will have questions from time residents not covered on the agenda we have several actions by appointment we haven't had time to ministre this report we have a couple actions by consent and and then at seven o'clock we're going to start the precinct meeting related to the pension and ok discussion back being said i'd like to incur if there are any questions from town residents not covered on the agenda construction how deep the gonna go because this is probably the fourth construction have had with it said the six or eight months that's happened in lot of street the first construction was very deep it was the waste i don't want any more water in the basement stores and i would try to control the rats with the belmont center reconstruction but if you would like to speak with us specifically about that i recommend that you talk to the time i met a stranger and set up a time in our agenda for in the next project in detail to see if we can understand his concerns and see if there's anything we can change if possible so we are looking to listen we will listen th you very much every she had consideration you're welcome any other questions from residents not covered on this agenda seeing the action by point i think we have drache the last one is to accept a donation from friends of the market sport is anybody here to represent recommend that you accept this donation is it's noted in your back up the friends of belmont sport has received a grant from the learning by giving foundation in the purpose of the money three thousand five hundred dollars for a recreation to be used by recreation apartment for special needs programs i second all effect i thank you very much the next item is the a pool hold of a request from belmont center business association to host their twenty fourth annual holiday celebration in tree lighting ceremony on thursday december fourth been the traditional time and that's always work that pretty well i mean they've done it so many times they've got a standard procedure they do a great job well i'm sure when this team and truly thought of this but you know if we're successful coming on num so why don't we put it on the agenda for the twenty ninth and if we get to it we can my point is i want to get to it ok rather than different we're not going to excuse me i meant monday i meant for monday so it's not the twenty ninth that that's  twenty nine all the twenty seven twenty seven in the morning and then twenty men find as long as the twenty nine we don't have a bunch of applications to approve another matter that we have to deal with i realize what we have busy agendas and try to get this all in here for the for one more time i asian came in to sell used automobiles what the intent of the boarders and clearly you will require some continued conversations with the business owner to reconcile existing but in all honesty we'll see the twenty ninth of this next wednesday so we'll see if we can reconcile those differences prior to the t seven thirty we have a joint meeting with the work committee is that correct in the couple and the capital that we have in our health and so we have an hour and a half or so let's dedicate on our agenda and let's dedicate thirty minutes to the financial fast for section fifteen so represent suggest is it's a little confusing about what actually the legislation says about opening of times at ten a m and what the authority is of the local licensing authority to grant those requests and to concerned about the closing time attempt him why do you want to open at ten a m on a sunday and so laughable you know it's a good question we've looked at our business of the last four years sometimes where in there on sundays doing  tory and things we have a lot of people people on the door honestly i love time yeah absolutely and we honestly we open the door and and we let them know you know currently it's not available in the state of mass of course you know as we know we saw the law change at least signed in a different way by the governor and so i think if my sense was that people weren't looking for it i wouldn't be asking for it there's something something very nice for us as a business about expand your hours so you know we say no no i mean quick quick frankly i as you have pointed out before we have a successful business i'm very grateful in a very humbled for it's we  community members we do care about the community and we care about whether people are pulling on the door for the wrong reasons quite frankly if people want to get in there because they're headed to a football game that's at one o'clock or two o'clock that's you know two hours away we just want to be able to provide the service to the people that live in our community which is you know we've done some recent demographic marketing stuff and tracking our numbers fifty five sixty percent of the people that show up in our store come from the belmont community so the service we are providing is for the people that live right here in zero two four seven eight which is also where we live so we care very much about this community it's it's  happening now i know that when the the governor signed the bill it was said to be on a ninety day hold and that the possibility would be available for late october i began i came forth immediately and asked for the request so it's just it's happening at the holiday it could be made for me it could be it could be january we like to ask for it we had planned on asking for it when this conversation came up a couple years ago ten to ten is very nice for us where you know we're managing a business that we believe in the psyche of the people when shopping in c z to keep things in a small box of consistency and ours is one of those things it will thank you we are waiting for the town council to give us a definitive read on this and if you would just bear with us  it may be that we don't have the authority to deny so but we need we don't have clarity there is still some ambiguity and county council is researching that for us so if you don't mind we would only we have our alumni holiday dinner on thursday december eleventh from six to nine and that's a whole application and we have another woman speaker series thursday march thirty first by next application is from bonnie friedman for a one day liquor license for a bar mitzvah right here at the beach street center on october twenty fifth which is something i miss to church just so that  we have an a pool an application from the friends of the belmont public library for a one day liquor license for retirement party on november thirteenth from four p m to six thirty  i just want to read through how we're going to go through this and then i'd ask the presentation to start greg mannus director of public sector retirement system for the at the pew charitable trust will give a benefits overview  tom gibson vice chair of the belmont retirement board will give a pension overview linda born of the who is the will give an opec overview richard sullivan partner of powers's sullivan are countless well given the accounting requirements of you and peter frazier senior vice president of first southwest our investment advisor will give us a rating agency perspective of the town's relationships to these important issues we will then have a panel discussion and questions to the panel from the public and then some closing remarks just a couple ground rules we're asking one question per resident in a follow up we if there are any other questions please e mail them to our website or our e mail address to selectmen at belmont dash ma dot gov if if somebody has additional questions please wait until everybody who hasn't asked a question gets their questions asked and then you may get back in line and ask a question we will end the meeting promptly at nine thirty we're trying to do this in a way that every that it's fair but that it's concise and descriptive as well that being said i'd like to invite up to the podium and i based on some of the work we do at pew at a national level describe a little bit how in my view i think that might apply to the conversation here in belmont and lastly offer some thoughts about how we might manage this discussion of town meetings interested in continuing a dialogue on what i think is a very important issue around a long term retirement liabilities before getting into that i also want to share my understanding that this is not a conversation about taking away benefit promises that have been made to workers in the town of belmont i don't think anybody is interested in discussing that rather this is a discussion about whether we have the right plans in place to manage those commitments and also pay for the other items in the budget that are important to everybody here in the room so as i said before i'm the director of the state local retirement systems project at pew prior to that i worked for governor patrick as the systems there secretary for fiscal policy where i had responsibility for tire issues and long term fiscal planning and before that spent most of my career in the private sector in corporate finance at the project if you we essentially do two things and i've got a staff of ten people that works on number one fifty state and major city research where we look at every issue under the sun from pension funding to pension investments to benefit design all the issues related to retir health care and essentially try to gleam in sight from the best in the worst practices that we see across the country and then secondly we do what we call technical assistance that's essentially free consulting where we partner directly with states and offer them hard analysis and careful diplomacy as they're looking at challenging issues around pensions and retiring health care benefits our work today right now is in pennsylvania we have a retiree health care project in hawaii we've done a lot analysis of our people in the state in new jersey city of nashville and not so not so long to actually work with the state of massachusetts where we did an analysis of all one hundred plus state and local retirement systems including belmont really to evaluate the fiscal future might hold for those systems so i think we're more familiar with the issues that are broad level and had some experience in the state as well and across our research there's really three issues that i think are relevant to a discussion here about fiscal sustainability across the country there's over one trillion dollars of unfunded pension liabilities i think as we all know unfunded liabilities put pressure on an annual basis on the budget and require careful attention secondly although we've seen very strong investment returns and pension fund portfolios in recent years there is a high level of exposure to the stock market in economic uncertainty at a national level seventy five percent of pension fund assets are in stocks and alternative investments and i think the point there is that careful attention is required because as we all know markets do go up and down level of head liabilities are less than ten percent funded so at a high level i think all the issues here are relevant to the conversation that we're having here in belmont if we look at belmont issues around that i would say in the pension side there's two parts of the story number one the state has one of the city excuse the town excuse me has one of the lowest funded ratios for its pension plan of anywhere in the state it's i think now fifty two percent funded based on the latest actuarial valuation on average  the pallet is across the state or a little bit north of seventy percent and the bottom line is that's in the bottom or tile and it's a function of practices in decades past where not enough money was put aside to pay for bench benefits the good news is the town is many people tell us today has a very strong policy to make up for that funding long story short we have a funding plan that will have the unfunded liability paid off in twelve years and i would put that in the top quartile among the strongest policies to pay down the pension debt and one of the reasons for the aaa credit rating that we have today and i think similar to just about every state and local pension plan in the country we have a high degree of exposure the stock market with our investments and stocks and alternatives and like everybody else i think we're thinking carefully about what to do about retiree health care if i look at the technical assistance work that we do in states of cities and states and cities across the country i think two things here might apply my sense of the conversation that we're having here tonight and have been having is that there's two essentially two opposing views one view points to the fact that the town has  take a number of fiscally disciplined steps to manage its liabilities points the aaa credit rating and emphasizes the need to stick with the plan and that things will be ok on the other end of the spectrum i think there is a point of view that expresses great  concern that there's too much uncertainty about what could happen to the economy going forward that we don't have a sufficient plan about opeth and retiree health care benefits and ultimately that will create even more pressure on the budget than there is today and just to put that a little bit in perspective in the current budget i believe we're paying approximately six million dollars to pay down the unfunded liability on the pension side if are funded ratio was and fifty percent but was closer to seventy five percent which many cities and towns enjoyed that level that debt payment would only be about three billion dollars that's three million dollars we would have today to go to the budget to go to schools to help fix the roads if we made better decisions in the past now it's true that over the past decade or more the town again has done many of the right things in terms of better funding its pension system has taken advantage of most of the tools that the state makes available to us to manage our retiree health care liabilities but i think ultimately there's a reason to have some concern or at least some attentiveness to what the future may hold so ultimately if there's two different points of view one that says that we have a plan in place and we should stick with it in the other that expresses grave concern i would ultimately ultimately advocate for something in the middle where we found a way to have a conversation and continue this in an effective way and just to give one example of that we've had a lot of discussion about the two hundred million dollars unfunded liability for opeth a retiree health care benefits but i think there's very little information that any of us can use to better understand exactly what that means for the budge what do we expect cost to be next year over the next five years over the next ten years are the plans that we have in place going to be sufficient to pay for those costs without further squeezing out other spending in the budget and if something happens such as a downturn in the economy or a spike in health care cost inflation what's our plan to do something about  and i'd be happy to go into this further in the panel discussion but i think that's a role that warren committee perhaps could play to help facilitate an ongoing dialogue around this so i want to thank you for having having me here and one thing i want to share that we try to emphasize in all the meetings that we have at a state local level across the country is recognizing that this is a very complex issue there's a lot of numbers and there's a lot of technical speak around it it's important just to remember that it's ultimately the people behind the numbers that matter whether the citizens of belmont whether it be the retirees that we may pension and health care benefit commitments to ultimately we need to come up with the right set of solutions to satisfy those parties thank you for that thank you greg i'd like to ask tom you have expressed to me a general of wonderment about the retirement plan and the retirement system and how it operates so my intent here tonight within the time allotted to me and if i want over twenty minutes of the pentagon is the kill to give me the high si is to just to give some information about the retirement board retirement system some historical information about funding and investments and what the benefits are that we pay our retirees after that and then municipalities have their own system two thirds of its apologies who are in county and regional systems the other one third have their own standalone system and belmont has a standalone system because back in one nine hundred forty six the population of delmon was in excess of ten thousand and that time if your population was more than ten thousand you could often have your own retirement system which gone to a retirement plan in massachusetts is in the form of a statute we're tonight there are a regulator we report to them they have authority and power over the retirement systems in the retirement boards the town treasurer is a statutory custodian of systems assets  finances are audited regularly by powers and so on an annual basis and try any only buy buy power there is a strong cash reconciliation plan in place to make sure that many sets of eyes look at payments  disbursements and those are audited regularly so massachusetts is one of fifteen what we call non social security states in where the public employees in massachusetts do not contribute to social security that is a fact that is not well known by my many in the populace so neither the employees nog employers public employers contribute to social security since one thousand nine hundred six however public employees do contribute to the medicare portion of the fica tax and also any so scary benefits that a public employee may be entitled to by virtue of private employment or spouses so security  municipalities forty years to do that and by that time employees contributions have been increased and now the employer was being required to put aside some money to address the unfunded liability that have occurre as you can see employees who come to work for the taliban and elsewhere in massachusetts in the public sector contribute to their own retirement pensions and the contribution rates are listed here by gage and they've been steadily increased from  seventy five in the one nine hundred seventy nine allows an act of that required employees to contribute an additional two percent of their salary over thirty thousand dollars so right now massachusetts has some of the  highest contribution rates in the country for public employees at the same time the time and boards were now allowed to invest in a wider variety of of investment vehicles previous to this loosening of the restrictions they were limited to what we call the legal list railroad stocks and bonds bank notes things of that nature and they were also allowed to keep all of the returns on the investment now you may think well why wouldn't they but the reality is that for many years when the retirement system enjoy a quote unquote good year on investments the employer would take the excess returns and put them back in the general operating budget and that sort of contribute a little bit to the unfunded liability so we  and we enjoy a very good history with n b c so and in massachusetts and probably elsewhere around the country as great can tell you on the assets eleven times as income from three sources that come from the employees contributions that come from the employer's contributions and they come from the investment returns this is a shock that this is not don't want to specific this is all massachusetts public pension funds but i would suggest  a sixty billion dollars fund right now it's the state pension fund and the green bar is the u s public fun meeting return so going back one three five ten years our returns when compared to these returns fund in perpetuity so every so often every year we do this comparison to compare our investment returns with print to see where we stand there are those who advocate in the past that perhaps we should transfer the manage and versus if it was in the valuation itself would be what happens well with this is is a snapshot of a comparison comparing the liabilities of the current and future retirement payments with with our assets how much money do we have in our kitty how much do we owe and  and what that valuation develops is the normal cost which is the liability of the amounts of expected to be earned in the current year by our active employees you crude liability which is the liability is associated with that employee's prior service and then the unfunded liability and the amount by which the accrued liability exceeds the system's assets when we do the valuation then we come up the funding schedule and we are required to fully fund the retirement system as was the minutes it indicated earlier  by twenty forty in massachusetts and nobody wants to walk that far because there's no room to maneuver once you're over twenty forty and every year when we give the appropriation to the town a part of it  a uniform increase in the appropriation of six point nine seven percent from two sixteen to twenty seven and then after two twenty seven the unfunded liability will have been met and the appropriation will drop almost ninety percent when the you normally costs will be the only state and state teachers are currently eight percent for an assumed rate of return it's been recommended however that they reduce that to seven point seven five percent and indications were as recently as this week that the that the treasurer of the current treasurer will be looking to reduce assets they totaled seventy seven point two million but the actual market value was five point one million dollars more than that so that's money we're going not to recognize we're going to keep that money aside to say help offset any future investment losses that we may have  d level of our system from one one twelve to one fourteen has gone up both the market value basis and the actuarial value of asset basis as you can see by those numbers and they come directly from the as school employees water hot and we the public works and i'm leaving somebody of public safety of course all committed to our retirement system we have one hundred forty one m active members those are folks who were formerly employed by the town and and had retirement contributions can contribute to the system and they left their money here with us in the return to public service it may take good public service somewhere else other may come at some point time in and choose to retire if they have enough time in the system so we have to account for those folks as well we have three hundred forty six retire is retirees beneficiaries are survivors folks who actually receive a payment every single month the dome or retirement system the median benefit for two thousand and thirteen twenty three thousand one hundred forty one dollars and seventy six cents here's a chart again apologize you can see it but this breaks it down into buckets of ten thousand so we can see how who is getting what in retirement benefits from the dumb one retirement system the real one hundred forty eight retirees receive less than twenty thousand dollars in annual payrolls nine point five million dollars the average benefit is twenty seven six and i said the median benefit is twenty three one so over the last four or five years there's been several acts of the legislature to reform into pension reform and in this particular act the legislature went after some of the high profile abuses that had attained a lot of notoriety a few not a small number of public employees were using the system  that to their credit the legislature actually made their own retirement situation a lot more equal to what other public employees were entitled to as well so this is what was referred indexed amount that fluctuates every single year so using a hypothetical two thousand and fourteen federal compensation limit of two hundred sixty thousand dollars that would cap the potential earnings for members entering the system after  one one one one two one hundred sixty six thousand four hundred four dollars with a maximum benefit of one thirty three one to zero now that only applies to people to a members who enter the retirement system after jerry first two thousand letters not apply retroactively to existing members in the retirement system this side second state budget also provided a local option to increase a minimum allowance paid to certain spouses of disability retirees the two thousand and ten and this bill the legislature allowed for a local option to increase the current twelve thousand dollars base cost of living increase for retirees  right now the basis of the cost would be increases three percent of the first twelve thousand dollars of an individual's time allowance and so if the board were to consider race in that cola of course we would have an actuarial counting as to how much that would cost to do that right now the cold case would increase for all state retirees as the future retirees the thirty thousand dollars and two thirds of other municipalities with their own standalone systems have also increased the cola base so now we get to shop the one seventy six of the apps of two thousand and eleven this is where the legislature really went in and and applied a lot of changes to the benefit structures and i had the top three bullet points i laid because this is the time and formula that has been amended by the legislature and tightened up so with the legislature did increase the normal retirement age for for public  crease the penalty for early retirement so if you were to take every time an allowance of earlier the factor that would be assigned to that would be reduced so they also had other changes that increased interest on service to fourteen percent so what are the cost of locations on benefit reforms in two thousand and eleven but first of all they're only prospective for for new employees coming into the retirement system after full second of two thousand and twelve so once again because our retirement plan is in the form of a statute it's very difficult to enact changes to that law which impact have estimated the long term savings will be five to six billion dollars i have the governor's press release on my wall when this happens i learned i want to see it happen so carly i want to talk a little bit about the current benefit assumptions members who have been in the system for a while and again these numbers come from puracal not go through them all but the question is though who's paying for these pensions are the taxpayers and citizens paying for the pensions and to deploy or paying for how financing so it's interesting that i think would deal with a lot of legacy costs in the in the retirement system because if an employee comes to work after one one ninety six and decide who's going to make a public service career going to stay here long term thirty twenty five thirty thirty five years and retire under superannuation which is the normal retirement benefits non disability benefit and assuming that the investment returns have been met consistently throughout that employee's career then the studies have shown that employees paying most if not all of the benefits kaviak the group one member which is a most employees of one public safety police and fire correctional officers and other isolated categories employees are g for employees different calculation applies to them so that this example flies to group one employees so if that person comes in to twenty five makes thirty thousand dollars a year receives four percent pay increases on average and and his contributions are invested in the accumulator the percent a year then depending on the retirement age all three retirement ages fifty five sixty and sixty five  that employee essentially is paying for his or her own retirement benefit and these are the benefits that they would receive a present value of that in the accumulated value of the employee contributions  change it up a little bit if you decide if that individual gets a five percent increase per year and every else stays the same then as you can see when that person retires the age fifty five and sixty or sixty five they will have then again the numbers can be used and they will not be paying for their own pension but again pretty close i'm sure and finally if you lower the assumed great investment sure of the seven percent to keep the other figures  consistent then at age fifty five and sixty then employees would not be paying for their own benefit but at sixty five they would be pay for all kind of it so i think these are instructive these these numbers show that yes we have an unfunded liability problem we are working to to eliminate that issue it's a sensitive issue there are as greg that said there's a lot of numbers involved a lot of different factors at play but the board is maintaining that budget to have that so our gender we have a lot to cover we're going to talk about the open the benefits themselves why we're looking at them why we're trying to put a value on them to talk about how we do that how are we doing this valuation that calculates these liabilities that you hear about we're going to talk about different ways to possibly pre fund some of those benefits it real important information i think that we need to dispel is basically sensitivity analysis that a lot of these liabilities are really dependent on you know a possible wide range of assumptions that could be used to calculate the liabilities and we'll wrap it up with a little bit of what local communities are doing toward either reducing or prefunding those liabilities and then what belmont has done recently to address these concerns so gaspy forty five came out in two thousand and six and it is an accounting standard put forward by the government accounting standards board and they are the governing body in terms of financial statement gap reporting that requires governmentally when this is all all walks of this pull and cities to measure recognize and display military so it's very important to understand what brought these numbers out into the forefront was really an accounting standard on how to report the liabilities there are particular ways that the gaz be has calculate these liabilities and we'll talk a little bit about those requirements but one thing that gaspy does not require and that is the pre funding of opec benefits there is a huge distinction between funding search and certain liabilities and reporting them and as tom mentioned what the retirement system tends to do is they they spend a lot of time working through funding policies because statute requires the retirement system benefits to be pre funded and ultimately fully funded by two thousand and forty on the open side there is no such body there is nobody at this point who requiring prefunding so this community and pretty much most other communities are really funding the benefits on a pay as you go basis as the parent benefits become do every month health insurance premium bill comes in the town will pay for it all right so guys we forty five again an accounting requirement that develops what's called the in your required contribution it's sort of a misnomer because it is annual that's about the only thing that you know right about it it's not required it is a contribution and it's made up in terms of an actuarially sound way to calculate an expense or rate so the expenses made up of a normal cost same definition as we look at on a pension system and that is the cost of the for the liability the present value of the benefits earned in this current year by our active employees a retiree does not have a normal cost they are probably basically have fully earned their benefit there is no future benefits that they're earning as they're working we're just trying to look at this normal cost piece for all active employees and then we have what's called the actuarial accrued liability lest any assets if there are some and that would be the unfunded liability the unfunded liability sort of treated like a mortgage you have a balance as of a particular day and you need to fund that but again in gadsby forty five terminology not really funding it you really just calculating that emerges ation of that unfunded liability so that it can if that is part you know in a component of the in required contribution or the expense be for forty five further goes on for a lot of requirements on disclosing certain information about the plan who it covers whether or not there are plans assets what the liabilities are all of those you will see in notes to the financial statement for any entity state local governments water districts in their financial statements you will see all of this disclosed information regarding minutes poli liabilities and one of things you'll notice is that there's a a wide range of liabilities that are reported and that's because the assumptions used to calculate those liabilities can vary wildly all right so what we do when we're calculating the liabilities is we actually collect all the census information from the town that includes all currently active employees who potentially could be eligible for the benefit so a seasonable a seasonal employee probably will never have the required hours working during the week to actually collect this benefit what you might think of is for these people people anyone who probably is eligible for retirement benefit is probably going to be eligible for a post retiree medical benefit what this system has that the retirement system does not is inclusion of the teachers all of the teachers in the commonwealth are actually members of the massachusetts teachers retirement system that's funded by the state for retiree medical benefits each miss apology who is the employer of these teachers are actually responsible for paying for the retiree medical benefits we also look at all the time retirees people who have worked here have retired from belmont and have now elected health coverage for either them or their spouse and or their spouse and then again the school retirees school teachers who have retired from the system they may be a member of the massachusetts teachers retirement system but they are for retiree medical purposes and in former employee of the town of elmont so we would include those who can kind of see the various plans that are  offered one of the things that law and now requires anyone once they turn sixty five if they are medicare eligible will be required to enroll in a medicare supplemental plan and that is kind of by law it used to be a local option for communities to elect whether or not they would require retirees to do this recent pension sorry recent health care reform change that so that now it's it's by law so it kind of gets the town off the hook for forcing that movement of retirees who light of state on what we call pretty the premed a care plans you might hear that or the active plans because when you're not medicare eligible yet you're say sixty years old and retired you cannot become you can't go on medicare you cannot be in a medicare supplemental plan so you would be in what we call the active plans of the premed a care plans there's plan provisions there's eligibility kind of consistent with the eligibility requirements for the different types of employees just like in retirement system group one employees are the general employees and your group for employees of your public safety group for public safety employees can actually retire a little bit earlier than general employees and again i kind of listed some of the issues between the pre april second two thousand and twelve employees and post we have entered that into our model that for more recent more recent hires we're anticipating that they're probably going to retire a little bit later because their full benefit from pensions will not be they'll of all till they're sixty seven for example in the general employees the plans are that just means there is a premium that's due every month and the in town will pay for a portion of that and the retirees will pay the remaining portion for the belmont plans retirees pay up to fifty percent and that is the la of chapter thirty two b of mass general laws say that in this polity who offers health insurance to their retirees cannot charge the retiree more than fifty percent of the cost of those plans there's also a very nominal life percent of the medicare part b premium again for retirees who are sixty five and older and on medicare so now we have two pieces of the puzzle the three pieces in total we have our census data we have our plan provisions now we have to make some assumptions about how to project an estimate what we think are going to be the stream of benefit payments that the town would be obligated to pay in the future so we have current retirees we want to look out if they're on a particular plan we kind of have a good indication of what they're getting in terms of a benefit today but we need to figure out what will that benefit be next year and the year after and as long as they will live so we have two pieces to think about is the longevity or life expectancy of those retirees and the benefits that they're getting how are those benefits going to increase in the future and you hear terms like health care cost trend rate that's what we applied to try to estimate that but we also have active employees who are currently working who may ultimately retire may elect coverage and then have their own life expectancies to kind of live through so we have to kind of apply all of those assumptions on whether or not an active employee who might have just gotten higher in these twenty two years old what is the probability that he will actually retire and collect one of these benefits so the two biggest economic assumptions that we look at here are the discount rate once we come up with that expectation of all those future payments we need to discount that stream of payments back to the present that's what's called the present value present value in terminology is the accrued liability then we have health costs health care sorry health care cost trend rates premium today is a particular level we know next year that premium is either going to stay around the same or may increase a year after it's going to increase and so on and so forth so we need to decide what do we anticipate those health care costs are going  they're going to increase in our previous valuation which was done as of july one of two thousand and twelve our outlook for health care was kind of bleak there were a lot of pretty you know recent high increases from year to year so we were anticipating that from two thousand and twelve forward health care was going to increase ten percent in the first year nine percent thereafter and decreasing by one percent a year up until we call the ultimate five percent rate so benefit payments way way out in the future i would assume to increase that five percent a year we have currently will be working on the next valuation same requirement as pensions a buy in you will every other year valuation we've already started looking at the health care rate so we can start talking assumptions and the health care rates are actually fifteen percent lower than what we expected them to be two years ago so that is nothing but good news in terms of our starting point where we're starting health cost you know on july one of twenty fourteen then we need to again think about the future and apply health care cost rights to the future again so we will have a recommended assumption change immediately before we even get started on the twenty fourteen valuation that we will be looking at trying to rates and and pretty certain that we will actually reduce them in addition to those economic assumptions and those are by far very important and they really cause  their liabilities are very sensitive to the choice of the discount rate in the health care trying rates there are other assumptions that i later to we need to figure out whether or not that active employee is actually going to retire and if he retires when so we need to look at things like retirement rates disability rates where the rates of people may become disabled or turnover what what's the probability that they may work for belmont maybe for five or six years and actually leave and never collect a benefit so we actually look to the retirement system actuaries and their valuation report assumptions and use those same assumptions for the valuation in addition and then that would be looking at both general employees and public safety employees they do have different retirement and disability and turnover rates and then for teachers we actually look to the retirement system valuations performed by the state actuary for the mass teachers retirement system we do also look at longevity and mortality and our mortality assumptions are assuming longer and longer long term for people so that has added to the the liabilities because as people live longer and they're collecting this benefit over their lifetime liabilities will increase as we assume longer a lot of longer life expectancies participation rate was covered just quickly is once somebody does retire what's the probability they actually might actually collect or elect coverage under these plans and if they do elect coverage who's going to cover a spouse as well so all of this information is available in the valuation report that we completed as of july one n there was some significant plan changes that were made to the program that resulted in a twenty six million dollars gain and i'm going to talk gains and losses none of the decrease the liability the plan changes were lowered the cost we changed the discount rate the discount rate in the previous valuation was five percent and that is a little high in terms of an unfunded obligation rate so we b decreasing the discount rate lower discount rates mean larger liabilities so that created a seventeen million dollars additional liability a loss is how we would define that and then some modest assumption changes we  lost a little ground there as well and that increase the liabilities but in total from what we expected to happen in two thousand and twelve from the prior valuation we had a decrease in the liabilities of the vote for and a half million dollars open trust and what that just means is there is a vehicle that is in place to place trust or put trip place employer contributions into a trust that will be used to fund these benefits and there's three criteria in order to be an irrevocable trust in terms of gaspy forty five first thing was the contributions must be irrevocable once they're in the trust they need to be used to pay for these benefits the benefits are dedicated to providing retiree medical benefits only and that plan assets are legally protected from creditors so if you have those three criteria you have a trust that usually spells those things out then you have what ghastly forty five would consider a trust in which assets can accumulate and can be used to offset liabilities and recognized in your financial statements so i talked about early on in the presentation that as we forty five is for reporting and disclosing information about opeth a liability plan provisions assumptions use but it doesn't really talk about funding so funding usually is a separate discussion and there's you know many ways to to pay for these benefits i want to say many i probably should've said most mis apologies or financing open a page you go you have to use a pretty low discount rate it's supposed to be based on the the rate of return on the assets that are actually used to pay these benefits while the general fund is used to pay the benefits because they're all on page you go for some it could mean potential ramification on bond ratings but i think we'll hear more about that later and so for fiscal year fourteen we anticipated back in the july one two thousand and twelve valuation that our page you go cost in italy would be about five point one million dollars the other extreme end of the spectrum is to fully fund what's called the in a required contribution remember that was the accounting terminology for that annual expense it could be deemed as an actuarial calculation that is probably the most aggressive form of funding and and not only for reasons that it's kind of fully funding under the gas requirements but gadsby has a few requirements in in its statement that really doesn't sync well with with prefunding these benefits and i'll talk a little bit about those later but of course if you going to prefund you need an irrevocable trust step one but it does allow the use of a higher discount rate and as i mentioned the higher your discount rate the lower the liabilities  fiscal year fourteen this in your required contribution was thirteen million dollars if we've already paid five point one pays you go then we would be contributing if we were contributing the full hour to the open trust of about eight point two million dollars in that one year what most most apologies who do have an irrevocable trust in our prefunding i would say they partially pre fund many many contribute some excess free cash they might have a policy that states we will contribute a certain percentage of free cash every year that of course again you have a trust you need a trust in order to how is the assets but then you can use a blended discount rate but most of the prefunding are still quite close to that pays you go discount rate because they're just not really funding very close to that are so one of the things i really want to talk about tonight is how sensitive are these liabilities to our choices of discount rates or other assumptions that we make to project these benefit payments out into the future and this slide hopefully you can see it the baseline is what the valu on is is performed on we use a four and a half percent discount rate and that creates a liability of about one hundred ninety six million dollars if we were to add one percent to that discount rate and and  take the present value of all these benefits at five and a half percent and we would actually calculate a liability of about one hundred sixty three and a half million dollars or right off the bat thirty two million dollars could come off the liabilities by changing the discount rate up one percent conversely if we lowered the discount rate by one percent and and calculated these liabilities at three and a half percent we would add forty three million dollars to to the liabilities just by changing an assumption and as i mentioned in a previous slide if you remember we did change the discount rate from five percent to four and a half percent and that created a seventeen million dollars loss or additional liabilities so you can see how sensitive you know we're talking about benefits that are paid well out into the future and that's you know that creates a lot of sensitivity to trying to discount those benefits back to the present the other economic assumption we talked about was a health care cost trend rate that again we have trends that we begin and end that tend means in year one it's ten then it's nine eight seven six five forever again creates the same hundred ninety six million dollar liability but by increasing those trying to raise by one percent we would add another forty one million dollars to the liability conversely by decreasing them one percent a year we would actually reduce our liabilities by about thirty one million dollars so again you know keep it keeping that in turn in sort of in perspective on how sensitive the liabilities are to these want plus or minus one percent of the discount rate of the  can see how they can be pretty volatile our valuation report actually does have a plus minus trend rate analysis to sort of show you a few of the pieces to retirees versus active employees how that kind of sensitive to those choices so we looked at some nearby communities they're what their unfunded opeth liability is whether they had a trust and whether there were you know what the balance was and then further the discount rates that are being used to calculate these liabilities as you can see they're all over the place and in dition to that the discount rates are really quite varied so if you look down to a town like newton has a unfunded obligation of about six hundred in one million dollars but they're there discount rate is two percent a rate that's less than half of the discount rate used by belmont and generally the way i look at it if you sometimes will show like a four percent discount rate versus an eight percent you could actually cut your liability in half by doubling your discount rate like that so again to compare communities it's there's a lot more than just shown on this slide this slide shows a discount rate that should be step one in thinking about you know a two percent community everything else being equal it's going to be very different than somebody discounting it for other things like the trend rates could be very different the ulta the underlying plan is actually going to be something that is driving a lot of these benefits is what kind of plan is being offered and what are the caution provisions so some of the things kind of again we're going to go forward on think about these nearby communities every valuation is sensitive to the census data it's who is who is being valued who are the employees what is the makeup of the employees it is that is that it generally younger employee group older or are there more public safety employees in a particular community than others because public safety employees generally are a little bit more expensive so you know we're talking about all those differences between communities that the the people that you're looking at the employees retirees could be different embedded in here also are some assumptions when will the employees retire every system every minute  look at different retirement assumptions belmont's retirement assumptions for their pension may be different then winchesters next door every valuation is sensitive to the plan provisions which i mentioned what are the benefits promised you know is the car sharing a twenty percent eighty versus fifty fifty will will benefits be paid for life in this case most of them are once the retired person elects coverage they will have this coverage for life again what are the costs of the underlying plans and again how long are those benefits continue after retirement and i think most importantly every valuation is really sensitive to the assumptions that are selected or rate so you have to talk about this they have a significant impact on the size of these liabilities our assumptions are first used to project the stream of payments out into the future then the discount rate is used to calculate a present value or the opeth liability the health care cost rates can vary as i mentioned in our in our old evaluation we started at a ten percent rate in this environment today that's probably a little high overly conservative so we'll be looking to reduce that initial trend rate discount rate depends on whether or not assets are being  another topic that can actually play into the plan provision and what exactly are you valuing there is something that is required by gadsby forty five for an experience rated community and that's the implicit subsidy and that has to be included in the liabilities experience rated just means for all of your priest sixty five not medicare eligible yet retirees they are pooled together with your active employees in order to  their benefits so when you experience rate those groups you're you know people know that it costs more health care costs more for older people than for younger people but we don't charge different rates we don't charge health care in a group plan on ages based on age we charge a blended rate so everyone pays the same gadsby forty five requires us to value for a retiree so we have to adjust those rates a little bit upward and sometimes it can be not a little it c pretty significant depending on the average age of your active group and then the average age of all the people in the group so these are the kind of things that really can skew comparison information if you're not digging down into the weeds reading the valuation report seeing what's covered every valuation report should have a clear description of the benefits provided the census information used and the assumptions that were used to calculate the li belmont done to address some of the costs and again i look at the cost is the the benefits that are being paid for the benefits annually that the town they're contributing on behalf of retirees they did establish an opec policy opeth trust so they have the criteria that does allow the auditors to say yes this is a valid trust that meets the three criteria and there is a current balance in there of one point nine million dollars so we can look at that trust balance and offset the liabilities as we do our projection models and as we prepare the disclosure information for the auditors as you remember from the side a few sides ago when i talked about the changes that and ten through two thousand and twelve there are some pretty significant health plan design changes those are very impactful not only for a ghastly forty five valuation but for budgeting because it's the true costs of those benefits that impacted by your health plan design changes requiring medicare eligible employees to enroll in medicare supplemental plans at age sixty five prior to the legislators coming in and saying that you must go into those plans belmont had adopted it was called section eighteen of chapter thirty two b that required medicare eligible retirees to go into those plans that can cause significant reductions in liabilities because when you're on a medicare supplemental plan those are not as expensive as a full aft of plan that covers everything because medicare is picking up the primary benefits as you said gaspy forty five requires to work with the town accounting and collecting all the information it is a pretty intense process to get that data compiled and go through all of the you know getting all the new rates and reviewing the data to come up with possibly assumption changes that we want to consider and so we'll be working on that over the next several months and i think again thank you for having me and you staying around for questions later ok i guess my job for you right now is just talk about how this information that was just shared by linda and tom and how that appears on your financial statements your audited financial statements so that's what i want to do for you right now right now the first thing i want to talk about is the pension now you think i think we had a nice discussion on the assumptions in the end the lying to say the underlying facts that provide for information  actuary comes up with in terms of the unfunded liability as well as the annual costs associated with a pension so how does it appear in your financial state well what's going to happen is actually after fiscal fourteen is going to change i just want to tell you what's happening now and i want to tell you how it's going to happen in the future right now the only thing that appears relative to the total liability associated with the pension plan is in the footnotes in some communities that don't have a standalone pension plan  also in what's called quiet supplementary information and what it is it's about a page and a half to two pages of footnotes which lays out the plan description which includes types of membership active retired active people in active people retirees free fiscal years of contributions that were made by the town and also any assumptions associated with their costs whether it be a coal or increase the the actual payroll increases whether it be divided by in belmont's case they do some for that group one group versus another as well as the assets accumulated and what the unfunded liability is the key to understanding in your financial statements what the pension plans let's say reporting is is that as long as what the annual required contribution which is determined by the actuary is made by the town to the retirement plan there is no one there is no liability it appears on what's called the state nepos ition what does appear and it's allocated among the functional groups within the financial statements is the actual cost of that contribution which give or take was about six million dollars in f y thirteen i'm not sure what it is roughly fourteen just yet so what's happened with the gadsby is they introduce gadsby number sixty eight and the purpose of gadsby sixty eight was to kind of pull back the curtain and really put on the front of your financial statements what that liability represents to the town it what it's going to do is the way your financial statements are set up you have a stable net position and a statement of activities considered like a balance sheet and a piano on the balance sheet you're go show a liability which is going to be close to the unfunded liability that you have as of year ran which is about sixty seven million dollars based on the pre on the two thousand and twelve actual report i don't know what that's going to be in the next one but that's what about what it is it's going to be somewhat less because it's going to be some present value calculations associated with it and maybe some fair valuation of assets which they don't tend to use on a regular basis but that number is going to be significant and it's going to appear on your statement of deposition in something called the first in flows of resources so now in addition to the the disclosures that are in the footnotes you're going to also have a number appearing directly on the financial statements and i think that's going to do i know it's going to do as gary has tended to do with gadsby forty five is draw attention to the significance of these liabilities and the significance of the fact that they're not funded just  yet now the footnotes clearly state as it was mentioned you've got a plan here of thirteen years you tend to have this thing fully funded only the only difference now between what we have in fourteen what's going to happen from fifteen future that number's going to be sitting like the elephant in the requirements of health care costs to do a nice job of putting together all the reasons for that as well as some of the disclosures related to it this is a little different this particular liability or a portion thereof does appear in your financial statements earlier when i was talking about the annual required contribution of the arc the difference between what is actually paid which we refer to the page you go and the actual amount of should be put into the trust t established to not only meet the current year obligations of retiree benefits but also set aside money for the future years the difference between that appears on your financial statement in this case it appears on in the notes on page fifty two in fifty three of your financial statements and that number as of two of june of two thousand and thirteen was fifty seven point six million dollars which means that through june two thousand and thirteen since gabby forty five was an act that you should have forty five million dollars in your trust sitting there waiting to be used because the idea is all the money goes in the trust and the pays you go comes out with the remaining portion left over to meet your future obligations so what happens here is on your statement of net position the difference between that amount that suppose we put into the trust and the amount is actually paid to the retirees for the benefits that they receive in the coming year shows up as that fifty point seven million dollars that amount is considered to be an expense which flows through your statement of activities or as i said your profit loss to me now in addition to the amount that appears on the financial statements which is the amount that should or somewhere set aside as of the year and that we're auditing in the footnote disclosures it also shows from the actually put that was put out in july of two thousand and twelve what the total unfunded liability is not the amount that hasn't been set aside yet based on the annual contribution but the actual unfunded liability in that case was about one hundred ninety six million dollars through two thousand july first of two thousand and twelve now this is what is appearing on your financial statements this is this is how the gaz we and folks like me deal with these liabilities so one of the things that i've i've had asked to me in the past is how can you give would be called an unmodified or clean opinion on a set of financial statements when they have these significant liabilities liabilities that some people would say are of the kind that can handcuff and the operation of a community well the reality of it is that we're pining on the fair presentation of that information and that fear presentation of that information is based on generally accepted accounting principles as well as the gaspe which is part of generally accepted accounting principles and the fact that these liabilities are there and they're accurately stated is good enough for us to be able piling on in the case to belmore give the best opinion get which is an unmodified opinion now the next question i've been asked in previously is well if these liabilities are so big how can you guys as authors rely on those numbers and what we do is this i called a u section three thirty six i'm not going to bore you with it but it's called the use of specialists an actuary is a specialist and actually was a person who comes in and tells us what we don't know how to calculate and then as a professional i'm supposed to evaluate how good they were at doing that in the three bullets that i show you the moment considerations are there professional certification now i can remember the aca knows we can rely on the work of specialists for the audit evidence in order to then put that information in the financial statements and applying on and provide the unmodified opinion the last thing i want to leave with you as it relates to the financial statements and you know belmont's aaa and what how that affects moody's and s and p and p or frazier is going to talk a little bit more about this in a minute or two is that what i've found today is that the rating agencies are really concerned about how you're doing among your peers not just belmont but every one of my clients how are they doing among their peers do you have a plan in place is there's is there a thought process in your organization is that this recognizing the fact that there is a liability out there and the fact that it has to be dealt with in some form or manner well belmont has a of i do sure he trusts one point nine million dollars i guess at the end of one june of two thousand and fourteen it's a start i mean i'm probably the first to sit here and i think i've said to the group here it's kind of like a pimple on the back of an elephant with a liability you have out there but it's a start it's a plan so what are the things to take a look at is what is happening in the other thing that i've learned at least from dealing with the folks from moody's and s and p is that even before gas be forty five even before gas p sixty eight which is coming these liabilities have been known and vetted they've been understood by the rating agencies since the get since they've been providing ratings to communities now i think it's appropriate that it's getting more attention now just because of what's happened in the health care industry particularly for gabby forty five and then we talked about the trillion dollars or so of unfunded liabilities give or take the pensions it's getting attention but they've always been paying attention to this so from this from the perspective of myself as a as an auditor and person responsible when you go to financial statements the fact that you guys have a aaa makes sense to me because of all the other factors when i look at all the key analyses in the ratios of your of your rough financial statements as as compared to peers and other massachusetts communities in the fact that i think that moody's has already taken into account a lot of things or talk about it tonight thanks thank you richard and next i'd like to invite peter frazier senior vice president of first stop west our investment advisor to talk about rating agency perspect good evening and just by way of introduction my name peter frazier i'm a senior vice president of first southwest company in boston and i've had the privilege of working with belmont since the late eighty's helping with  and floyd kerman inviting me here tonight to talk a little bit about the rating agencies perspective every time the community goes out to borrow money for schools or roads or younger with whatever  you have access or an interface with the rating agencies and or the rating agency in your case moody's and it's an exhaustive process where they sort of look at everything if in terms of finances and whatnot and so what i thought i do before i got into the open and the pension topic was was sort of get everybody sort of on the same page with respect to what is a bond rating what's the value of a bond rating where they look at it drives of the various credit criteria and then we can talk about that and then perhaps a little bit about other funding  options with respect to ok so what what are bond ratings it's simply an opinion of the credit worthiness of an issue in this case the town the one and it's used by market participants underwriters the folks that buy and sell on and notes to to determine the prices of those securities essentially to set the interest rates that the issuer in this case belmont would get and what they do is they assign  a rating here's moody's and standard and poor's rating scales as you can see belmont's sitting at the top of the scale the aaa rating the highest rating at the end of all and there are a number of other bond rating agencies these are the two that do almost all of the local municipal bond work in massachusetts and this isn't each each scale isn't the entire scale this is referred to as the investment grade rating within the the rating scales the rack surely some below this that would be called junk bonds in terms of bond ratings did these are the investment grade skills so there's there's nobody in massachusetts currently below this and a sexually what it reflects is that the higher the rating the last perceived risk of default or late payment in terms of the investor and it's a handy tool for mark participants so that they can figure out relative  in terms of translates to interest rates these are yield curves by rating as he can see if you have a twenty year bond it's actually twenty individual maturities twenty individual loans categories are referred to as quality spreads and so in terms of what the value of the credit rating is obviously the higher your credit rating the lower your borrowing costs you also have greater market access meaning that there are more market participants out there that are eager for those safer investments and that that supply and demand is what  allows you to borrow at those attractive rates and the real value from a dollar standpoint is that translates to savings versus a lower credit rating so in this case a hypothetical hundred million dollar bond issue over twenty five years the additional interest cost that a double a would pay over aaa is ballpark right now about two and a half million dollars and right now interest rates are very low so those rates are actually compressed in a more normal interest rate environment there'd be wider crop quality spreads and an even greater benefit to having that very high credit rating and the other value of rating is it's an unbiased expert assessment of the town's wellbeing in terms of the this works of things that the rating agencies examined every time you come to market is it falls into four major categories economy economy management finances and debt and contention liabilities with and that's what we're going to talk about tonight in terms of pension opeth in terms of economy they're looking at the local economy regional national economy the tax base tax collections employment wealth levels and so forth management they're looking at the management's experience sort of their resumes if you will the policies and procedures that are embedded in the town where they're your planning and forecasting practices as well as the frequency and type of performance monitoring budgeting practices except with respect to finances they're looking at reserve levels there they're looking to see that there are structural balance meaning you do your recurring revenues do you have recurring revenues that support the recurring expenses there they're looking for  historical stability and operating trends surpluses and starting about a year ago moody's changed their methodology and sort of assigned  more explicit percentiles to teach of these rating categories so when they're looking at the economy they're winning that about thirty percent of the rate the rating management gets about twenty percent finance is thirty percent  debt and contingent liabilities debt is ten percent and pension is ten percent interesting lee because of the nature of  terms of the sort of the strength of the promise and the variability of opeth versus pension they don't assign it it's own percentage if it's referred to as below the line so it's weighted in the decision making but it's not as discrete as some of the other the other categories with respect to when they're looking at debt and the unfunded liabilities  is in massachusetts it's all fixed rate debt typically when you go out and world it's you can't you have no flexibility for the but generally the first ten years of a loan so you do you're locked in whatever you do with debt with open pension they tend to be more flexible because you have the ability to alter the terms of the benefits you can adjust act actuarial ation schedules when we're talking about what they look at when they're analyzing unfunded pension and opeth liabilities they're looking at the gross amount of the liabilities they're looking at the funded ratio meaning the the assets as a percent of the liabilities they're looking at the images ations schedule essentially how long a schedule you have to become fully funded and there are as richard pointed out there they're looking for an open up trust and an in terms of comparing with you or your peers which which as was stated is extremely important for movies in terms of when they're there doing their assessment the fourteen cities and towns that are rated aaa by moody's they're about thirty four that are rated by standard course aaa but in terms of keeping this as sort of manageable group you know you  have the most aggressive pension retirement being fully funded by two thousand and twenty seven of all of the ways so that's clearly a credit positive but you are closer to  the bottom of the cohort when it comes to your funded ratio that being i guess it's now fifty two percent that the older material that i'm working with was at forty nine point nine and the those triple ways range from forty three point seven percent to seventy eight point three percent in terms of funding and as was pointed out you know the level of funding is a function of not only what's been contributed in the past but how those assets are performed in the fog and with respect to opec of the fourteen you're close to the bottom right now as well in terms of looking at and i college as if this is too small that there are that takeaways are pretty easy that the first two on the left hand side deal with unfunded pension liability and if it looks at first  dollars and then as a percent of revenue which is one of the metrics that that that moody's uses to disorder normalize between different systems because dollars you know are particularly relevant when you're doing comparisons between systems that may be very different in size on the right hand side and you can see in terms of your unfunded pension liability as a percent of revenue at seventy percent you're not you're not the lower or the highest that would be brooklyn at the moment but you can see where you've sort of fall within the  liability as a percent of revenue it should be and these numbers aren't adjusted but but one of the things that moody's does because as linda pointed out there are so many assumptions make in everyone's numbers and the various communities may have a very different set of assumptions that what they do is they do some simple normalizing and in the case of unfunded pension liability what they do is instead of using the actuarial discount rate that you use what they do is they substitute that with the citi group corporate bond index and use a three year average which ends up in your case overstating inflating the pension liability and then they basically take that number as a percent of budget and also look at it as a percent tax base to figure out sort of how you stack up with your peers not as well funded and but in terms of that final pension funding date you can see that you're amortizing your and your liability currently under going to its schedule in terms of opeth funded ratio you know it's really important that everybody understand that opeth folks are still just getting their arms around it you know it was only was less than ten years ago that mo first came out and although they they sort of knew it was there the practice almost universally was that it was a phase you go number and people were were weren't doing the same sorts of calculations from an actual world standpoint that they are now and almost no one was setting set aside money so the fact that you guys don't have a particularly large balance you can see almost nobody else t the next ten years we're going to tax folks a million eight more than you know our normal levy and we're going to take that money and we're going to stick it in that trust so that's kind of how they got a jump start on their number and and brookline was also sort of forward thinking in terms of salting some money away in terms of credit rating agency considerations you know it's it's important to understand one that the rating process is an opinion it's not perfect and it's constantly evolving in terms of the the way they're looking at these liabilities and how they're going to to fold that into their credit decisions on your rating and others in terms of and again not to being sort of a peasant repetitive with richard but rating agents or rating agency are currently looking for sexually for things right now and that's the periodic actuarial valuation reports that massachusetts are required and you're you're doing that they're revocable trust and and you're doing that so that's good you've got a funding plan that's positive and the other thing they're looking for is a historical and future commitment that from day one that clearly by as evidence by this this meeting you know you guys are ahead of the curve in terms of learning about it and making that commitment some folks who have asked well what are our alternatives with respect to funding these liabilities and there have been probably over the the pension plan as actually to partially or fully fund it and the idea is then you know they're they're not issued by the pension system itself and it would be a general to fund their pension systems that the so the idea is that the plan sponsor uses the money to to put into the pension system and now you've got effective no unfunded liability there and you've traded this schedule the sort of soft liability that's malleable that changes over time to this very hard you know this is that now you can't get around making the those payments you don't have any relief you can't stretch out the payments if you want to do so there are some risks and potential benefits the bank benefits obviously is the pension plan is fully funded with the proceeds and there can be substantial savings realized if versus the existing amortization schedule because again that's got a imputed rate of seven and three quarters percent right now versus whatever the bond rate is and it's important to keep in mind that these are tax exempt bonds like you would normally use you for your schools you roads and so forth they're taxable bonds because it's essentially an arbitrage play what you're doing is you're borrowing money to invest in the stock market or whatever that basket of investments is and under the federal tax code that you're able to borrow at tax exempt rates meaning the lender the investors don't have to pay income tax on the interest that you pay them but in this case because these are considered a public purpose of by the tax code you're borrowing  taxable rates which are higher and so anyway but to the extent that that you meet your actuarial investment return there may be an opportunity to save considerable money with the over the life of the bonds from a rating impact that's neutral to the positive again depending on whether or how the assets perform and one of the benefits is if the market's low when when you do this borrowing and you you essentially dump all this money into your pension system at a low point in the market you may have extraordinary returns but that also  counts as a risk because you don't know you know where the market is relative to the future at any given time in terms of the risks of the pods and they can't be understated there's reduced flexibility you've you've just again given up all that flexibility to stretch out your schedule or shorten your schedule to provide yourself some relief should there be a problem in terms of the annual appropriation and analysis in terms of that by the rating agencies which you know more debt is worse than less debt from from their standpoint so that that is a consideration and if the retirement before portfolio underperforms once you put that money in there there's there's going to be new unfunded liability generated and so you may not not only have you now locked in this hard schedule but you're also generating more unfunded liability that's going to have to be him and the other risk obviously is if you do this at a time where the  market is relatively high when you're in buying all these investments for your portfolio that can obviously hurt but finally i just want to leave you in terms of the pension obligation bond ideas there are obstacles there's no general legislation to permit pension obligations on borrowing it requires a special act of the legislature  and the commonwealth at least in the case of brockton which was the most recent two thousand and five issue they imposed restrictions that basically said we don't want you do do it if you're going to do this we don't want to do it to do it for the wrong reasons in certain parts of the country where this is been done it's done as a mechanism to essentially alleviate budget pressure in the current year that the next couple of years and  by essentially substituting those images ation payments that you were making with that service payments but if you could structure the bonds g s where i don't have payments for the next three years or five years or whatever and i back load the d have you know i got myself out of this this hole in terms of from a budgetary standpoint there they basically said we're not going to allow that we're not going to allow you to take any benefit in the early years of those who you have to backload the benefit as opposed to back loading the debt so that that may change some of the appeal of and some of those restrictions may change some of the appeal of doing pension obligation but and then finally you know iraq and the department of revenue has had some issues with the pension obligation bonds because in both cases with worcester and brockton they did ok with respect to the level of interest rates they got on the bones of the problem was the timing in one case right before sort of right before nine eleven and that the hit the market took and then in the second case with two thousand and five you know they would all these these proceeds into the pension system in two thousand and eight the financial meltdown they suffered that way so you know it's  it is an option but if everybody's got to go in with a real understanding of the nature of risks associated thank you thank you peter but i'd like to do now is invite the panel to come on up here and including senator brown's burger and representative rogers and have the public come up to the microphone and ask any questions of the panel and again will really want to do one question per resident and a follow up and any additional questions please be prepared to send them to selectmen at belmont dash and we will get back to you on them please come forward and introduce yourself and your address and please ask questions and we'll directly to the right precinct one first of all thanks for organizing this i'm sure it was a lot of work and probably alignment of a lot of stars to have all of these people here and so thanks for all the multiple people who put it together and town member meeting i don't actually i e mailed them but i don't actually know what it looks like mr williams who helped organiz you i had a lot of questions but i'm just going to ask one so i prioritize my most important one that they didn't feel like was answered here that i'd like more background on which is the point about the teachers being part of the system and i'd like to have some background on how that came to pass in the i think someone said it was there in the mid eighty's how that came to pass that the teachers became part of the state retirement system what was the s where the state teachers had their own retirement system except teachers in boston belong to the boston retirement system and they see in the end they still do although their assets have now been transferred over to the countries your best would manage when what's with that was there was an act of the that thank you please if i could chime in on that just to say that that's common in the vast majority of states i think is only several exceptions the state sponsors two major pension plans one for state employees hundred teachers there are also smaller plans but it's a pretty common practice across the country do you mean my name's jim williams i'm a town meeting member precinct one and i'd also like to thank the board of selectmen for organizing this meeting  as i'm standing here we're certainly a long way from where we were at the last town meeting and so i appreciate you all following through and bringing these experts to to bear on these important questions i have a number of questions i'm going to get back in line to talk about specifics i don't agree with everything that was presented here today but i do appreciate answers to questions that i had submitted to the board of selectmen earlier in that particularly came through in the rating agency presentation and also in the open presenting but i'm probably going to surprise you but i want to talk to you richard so and when i was elected last year the first thing i did was to read the two thousand and thirteen report annual report and in that report the management analysis says that does not have the reserves to meet its obligations to its citizens it creditors its employees and i was wondering who wrote that analysis and who the management is  the you're saying who the management is of belmont you know the the in your report the comments are you bought into the comment right and i'm not trying to be combative i'm just i know we're trying to figure out in terms of the of the city government who you know the people who are the people that are behind that management analysis and comments of no i personally think that you almost have written it for them because i don't think you know an independent you know the group came together in and  from the beginning process we might highlight some of the issues some of them as it occurred inside the financial statements for that year certain evaluations in your consideration as to what the reader can expect to see in the only or would it be the board of selectmen the treasurer and the town administrator will who are the people to the governing body is always the board of selectmen and that's where the a fact our opinion is too over when it gets down to you don't do what's called  and sometimes even signed by the finance director so it varies from community to community oh this is a good take away from belmont though i mean i think david killed those more about the financials than anyone sitting in this room but i'm not sure that that he would be the person as an employee to sign that that that analysis is that fair to say or not fair to say i i couldn't comment on that because i really don't think that is a question that you want me opine on i mean could david do it i think you two could do it well put it another way as an auditor would be acceptable for you in just david signed that that doc sure ok then if i may have a follow up i personally think that the board of selectmen run run the town that's that's what i think in if i wanted somebody to sign that document i would ask the this the sitting board of selectmen sign that document now my main concerns about pensions and opeth and i have specific questions about the way they are calculated i know how they're calculated but i have specific questions about how they're hooked together but if i go to the pension fund we know that that number is going to get bigger and in fact it's going to go to about ten million i think according to the schedule that's in the the report i don't think the pension fund can tax and so my question is to the board of select where is that extra money coming from to make this payment in the coming years mark revenue and why would we go to the taxpayers and ask them for an override for example as opposed to a de berenger you want my point of view yes i think there's so many other needs in town jim there are so many other needs in town let's just go through the of issues first of all i feel as though we might need an operation override i think from an infrastructure perspective would definitely need a high school and that's ninety two hundred million dollars potential costs to the community for the new police station potential library d p w facility there are some in the capitalist is on is i'm limited so from my point of view i think from the pension side this is my point of view only from the pension side i think we are put at least approaching that obligation by twenty twenty eight that will be fully funded you can ask me about opec whether we're doing enough there i think perhaps we could do more but we don't have the money to fund it you know what it can do well let me ask you about open though i got to get out from my point of view ok but my concern is that the real estate tax revenue is seventy five million as i understand that's correct and that is a tiny number compared to the the pension obligation for example that's scheduled to be paid so if you if you take six million out this year and as dana says only three million is going to the old and under the under two hundred that's fine but but if you if it goes to ten million where are you going cent each year i mean that's the plan this point in time ok so it's coming out of that seven by where else can it come from you know i mean it you know the pension obligation bonds to someone talked about certainly perhaps the devil is in a lot of communities that have done that i mean jim there's only there's only a limited number of funds so i would ask you and everybody in this room plus our residence where we want to spend our time and money we can't tax everybody out of town so from my point of view as i'm one member of the board there we have to prioritize the bourse like who are present i already to this community and you need to decide where whether you support them ok thank you thank you thank you mark vincent stanton royal road also town meeting member i also have several questions but first time round is born of all the discount rate you mentioned has been dropped from five percent to four and a half percent you also pointed out that it should reflect the type of rate the rate of return that could be earned on the assets that are actually being the discount rate at zero to a quarter of a percent so interest rates short term interest rates are are negligible how can we possibly justify even a discount rate of four point five percent in view of that and i assume that the town of newton came to a similar conclusion that and that's why their numbers it is at two percent you listen to while and actually mr sullivan might be able to offer a follow up to this as well many communities are probably discounting right around the four percent rate  it's more i think when i guess these kind of came around it's a it's controversial i have to say that i mean if we discounted these liabilities as the you know point one that cash is flexibility in terms of the discount rate that is keeping these liabilities kind of a manageable i mean four is probably on average what many of the communities are are  counting at it really it really may not be so much the rates of the general fund as communities are accepting open have policies and funding a portion of their arc a little bit more are able to kind of use a blended discount rate so it can be one of those policies are in place we have a i think a little bit more flexibility on i'm choosing that discount rate plan has this one point nine million versus one hundred and ninety six million so that's why i'm saying we're at our funding rate is about one percent ok and we don't plan to alter that significantly will be making two hundred fifty thousand dollars per year contributions a town meeting until two thousand and twenty eight so in other words that type of blended approach that you referred to that is maybe relevant for towns that have a substantial pile in their own trust it and or are increasing it quickly doesn't apply to belmont we're one percent and we're going to be at one percent until twenty twenty eight so it would seem again th discount rate and that it's relevant for belmont should be closer to two percent than four percent and it would take us to fall of the would you referred to how big it is better be interesting to see what the sensitivity analysis you provided bands of one percent plus or minus but maybe that should be extended to two percent plus or minus for two and a half percent to bring us into territory that's more realistic for the belmont circumstances to her point the the assumed rate of return should reflect the the source of the funding in belmont where pays you go it's coming out of the operating budget we don't take money from the operating budget and invested in the stock market and assume we're going to earn seven and a half or a percent of that and the money that that's going to pay you know next month's salaries and so forth that's invested in very short term analysis that the correct number is the number that we can earn on our short term funds but just as this you can  in town treasurer the me and nine is in a trust you wrote your revokable trust it's earning roughly about eight percent that is money that for the most part isn't a stock market it is segregated totally right but my point is that we are on a pay as you go basis for opeth now and the money that we pay every year comes from the general funds comes from tax raised from  that association of short term interest rates that assumption of what your assets are generating currently is really intended to be the long term view of what that thirty really thirty plus thirty open thirty dollars it is really but if you think about what you just kind of liabilities you just kind of benefit that might be paid you know just thirty is the fifty sixty seventy years no future so it's really the long term deal with those interest rates are and those without a doubt those interest rates are historically low and they're expected to rise in the future and that's really why you could justify using a four percent assumption the range in the you know the the three to four percent even the two percent assumption is the individual actuaries expectation of how high those interest rates will go and with when that will long cycles multiple decade cycles maybe thirty year cycles of inflation and deflation these periods can last a long time who would have thought two thousand and eight that would be six years at zero percent interest rates not one so the possibility that we are currently in a you know long term deflationary period can't can't be excluded and that the normal rate of interest rates over the next twenty five years may not have much to do with what it has been over the last twenty five years it may be enough but they are most likely going to be i think most people would expect them to go up somewhat no disrespect but i'd like to have somebody who hasn't asked the question yet i would observe that i've had the least creative use of the one question and i'm alright let it go first ok my second question they're trying to use one question and that's it down just like i did last time is how the process the information about tension and overhead factors into labor negotiations i would hope that what happens is when you have a serious labor negotiation proposition on the table that you run  that proposal through modeling for pension and open have even if it might come at some incremental small marginal cost to the use of these consult i would hope when we have a serious labor negotiation proposition on the table that we the provisions the plan provisions change the plan visions i've heard of looking at altering terms of benefits and just really leads to the big hype question and that is that i just want to be assured by somebody that we're going to continue to move forward and we're going to have to reduce the better so i'm a retiree from each he as of the end of december is his is hard decisions have to be made or the state level ok because we collectively in this world ok cannot solve this problem we can be helpless to help solve the problem but the key is that benefits have to be reduced it's the fact of life and i know that everybody is working towards towards these goals is to hide that crack so all i want to say is that the common in the state budget health care is almost forty percent of the picture so you know approaching fifteen billion dollars a year and most of that is medicare medicaid rather and which is a pretty firm obligation of the of the state government to people who then come in the state almost one in five people in the commonwealth are on medicaid and then there's a state employee health care obligations so you know today was making dave and i were talking about this earlier in other the other that that's the kind of the number one point is we have to get the cost of health care under control or else we're completely  croaked but the the thing that's that i that i keep thinking having you know i think this community has great you know citizen and professional leadership a great team of consultants that's been working with over the long term understand the problems of the community understand of the systems of the community and you know as i look around the state i just always give either a warm spot in my heart for how bell ball well belmont is manager of course the rating agencies see it the same way it's just it's just a great town and you know we have you this kind of this cost which is very hard to control the form of opeth which and we jamming it into a box that's extremely rigid i mean you know we as steve gibson was explaining it's a it's a structure that is entirely defined by the state and it's kind of a mismatch in a contradiction in the way the states to find them in a civil structure on the one hand you've got this extremely limited revenue growth defined by proposition two and a half on the other hand you've got this wild card chunk of cost to keep growing and growing and growing i think the the the major elements of reform the got to come to the marks common are i'd like to see this as part of the municipal aid reform package transfer a lot of those open up liabilities from this minuscule level to the state level where they fit whether you know whether revenue have a better match with our ability to manage them and at the same time i think you have to end the benefit for future employers i don't think we can't legally cut the pension benefits for existing employees we knew the right thing to do anyway and i don't think we should try to cut the b the health care benefits for existing employees but i think we need a new deal going forward for people as they come on books in the future and that's that those are the elements of reform as i see them and i think there's a whole bunch of things to talk about pension reform basically a much simpler system than what we have today but the open benefits should go away for future employers everybody's on the books today if they got hired yesterday they should have open for the rest of their life we don't want to change the deal on employees that have made a deal with the state or the municipality should do that but we should change the structure and i think it should go hand in hand take the remaining commitment to existing employees going to the stable and just one you know that's kind of a high level view this i'll say from the town's perspective we are doing everything and we are looking at every single option on how to better manage the benefits for new employees so that to keep us out of this box whatever we can do as a town or wherever we have control we are looking very carefully at modeling these options so that we can make the changes necessary we completely agree with you mark and we are doing the modeling and we'll make the changes necessary that we have control  massachusetts municipal association so a big coalition and issued a lengthy report i thought we would vote on it last session i thought great i'm a first term representative and this is going to be one of my first votes because it came out in january of last year we did not act on it and the the report makes the point that there are some competing or countervailing considerations here on the one hand we need to control cos s on the other hand you want to have equitable and fair treatment of employees and you want to be able to attract and retain good employees i had the association of engineers moses come to me that's the acronym that for the engineers and say look we we want to hire civil engineers from the private sector where they can make a lot more money but we want them to come be civil engineers for the state for our roads and bridges and  this was part of the benefit package they were offering health care and many were induced to accept the employment for that reason so to senator brown's berger point pulling that benefit back from current employees would be extremely controversial a tough tough vote in the legislature and so i agree there that changes need to be made but just like all the expert professionals who who presented this evening and all the variables that