City Council

MINUTES CITY OF DEKALB SPECIAL COMMITTEE OF THE WHOLE MEETING AUGUST 21, 2018 The City Council of DeKalb, Illinois held a Special Committee of the Whole meeting on August 21, 2018, in the City Council Chambers of the DeKalb Municipal Building, 200 S. Fourth Street, DeKalb, Illinois. Mayor Smith called the meeting to order at 5:02 p.m. A. ROLL CALL City Clerk Lynn Fazekas called the roll and the following members of City Council were present: Alderman Bill Finucane, Alderman Mike Marquardt, Alderman Patrick Fagan, Alderman Kate Noreiko, and Alderman Mike Verbic, and Mayor Jerry Smith. Alderman David Jacobson and Alderman Tony Faivre were absent. Also present were: Interim City Manager Molly Talkington, Acting Finance Director Robert Miller, and Executive Assistant/Deputy City Clerk Ruth Scott. Mayor Smith welcomed newly-appointed City Clerk Fazekas to her first official meeting duties, and complimented Deputy Clerk Scott on yeoman’s work of several months in the role. Mayor Smith also explained that Alderman Jacobson was on vacation, and Alderman Faivre was traveling out of town. B. PUBLIC PARTICIPATION Mayor Smith asked if there was anyone present who wished to speak to an item not listed on the agenda. There was none. C. CONSIDERATIONS 1. FY2017 Comprehensive Annual Financial Report, Audit Report, and Management Letter. Acting Finance Director Miller introduced Brian LeFevre from Sikich, LLP, who is the City’s auditor, and who offered comments on the report and audit. Mr. LeFevre first differentiated an annual financial report (AFR) from a comprehensive annual financial report (CAFR). The latter goes beyond statutory requirements by including an introductory section and statistical section. Mr. LeFevre then brought out several points and highlights as follows: • The City received an award, the Certificate of Achievement for Financial Reporting, for its 2016 fiscal half-year from the Government Finance Officers Association (GFOA), which makes 24 consecutive years that the City has received this award. The Special Committee of the Whole Meeting Minutes August 21, 2018 Page 2 of 7 Certificate is the highest such award in the local government industry, Mr. LeFevre said, and is to be commended. • The City has also been receiving the award for its budget, as well as preparation of a Popular Annual Financial Report (PAFR). The PAFR is basically a streamlined version of the CAFR. • At the beginning of the Financial Section of the CAFR is a letter from Sikich that expresses an opinion on the financial statements, using two sets of standards: standards issued by the American Institute of CPAs (AICPA) for conducting audit procedures, and the Government Accounting Standards Board (GASB) reporting standards that drive what the CAFR should look like. Sikich presented an “unmodified” opinion, which means the financial statements are a fair representation of the City’s financial position and free of material misstatement. “Unmodified” represents the highest-level opinion that the City can achieve. • The City was also subject to a separate, single audit, triggered by expenditures of federal funds totaling more than $750,000. Specifically, the City spent just under $1.8 million in federal grants for mass transit projects during the reporting period. Sikich issued unmodified opinions on laws and regulations that impacted the financial statements, and on compliance with the program financed by the federal funds. • Sikich also issued unmodified opinions on the financial statements of DeKalb’s Tax Increment Financing (TIF) districts and compliance with TIF regulations. • Management Discussion and Analysis in the CAFR, prepared by the City, is required under GASB standards and serves as an executive summary of the financial statements. Immediately following that are the Statement of Net Position and Statement of Activities, which Mr. LeFevre calls the “global view” financial statement. The long-term liabilities include the net pension liability for IMRF, police, and fire pensions; this has been a GASB rule for several years, and it’s what causes the unrestricted net position for governmental activities to be negative. • Revenues over expenditures for the year in the general operating fund were $1.2 million following budgeted transfers to and from other funds, a decrease to the fund balance of $155,000; this started the fiscal year with a fund balance of $9.299 million, the City finishing at $9.073 million which is just shy of the 25% benchmark for operating reserves. • Covering statements for the proprietary funds, the water fund showed a net increase of $469,000. Airport also showed an increase for the year, but Mr. LeFevre noted that the City had significant grant dollars going into that fund, as well as home rule motor fuel taxes; therefore, from an operating standpoint, airport expenses exceeded revenues.  Special Committee of the Whole Meeting Minutes August 21, 2018 Page 3 of 7 • Consolidated police and fire pension fund statement shows city (employer) contributions just over $5.453 million; active member contributions $1.1 million; so, $6.554 million in new monies went into the police and fire plans. Net investment income was $7.431 million, so overall revenues totaled $13.9 million. Expenses were $6.7 million, leaving an increase in the combined plans of $7.2 million. Total assets in the plans rose from $57.27 million at the beginning of the year to $64.512 million at the end. • The budgetary impact of City contributions for IMRF was just under $1.12 million, which is equal to the actuarially-determined contribution rate required under a statutory provision. It was 15.3% of the payroll for the year. For the police pension plan, the contribution was $4.485 million, just shy of the actuarially-determined contribution and 42.6% of payroll. Fire pension contribution was also just under the actuarially-determined contribution at 58.2% of payroll. Making required contributions is an indicator of the health of the pension plans, as is fiduciary net position (i.e., assets at market value). Total pension liability in the CAFR is the total of the actuarially- projected payments for all the active employees and beneficiaries over the life of these individuals from December 31, 2017. For IMRF, the liability is $56.1 million with a net position of $52.8 million, and therefore unfunded liability of $3.3 million – meaning the IMRF pension was 94% funded at the end of 2017, up 11% from the prior year. Police net pension liability is $35.6 million with funded percentage going from 47.9% to 49.7% based on the market value asset numbers. Net pension liability for fire was $42.5 million and the percentage funded rose from 39.1% to 40.8%. • Investment returns in the fire and police pension funds enjoyed a “banner year.” The police pension fund had a 14.21% investment return, and the fire pension a 12.26% return. • The audit went very smoothly, and Sikich received the information it needed on a timely basis. Mr. LeFevre also specifically complimented the professionalism of the staff in all departments. Alderman Noreiko asked about an outstanding deficiency noted for the library (a component unit of the City) in the context of its operations, the property tax rebate issue, and transparency. Mr. LeFevre noted that these were recommendations specific to the library management letter, and that Sikich helped the library file its accounting statements in accordance with GASB rules. Mayor Smith interjected that the recommendations by and large have been completed. Interim City Manager Talkington expanded on the explanation, saying the issues the library had mainly arose from turnover of office management staff, a new accounting firm, and new financial software. She added that the library is working to get account codes in synch – for example the library’s account coding for office supplies will be the same as the City’s – and to adjust library budget line items to better account for fixed assets and long-term debt. Alderman Noreiko asked Interim City Manager Talkington whether she was confident the library has the right people in place to move forward, so deficiencies don’t carry forward Special Committee of the Whole Meeting Minutes August 21, 2018 Page 4 of 7 year after year. Interim City Manager Talkington expressed optimism about the library’s ability to make corrections, but also indicated the City has been, and will be, working more closely with the library, for example by double-checking and correcting information. Mayor Smith said Alderman Noreiko’s question was “well-placed” in view of the library’s issues with tax abatement and property tax rebates over the past year. He noted that the library’s audit is separate from the City’s, but that the City and the library board do share a special relationship, and that while he did not like the deficiencies, the City received explanations about what needed to be done to fix them. He also commended Manager Talkington, DeKalb Public Library Executive Director Emily Faulkner, and Sikich for working together. 2. Actuarial Reports for Police and Fire Pension Funds. Acting Finance Director Miller introduced Heidi Andorfer of Foster & Foster to present the police and fire pension reports. Ms. Andorfer said she would focus on the recommended contribution amounts to those funds, to avoid overlap with the accounting side that Mr. LeFevre already covered. Ms. Andorfer began with the police pension, which experienced growth of about 15% in contributions this year over last. Most of the growth was attributable to a change in performance assumption that increased the liabilities. There was also some “unfavorable experience” related to demographic assumptions about rates of retirements, terminations, and disability; and another factor is assumed payroll growth, which drives annual increases in contributions. Main points covered are as follows: • The biggest factor driving the increase is the change in assumption of interest rates. Last year DeKalb used a 7.5% discount rate, but since has dropped it to 7%. At 7.5%, the City was a borderline outlier, and at 7% is on the higher end of a lot of funds – 6.75% is more typical – but 7% is much more in line with the predictions of the City’s investment advisors. However, it did increase liabilities. • Changes in rate assumptions about demographic categories was triggered by a Department of Insurance study. Every five years, DOI does an assumption study of police plans across the state over the previous five years to see what the rates of retirements, disability, and terminations look like, for municipalities to use. DOI does this because most retirement funds aren’t large enough to do this on their own. However, Foster & Foster doesn’t just rely on DOI tables, but also software to compare DeKalb’s actual experiences to them as well. In this case, DeKalb’s experience did line up well with the new DOI tables from 2017 and decreased the liability a little. • The payroll growth assumption is solely used to amortize the unfunded liability. That’s been brought down from 4.5% to 4%, because the amortization payment isn’t expected to increase as much in the future, but the lower assumption increases the contribution requirement today.  Special Committee of the Whole Meeting Minutes August 21, 2018 Page 5 of 7 • Funded status is based on market value of assets, but when calculating a contribution, a smoothing method is used to decrease volatility, so the contribution doesn’t “jump” up and down on a yearly basis. Gains and losses are smoothed over a five-year period, and funded ratios are based on the smoothed values. • Changes of assumptions raised the recommended police pension contribution to $3.1 million. Contributions consist of normal cost (one year’s accrual), administrative expense, and the unfunded component. At present, 75% of the contribution is just paying down past liability accruals. • The City is funding very closely to the recommended amount, so can expect funded status to improve over time, even though the amortization amount will increase in the short term (due to payroll growth assumption). • On the current population, the expected benefit payments are expected to total $3.2 million in 2018, which is about 9% of the market value of assets, and these payments are not expected to double for 13 years. This means the City has time to strengthen these funds and avoid liquidation issues. • The five-year smoothing method is currently accounting for past losses. Last year’s performance of 6.92% didn’t reach the 7.5% assumption, but only because the smoothing process diminishes more recent gains – that will be realized in actual value of assets if the trend continues. • DeKalb has 46 Tier One active employees, and 18 in Tier Two, when it comes to the police pension plan. The City introduced a Tier Two (lowered) level of benefits in 2011, and as Tier One employees leave and Tier Two employees replace them, costs will go down as these employees contribute the same amount but earn benefits at a lower rate. • Age and service distribution reveals who can retire right now, which impacts both the benefits paid and workforce planning. As of January 1, 2018, 6 people are eligible to retire (about 10% of the population) and a total of 19 eligible in the next 5 years (30% of the population). Alderman Noreiko asked how many years get smoothed in the process. The answer was five years back. Ms. Andorfer also pointed out where the individual years’ gains and losses are listed. Then she began her report on the fire pension. Main points covered are as follows: • Increase in contribution year-over-year was 10%, a little less than the 15% seen for police. • The drop of 50 basis points in the interest rate assumption, from 7.5% to 7%, is the same, as is payroll growth assumption that feeds the expectation of contribution increases each year. Special Committee of the Whole Meeting Minutes August 21, 2018 Page 6 of 7 • Funded status last year was 41.1%, but with the new assumption changes, it drops this year to 40.9%. Fire pension is less well funded than the police pension. • Amortization amount of the contribution is $2.7 million, which is 76% of the recommended employer’s contribution of $3.5 million. Employees’ contribution brings the total amount to $4 million. • The drop from 4% payroll growth to 0% increases the amortization number by about $1 million, a painful increase in the short term but will result in less pain in the future. • Factors that raised last year’s recommended contribution amount of $3.2 million were amortization growth of $100,000; and the assumption changes added nearly $250,000. • Fire fund production total benefit payments for 2018 of $3.5 million equals 12.5% of market value of assets, higher than the 9% of the police fund, but still not alarming in terms of risk of having to liquidate assets to pay benefits. Payments are not expected to double for 16 years; which time factor gives the City the time to further strengthen the fund. • Investment return for the year was 12%, but the actuarial value of assets shows a loss for now, 6.73% after smoothing. • Population of fire employees active in Tier One is 38, and in Tier Two there are 19. As with the police pension, over time the Tier Two benefit level will help bring down normal cost. As of now, there are 9 fire who are eligible to retire, plus 6 more who will reach eligibility within 5 years, or about 26% of the population, a relatively low number. Alderman Marquardt commented that he learns something new each year about the “actuarial world.” He then asked about the “20 and 80%” assumption for death and dismemberment, and disability. Ms. Andorfer responded that assumptions in that area are required, because the benefit structure will vary for disability, and are separated between events happening 80% in line of duty versus 20% outside of work. She referred the alderman to another chart that projects the number of actual events of rates of disability et al, which are much smaller numbers. Alderman Finucane asked Acting Finance Director Miller when actual pension contributions are made (e.g., annually). Acting Finance Director Miller said when the City receives the property tax payments from the county, they are deposited directly into the police and fire pension bank accounts. 3. Five-Year Financial Plan 2019-2023. Interim City Manager Talkington told Council that the plan is an open item, because the document contains no direct recommendations and was discussed at a higher level at the last budget workshop. She said she’d answer any outstanding questions for now. The  Special Committee of the Whole Meeting Minutes August 21, 2018 Page 7 of 7 financial plan currently shows revenue growth not keeping up with expenditure growth, and a gap of $1.6 million that can be bridged with revenues, cuts to expenditures, or some combination of both. Possible solutions can then be projected through the plan. Input has been collected from all departments, the unions, and council discussion, and these specifics are being compiled for the next budget workshop. Mayor Smith commented that he might have “jumped the gun” in his recent radio interview in terms of where discussion was on the gap in the operating budget. He commended Interim City Manager Talkington and others on their work and asked her and Council whether they felt they were “where we want to be” in terms of the budgeting process for 2019. Interim City Manager Talkington indicated she did think so that there is time for Council not just to receive recommendations, but to digest them by the time of the joint meeting with the Finance Advisory (FAC) meeting in early November. After that, they could complete the budget proposal and still have time to collect public feedback, in contrast with the rushed process last year. Interim City Manager Talkington also noted that regular reports to council now contain hyperlinks to keep prior information at hand. Alderman Noreiko noted that the previously-discussed amusement tax is not on the list of options. Interim City Manager Talkington responded that she would put it back on the list. D. ADJOURNMENT MOTION Alderman Noreiko motioned to adjourn the meeting; seconded by Alderman Fagan. VOTE Motion carried by a voice vote of 6-0-2. Mayor Smith declared the motion passed and adjourned the meeting at 6:03 p.m. _____________________________ LYNN A. FAZEKAS, City Clerk Approved by City Council: September 10, 2018.