years to reduce future
payments. These options all increase the total cost to taxpayers, and the least expensive option
is to remain with the existing funding schedule. Mr. Tracy noted that Watertown is currently
“ahead of the game” in terms of reducing its unfunded liability and Mr. Driscoll stated that the
most financially responsible action is to remain with the existing schedule.

COLA changes will be discussed at a future meeting with the Retirement Board.

Mr. Gibson presented the Pension Reform Initiatives report to the Committee (see attached),
including:
 Pensions are considered a contract with employees and (with a few exceptions) pension
changes are not retroactive, so changes affect new employees only.
 Because the State regulates public pensions, there is very little a municipality can do on
its own to reduce its long-term financial obligations. Mr. Gibson indicated that ongoing
dialog with our state legislators is the key to reform.
 Earlier changes to the law requires contributions of 9% and an extra 2% over $30K for
new employees, which means eventually the pension system will be more than 90%
funded by employee contributions for Type 1 (non-police, non-fire) employees.

Health Insurance Benefits

Mr. Tracy discussed the health insurance benefits provided to current and retired public
employees. These are governed by MGL Chapter 32B and union contracts. Similar to
pensions, these restrict what can be done to reduce costs. Noting the Town joined the
Commonwealth’s Group Insurance Commission (GIC) on 7/1/09, he provided the following
data:
 In April 2011, there were 1374 subscribers; 843 were non-Medicare, 392 individual
plans and 451 family plans.
 33% of subscribers were Town employees, 44% School employees, and 24% non-
Medicare retirees.
 As determined through collective bargaining, the Town pays 80% of costs for the PPO
and HMO plans, employees contribute 20%, with the exception of the more expensive
indemnity plans (60:40) and some grandfathered retired teachers (90:10).
 Retired teachers were already in the GIC as part of the MTRS, so they were
grandfathered in at the old rate if retired before 7/1/09.
 The two most popular plans chosen are Harvard Pilgrim Independence (28% of
subscribers) and Tufts Navigator (48%). The full FY2012 monthly cost of these for
family plans is $1593 for Harvard Pilgrim, $1440 for Tufts (employees pay 20%).
 Plan design including co-pays and deductibles are governed by the GIC.

Page 2 of 3
  Watertown increased the percentages employees pay for their plans through collective
bargaining when the Town joined the GIC. The GIC agreement is for 6 years and
expires 6/30/15.
 Watertown requires retirees over 65 to join Medicare, and reimburses the Part B
premium at 60%.
 Specific information for Watertown’s plan can be found at the GIC web site at
www.mass.gov/gic .

Mr. Driscoll noted that because of our participation in the GIC the FY2012 budgeted health
care costs are currently $72K less than in FY2009.

Other Post-Employment Benefits (OPEB)

Mr. Tracy reviewed our OPEB situation. We currently have an unfunded liability, as of July 1,
2009, of $118M, which is primarily health care for retirees. The State has no requirements in
place for municipalities to fund this. The Town has put $1,016,697 in an OPEB stabilization
fund since FY2006, but this does not show up as an OPEB asset because it is not in a restricted
trust fund. There is a requirement to do an OPEB study every two years and the next one for
Watertown will be effective July 1, 2011.

Compared to last report July 1, 2007, liability increased by $20M, from two factors: increase of
health care costs in the range of 8% per year, and reduced assumptions on investment returns
since 2008.

The Town Council has been considering a home rule petition to set up an OPEB trust fund, but
Mr. Sherman said changes to MGL Chapter 32B Section 20 were made to allow a trust fund to
be set up directly, which Watertown should consider.

Mr. Sherman indicated that the best strategy for handling the OPEB liability might be to
address it after the pension liability is fully funded, as was noted in the Committee report dated
October 13, 2009. He indicated that the Council should consider adding a small amount of
funds into the OPEB trust fund each year as this action would be looked on favorably by rating
agencies.

In summary: While Watertown has an unfunded pension liability of $58M and an unfunded
OPEB liability of $118M, the Town has taken steps to pay down both liabilities ahead of
schedule, as compared to other Massachusetts cities & towns. Secondly, the Town has taken
significant steps to get health insurance costs under control, by joining the GIC and increasing
employee contributions, which will reduce the rate of growth for the OPEB liability. Finally, in
its FY2012 Budget Priority Guidelines, the Town Council has instructed the Town Manager to
work with the Retirement Board and our State representatives to seek additional steps to reduce
the Town’s future pension and OPEB liabilities.

The meeting ended at 9:10 pm.

Report prepared by Cecilia Lenk

Page 3 of 3
 Watertown - Funding Schedule issues. Fru"t Dro"t
5lv."at+l

r FYEll Appropriation, 58,608,733, is the minimum for FYE12.

r The FYE12 appropriation, 58,955,000 is the minimum for FYE13.

o A new FYEI? appropriation is available.

o We can not have the following type schedule straight up. A work-around would be required:

FYEI2 = S8,965,000

FyE13 = 98,6G0,4G0
 Town of Watertown Contributory Retirement System
ofJanuarY l'2011
as
Primary Results ComParison
Change as a
Percent
January 1,2010 January!, lQ! | (Annualized) FY 2013

Actives 47s s02 s.'t%

Retirees and Beneficiaries 350 3$4(Wkad? -2.0%
Inactives (Refunds) 156 t46 -6.4%
Disabled 64 64 0.0%
Total r,045 1,05s 1.0%

Total Payroll 25,403,413 25,004,201 -1.6% 26,129,390

Average Annual Salary 53,481 49,809 -6.9%

Average Past Service 12.0 12.6
Avbrage Attained Age 47.0 46.9

2,180,116 2,147,370 2,265,723

Employee Normal Cost
8.6% 8.6% 8.'.7%
% ofPay'oll

1,456,008 7,439,779 7,482,848 TrJo

Employer Normal Cost
% ofPayroll s.7% s.8% s.7%

Administrative Expense 225,000 225,000 235,125

% ofPayroll 0.9% 0.9% 0.9%

Total Normal Cost 3,861,724 3,812,149 3,983,696

ls.2% ls.2% 15.2%
% ofPayroll

Total Actuarial Accrued Liability 1 55,963,135 t59,248,369 2.r%

Assets - Market Value 81,302,542 93,207,602 14.6%

Assets - Actuarial Value 89,432,797 100,743,868 12.6%
,,L,\ v1l
Funded Ratio s7.3% 63.3% 10.3% 6t i]0, ,.r \
'4i 5
fr
Total Unfunded Accrued Liability

Expected Unfunded Accrued Liability

66,530,338 58,504,501

64,721,797
-12.1% ){{,
$, 0}?t
it'
(Gain)/Loss (6,217,296)

Asset (Gain)/Loss (3,136,639)

Liability (Gain)/Loss (3,080,6s7)
Salary Increases (s,18e,061)
New Participants 169,724
Active - Retirements t,43t,107
Active - Terminations 329,751
Active - Mortality (8,71s)
Active - Disabilities 894,88s
Inactive - Mortality and data adjustments (1,690,449)
Actives miscoded as inactives in the 2010 valuation 4,919,389
Other, including data, contribution interest, 982,701
purchased service

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 Town of Watertown Contributory Retirement System
as of
January 1,2071
Analysis of F unding Alternatives

FY 2012 FY 2013

Employer Appropriations under current funding schedule $8,965,000 $9,335,898

As a percent ofpay 35.9% 37.3%

OptionA-NotAvailable
Employer Normal Cost $1,664,719 $l ,717 ,973

(<t u
Total Unfunded Accrued Liabilities $58,504,501 ^.Cllr'b
AtA

Prior unfunded accrued liability 64,721,797

1 1 years remaining as ofJanuary 1,2011 (2022)

8.000% interest and 4.5%o increasing payments 6,899,872 7,210,367

Unfunded liabil ity for current (gain s)/losses (6,217,296)

15 years remaining as ofJanuary 1,2011 (2026)
8.000% interest and 4.5Yo increasr'ng payments (st6;t40) (s39,993)

Total Required Employer Appropriations 8,047,9lt 8,388,346

with interest adjustment for the complete contribution on July l. fJ--T363!ossl
As a percent ofpay 33.4% 33.4%

If Fy 201 2 appropriation unchanged: a-T,e65,oon

Option B
Employer Normal Cost $1,664,779 $1,7r7,973
Total Unfunded Accrued Liabilities $5 8,5 04,5 01

Total unfunded accrued liability 58,504,s01

10 years remaining as ofJanuary 1,2011 (2021)
8.000% interest and, 4.5To increasing payments

Total Required Employer Appropriations

with interest adjustment for the complete contribution on July l.
As a percent ofpay

If FY 20I 2 appropriation unchanged:

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 Town of Watertown Contributory Retirement System
as of
January trzOll
Analysis of Funding Alternatives

FY 2012 FY 2013

Employer Appropriations under current funding schedule $8,965,000 $9,335,898

As a percent ofpay 3s.9% 37.3%

Option C
Employer Normal Cost $1,664,779 $t,717,973
Total Unfunded Accrued Liabilities $58,504,501

Initial unfunded accrued Iiability 58,504,501

I I years remaining as ofJanuary l,20ll (2022)
8.000% interest and 2.7 0% increasing payments 6,754,280 6,936,645

Total Required Employer Appropriations

(-{, ; #n J,7 8419,059 8,654,678
with interest adjustment for the complete contribution on July 1. l--@
As a percent ofpay 3s.0% 34/%
-B,ee4,r$1
If Fy 2012 appropriation unchanged:

Option D
EmployerNormal Cost $1,664,779 $t,7 t7 ,973
Total Unfunded Accrued Liabilities $58,504,501

Initial unfunded accrued liability 58,504,501

12 years remaining as ofJanuary 1,2011 (2023)
increasing payments
4'l) r, ,o
8.000% interest and 1.0%o 6,862,996 6,931,626

Total Required Employer Appropriations 8,527,775 8,649,s99

with interest adjustment for the complete contribution on July 1. 41 f--n,r8sltF1
As a percent ofpay 35.4% 34.4%
-8,s6n
If FY 2 0 I 2 appropriation unchanged: reeAs,nil @

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Town of Watertown Contributory Retirement System Page 4

Actuarial Value of Assets

The actuarial value of assets is determined by projecting the market value of assets as of the beginning of the prior
plan year with the assumed rate of retum during that year (8.0%) and accounting for deposits and disbursements with
interest at the assumed rate of retum. An adjustment is then applied to recognize the difference between the actual
investment retum and expected return over a five year period. This preliminary actuarial value is not allowed to
differ from the market value of assets by more than l0%. The calculation of the actuarial value of assets as of
January l, 207I is presented in Table V.

Table V

Januarv 1. 201 I
(1) Market value at January 1,2010 $81,302,542
(2) 2010 Contributions $11,841,029
(3) 2010 Payments ($10,860,444)
(4) Net interest adjustment at8.0% on (1), (2), and (3) to December 31, 2010 $6,543,427
(5) Expected market value on January 1,2011 $88,826,555
(l)+(2)+(3)+(4)

(6) Actual market value on January 1,2011 $93,207,602

(7) 2010 (Gain) /Loss ($4,381,048)
(8) 80% of 2010 (Gain) /Loss ($3,504,838)
(9) 2009 (Gain) / Loss ($4,013,491)
(10) 60%.of 2009 (Gain) /Loss ($2,408,095)
(11) 2008 (Gain) / Loss 932,877,440
(I2) 40% of 2008 (Gain) /Loss s13,150,976
(13) 2007 (Gain) /Loss $1,491,1l1
(14) 20% of2007 (Gain) /Loss $298,222
Actuarial value on January l,20ll, (6) + (8) + (10) + (12) + (14)
(15) but not less than 90%onor greater than 1 10% of(6) $1 00,743,868

(16) Ratio of actuarial value to market value 108.09%

(17) Market Value Return for 2009 -26.2%

(18) Actuarial Value Retum for 2009 -19.8%
(19) Market Value Return for 2010 13.6%
(20) Actuarial Value Retum for 2010 13.6%
 Town of Watertown Contributory Retirement System

Asset Values

100

90

80

U) 70
o
Actuarial
-FI 60
e Market
6 50
-
40

30

20

^Es "F$
"sp "S "s" "S "$ "N,* "S "$ ^,s)
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 Town of Watertown Contributory Retirement System
as ofJanuary l,20ll
Primary Results Comparison - COLA Base at $14,000
Change as a
Percent
January 1, 2010 January 1, 201 1 (Annualized) FY 2013

Actives 475 502 s.7%

Retirees and Beneficiaries 350 343 -2.0%
Inactives (Refunds) 156 146 -6.4%
Disabled 64 64 0.0%
Total 1,045 1,055 1.0%

Total Payroll 25,403,473 25,004,201 -t.6% 26,129,390

Average Annual Salary 53,481 49,809 -6.9%

Average Past Service 12.0 12.6
Average Attained Age 47.0 46.9

Employee Normal Cost 2,1 80,1 I 6 2,147,370 -1.5% 2,265,723

% ofPayroll 8.6% 8.6% 8.7%

Employer Normal Cost 1,456,008 1,469,252 0.9% 7,513,647

% ofPayroll 5.7% s.9% 's.8%

Administrative Expense 225,000 225,000 0.0% 235,125

Yo ofPayroll 0.9% 09% 0.9%

Total Normal Cost 3,867,724 3,841,622 -05% 4,074,495

% of Pay'oll 15.2% ts.4% 154%

Total Actuarial Accrued Liability 155,963,135 160,604,947 3.0%

Assets - Market Value 87,302,542 93,207,602 14.6%

Assets - Actuarial Value 89,432,797 100,743,868 12.6%

Funded Ratio s7.3% 62.7% 9.4%

Total Unfunded Accrued Liability 66,530,338 59,861,079 -10.0%

Expected Unfunded Accrued Liability 64,721,797

t'
Impact of $14,000 COLA {t,@ {l,AlLl
Before After
=@E Percent Change
Employer Normal Cost
Unfunded Accrued Liability
@ 58,504,501 59,861,079
Lo%
23%

/, ](7

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 Town of Watertown Contributory Retirement System
as of
January l,20ll
Analysis of Funding Alternatives - COLA Base at $14,000

FY 2012 FY 2013

Employer Appropriations under current funding schedule $8,965,000 $9,335,898

As a percent ofpay 3s.9% 37.3%

OptionA-NotAvailable
Employer Normal Cost $1,694,252 $1,748,772
Total Unfunded Accrued Liabilities $59,861,079

Prior unfunded accrued liability 64,721,797

11 years remaining as ofJanuary 1,2011 (2022)
8.000% interest and 4.5Yo increasing payments 6,ggg,g72 7,210,367

Unfunded liability for current (gain s)/losses (4,860,71 8)

1 5 years remaining as of January 1,2011 (2026)

8.000% interest and 4.5%o increasing payments (403,990) (422,170)

Total Required Employer Appropriations 8,1 90,134 8,s36,969

with interest adjustment for the complete contribution on July
As a percent ofpay
l. f J,JtT;sila3il[-J,.s-?t-,^sml
34.0% 34.0%

If FY 2012 appropriation ttnchanged: a s,%-lun

--sWr7l
Option B
Employer Normal Cost $1,694,252 $1,748.772
Total Unfunded Accrued Liabilities $59,861,079

Total unfunded accrued liability 59,86 r,079

10 years remaining as ofJanuary 1,2011 (2021)
8.000% intercst and 4.5%o increasing payments 6,911,711 7,222,738

Total Required Employer Appropriations 9,605,963 8,971,5 1 I

with interest adjustment for the complete contribution on July l. lT4l-ss-d-l l- e6,lr1l
As a percent of pay 3s.8% 35.7%

If FY 20 I 2 appropriation mtch anged:

-s,w,oon --eln-546iil

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 Town of Watertown Contributory Retirement System
as of
JanuarY 1,2011
Analysis of Funding Alternatives - COLA Base at $14'000

FY 2012 FY 2013

Employer Appropriations under current funding schedule $8,965,000 $9,335,898

As a percent ofpay 3s9% 37.3%

Option C
EmployerNormal Cost $1,694,252 sl,748,772
Total Unfunded Accrued Liabilities $59,861,079

Initial unfunded accrued liability 59,861,019

1l years remaining as ofJanuary 1,2011 (2022)
8.000% interest and 2.70% increasing payments 6,910,895 7,097,489

Total Required Employer Appropriations 8,605,147 8,846,262

with interest adjustment for the complete contribution on July 1. l-BplrJTll l-j- e,tr3ios I

As a percent ofpay 35.8% 3s.2%

If FY 20I 2 appropriatio n unchanged: a--Wrooil Wnl

Option D
Employer Normal Cost sl,694,252 sL,748,772
Total Unfunded Accrued Liabilities $59,861,079

Initial unfunded accrued liability 59,861,079

l2 years remaining as ofJanuary 1,2011 (2023)
8.000% interest and 1.0%o increasing payments 7,022,133 7,092,3s4

Total Required Employer Appropriations 8,716,385 8,841,126

with interest adjustment for the complete contribution on July 1. l- ,Jsrj3 I fj-tsZg6sl
35.2%
As a percent ofpay 36.2%

If Fy 20I 2 appropriation unchanged : a w6lon1

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Pension Reform
lnitiatives
Watertown Retlrement
hard
May?3',mll
 Pension Reform Update
t ln the 2009 -20t0 session, the Legislature enacted many
substantive reforms to the Massachusetts public
pension laws

* For the current }OLL -20L2 legislative session, further

changes have been proposed which, if adopted, will
significantly change the retirement laws

$ Most, but not all, of these changes are prospective,

impacting new members entering the retirement system
after the effective date of the legislation
 ChapterzLof the Acts of 2009
Effective July L,2009, this law:

T Eliminated termination retirement allowances for elected

officials

Eliminated one day for one year of service for elected

officia ls

S Required elected officials to serve at least ten years prior

to becoming vested in the pension system
Chapter2L of the Acts of 2009
* Redefined the compensation to be used in pension
ca lcu lations

* Prohibited creditable service for officials and

employees earning under 55,000

* Changed the retirement calculation for employees

with dual service in separate pension systems

* Eliminated "working out of grade" disability

ca lcu lations
 Chapter L31 of the Acts of 20L0
rcorporated as outside sections of the 2OtO State Budget Act,
Chapter 131 of the Acts of 2010:

) Capped pensionable compensation (not overall earnings) for

new members entering the retirement system after January
t,2OLLto 640/o of the annual pension earnings limitation
imposed under federal law

) Federal limitation, which is indexed annually, is currently set

at 5245,000. Had the cap been in effect today, a maximum
retirement benefit of 5125,440 would be established: 80%
of 64% of s245,000 = s125,440
 Chapter L3I of the Acts of 2010
* lncreased the interest rate to 3% on refunds of
retirement deductions for employees leaving the
retirement system with less than 10 years of service

t Allowed for a local option to increase the minimum

allowance paid to surviving spouses of disabled retirees
from 56,000 to S9,ooo

* Sought to clarify the status of clothing and uniform

allowances as pensionable compensation, and prevented
modifications of pensions already granted where clothing
allowances had been included
Chapter L3L of the Acts of 20L0

$ Allowed employers' health insurance contributions for

employees retiring after January t,20It to be
prorated among prior public employers
 Chapter 188 of the Acts of 20L0
The Municipal Relief Act, effective July 27,2010:

I Extended the requirement for retirement systems to be

fully funded to 2O4O

$ Allowed a local option to increase the S1Z,OOO current

base amount of the annual cost-of living adjustment for
retirees

t Provided a 3 year Early Retirement lncentive program for

municipal employees (not widely adopted)
Governor Patrick's Proposa ls
House Bill No.35

* lncreases the Minimum Age of Retirement from 55 to

60 for Group L Members (General) and from 45 to 50
for Group 4 Employees (Public Safety)

* lncreases the Maximum Benefit Age to 67 for Group I

Employees and to 57 for Group 4 Employees

* lncreases from Highest 3 Years to 5 Years the Average

Compensation for Retirement Calculations
Governor Patrick's Proposa ls
House Bill No.35

* Prorates Benefits Based On Number of Years ln Each

Group (Would Apply to Existing Members)

I Limits Annual lncreases On Pensionable Compensation

in the 2 Years preceding retirementtoT% + CPI
(Would Apply to Existing Members)

tr Eliminates Enhanced Termination Retirement

Allowances (Would Apply to Existing Members)