PERB: Day 11 – January 10, 2008
City Actuary Robert North
The City’s next witness was Robert North, Chief Actuary for the New York City Retirement System. In that capacity, North determines the City’s contributions to the various City pension funds and serves as a technical advisor to the pension funds’ boards of trustees, including the Police Pension Fund (“PPF”). Following Mr. North’s statement of his background and credentials, the City introduced a document prepared by the City Actuary’s office entitled “Employee Contributions to Police Attributable to Actuarial Present Value of Future Skim to Variable Supplement Funds.” (hereinafter “VSF Report”).
North confirmed that the VSF Report was in the possession of both the PBA and the City. North explained that the document was an attempt to discuss how much of the City’s contribution to the PPF was attributable to the VSF. North explained the liability valuation method by which the Actuary determines the value of the VSF and whether the VSF requires a skim from the PPF. This requires a determination as to the value of the benefits that the VSF will have to pay out to retired police officers. In FY 2007, the City paid $265.9 million into the PPF to cover the City’s obligations to the VSF. Of that, $74.7 million was attributable to the Police Officer VSF, while the balance of 191.2 million was attributable to the police superior officer VSF, which is not funded as well as the police officer VSF due to the fact that MOS generally serve as superior officers, and have VSF liabilities occurring in the PSVSF, for a relatively short period of their career. According to North, the amount attributable to the VSF has no effect on the skim from the PPF to the VSF. The VSF report posited a total of $548.1 million of present value, or future skim, which would have to be skimmed off of the PPF and put into the VSF in order to cover currently unfunded liabilities. Since these are future liabilities, the additional money’s needn’t actually be skimmed from the PPF. Until these liabilities actually must be paid out, the Actuary must ensure that the pension is building enough assets that it will be able to cover the VSF liabilities in the future. According to North, actuaries actually put aside money within the PPF in order to fund the eventual VSF skims. North added that the amount contributed to the PPF in any given year to fund the VSF (not money skimmed from the PPF into the Fund) results in an equal net decrease in the money’s available to fund the main PPF. So that the contribution amounts for the VSF and the skim for the VSF are two different concepts.
A PBA attorney then cross examined North. The PBA first asked North whether the PPF had in the past only been invested in bond-like securities or cash rather than in equities, as it is currently invested. North responded affirmatively. North also confirmed for the PBA that investment incomes serve to decrease the City’s contributions to the PPF and by implication to the VSF. The PBA attorney then asked North about the VSF’s conversion from a variable to a defined benefit in the 1987-1990 round of bargaining. As part of that agreement, the City was allowed to take $75 million from the VSF. North also admitted upon questioning by the PBA attorney, that the equities investments had resulted in a much more valuable fund, and correspondingly less contributions were required, than would have occurred had the funds continued to be invested only in bonds. North confirmed that to the extent that the market value of assets in the VSF exceeds the accrued benefits obligations, that no skim would occur. The PBA attorney asked North what the circumstances were that had to exist in order for there to be a skim from the PPF into the VSF. According to North, the first condition was is that equity returns must be in excess of a fixed index, which is an average yield on bond securities (currently 115% of the ten year treasury). Second, the PPF cannot be in a deficit. The PBA attorney then asked about the concept of the “ABO Gate”. North confirmed that the ABO Gate was what he was referring to when he described the comparison between the accrued obligations of the VSF and the market value of the assets of the VSF. To the extent that the obligations exceed the assets, the Gate is “opened” allowing skim to flow into the VSF from the PPF. North confirmed that the last time that funds were skimmed from the PPF into the VSF was 1996. Potential skims were not transferred in 1997-2000 because the ABO gate was down. In response to several questions about investment returns from the VSF, North stated that he is currently assuming an 8% investment return for year in future fiscal years, and that to the extent investment returns exceed those estimated, then the present value future skim would decline and the need for future skim from and future contributions into the PPF would also decline.
The discussion then turned to the Actuary’s method of “smoothing” market losses, whereby PPF losses are made up by phasing in increased contributions over a number of years rather than in one year. The Actuary uses a six year smoothing method, but confirmed after questioning that other methods (e.g., seven years rather than six) would also be valid. The PBA attorney then asked whether if one were comparing the cost of pension funds by comparing employer contributions [as the City had done in its compensation analysis], he would have to know the smoothing method used by that employer. North responded that this was only one of many factors that may be unique to a jurisdiction, and that one would have to be aware of and factor in many particulars when comparing pension costs, including the benefits, assumptions, and methods used by the employers’ actuaries. Finally, in response to a question from the PBA attorney concerning whether prior year contributions were considered in calculating future skim, North testified that his recommendations for City contributions were generally, and intentionally, conservative in order to ensure that the proper amount of funds has been set aside for the VSF, but that he does not believe that he is overfunding the PPF. On redirect, North confirmed that by law the City cannot refuse his recommendations on contributions to the pension funds, and that the boards of the pension funds approve many of the assumptions used in the actuary’s valuations. Mr. North’s testimony then concluded.
The next hearing date is Friday,
January 11, 2008.