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HomeMy WebLinkAboutRes2006-099 Sponsored by: Corbridge -- CITY OF SEWARD, ALASKA RESOLUTION 2006-99 A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF SEWARD, ALASKA, AUTHORIZING THE PAYOFF OF THE SEWARD GENERAL HOSPITAL UNFUNDED PUBLIC EMPLOYEES RETIREMENT SYSTEM LIABILITY IN THE AMOUNT OF $1,708,125.74, AND AUTHORIZING INTER FUND LOANS IN THE SAME AMOUNT WHEREAS, effective January 1, 1986, the Seward City Council authorized Seward General Hospital employees to participate in the State of Alaska Public Employees Retirement System (PERS), and agreed to purchase all eligible past service for hospital employees hired on or after January 1, 1986, incurring an initial unfunded liability of$607,775; and WHEREAS, the City of Seward ceased operating Seward General Hospital on June 30, 1996, and terminated the PERS Agreement on that same date, thereby incurring the unfunded liability for all PERS benefits to which hospital employees were entitled according to State of Alaska Statutes; and ..... WHEREAS, a Termination Study for Seward General Hospital dated July 1, 1997, determined the actuarial unfunded liability for SGH to be $2,129,884, which included a 5% upward adjustment to account for added financial risk to PERS on behalf of a terminated employer; and WHEREAS, the City of Seward agreed to pay this debt over 15 years at the State of Alaska-mandated interest rate of 8.25% (equal to the actuarially assumed investment earnings rate of the PERS); and WHEREAS, the City of Seward desires to retire this outstanding debt in order to reduce the overall borrowing cost, and to close out the City's Seward General Hospital PERS account in order to consider the payment agreement with PERS to be completely satisfied; and WHEREAS, the General Fund lacks cash reserves to cover this debt, and will borrow $1,250,000 from the Motor Pool Internal Service Fund, and $458,125.74 from the Electric Maintenance Repair & Replacement Fund, over 20 years, at an interest rate of 5.25%, resulting in annual debt service payments of $134,705, annual cash flow savings of $76,744, and a total interest savings to the City of Seward of $985,970.26 (since interest will be paid to other City funds rather than to the State of Alaska). -- CITY OF SEWARD, ALASKA RESOLUTION 2006-99 ! ....I NOW THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF SEWARD, ALASKA, that: Section 1. The City Manager is hereby authorized to submit payment to the State of Alaska Division of Retirement and Benefits in the amount of$I,708,125.74, representing payoff of the actuarially determined unfunded liability for the Seward General Hospital PERS. Section 2. The City Manager is authorized to utilize cash reserves from the Motor Pool Internal Service Fund ($1,250,000.00) and the Electric Maintenance, Repair & Replacement Fund ($458,125.74) to cover this payment, and to establish loans from these funds to the General Fund, to be repaid over a period of 20 years at the rate of 5.25% interest, resulting in annual payments from the General Fund to the Motor Pool Fund of $98,576.47 and from the General Fund to the Electric Maintenance, Repair & Replacement Fund of$36,128.33. Section 3. This resolution shall take effect immediately upon adoption. PASSED AND APPROVED by the City Council of the City of Seward, Alaska, this 25th day of September, 2006. THE CITY OF SEWARD, ALASKA I ...", u~~ Vanta Shafer, Mayo AYES: NOES: ABSENT: ABSTAIN: Dunham, Valdatta, Schafer, Thomas, Bardarson, Shafer None Lorenz None ATTEST: (City Seal) ","IIU", ,~,~~ O~ S~W~#"" ,$ <""o?-poFi4~',~o"~ .. ..~v <-'<,)'. ~ ~ l..... ---- ... c:. -. AL'" :.: BE :0: : i ; : ~ -.. - ~. : ':. '..1/,. "fI,,/ ~ ~ ~ ~~ ..'f.IVt: 1. \?... ~ .: '" '-1)'j " . .. .. . . '?- C;j ,.... ~", l! OF p..\.. \\..~ ""'"""" ..." CAS OUNCIL GENDA TATEMENT Meeting Date: September 25, 2006 Through: Clark Corbridge, City Manager From: Kristin Erchinger, Finance Director Subject: Payoff of Seward General Hospital PERS Debt BACKGROUND & JUSTIFICATION The City of Seward began participating in the State of Alaska Public Employees’ Retirement System (PERS) on January 10, 1979 (Resolution 78-43). Effective January 1, 1986, the City Council authorized Seward General Hospital (SGH) employees to participate in PERS (Resolution 86-2), and agreed to purchase all eligible past service credit for hospital employees employed on or after January 1, 1986. Based on a PERS actuarial report dated 1985, the beginning unfunded liability for Seward General Hospital, based on purchasing all eligible past service credit, was $607,775. Effective July 1, 1992, Seward General Hospital began operating under a PERS Agreement separate from the City (Resolution 92-160). The City of Seward ceased operating Seward General Hospital on June 30, 1996, at which time the PERS Agreement was terminated. Upon termination, the City requested written confirmation from PERS of the final termination liability. The City of Seward received official confirmation on March 30, 2004, of a SGH unfunded liability in the amount of $4,437,781. The City disputed this amount, based on the fact that in computing the liability, PERS was not using the actuarial assumptions that were in place at the time of termination, but was using actuarial assumptions and methods presented in the June 30, 2002 Actuarial Valuation Report to PERS (with the addition of a 10% load to the Total Accrued Liability to account for the added financial risk PERS was assuming on behalf of a terminated employer). The City disputed the change in actuarial assumptions, based on the fact that PERS should have conducted a more timely close-out of the SGH from the PERS system, which would have resulted in calculating the unfunded liability utilizing the actuarial assumptions in place at the time of termination. Ultimately, PERS presented the City with a Termination Study for Seward General Hospital, dated July 1, 1997, which utilized the actuarial assumptions in place at that time, and which listed the final termination liability as $2,129,884. The Seward City Council authorized the first payment toward this debt in the amount of $350,000, on April 26, 2004 (Resolution 2004-48). Since that time, the City has made two additional annual payments of $211,128.05. Assuming Council authorizes the payoff of this liability, the amount necessary to retire this debt as of October 4, 2006, will be $1,708,125.74. The City Administration desires to pay off the outstanding debt on the hospital PERS unfunded liability based on the fact that the current PERS actuarial report does not reflect the unfunded liability that was agreed on between the State of Alaska and the City of Seward. The State of Alaska PERS Supplement to the Actuarial Report dated June 30, 2005, shows a growing unfunded SGH RESOLUTION 2006- PAGE 2 OF 2 PERS liability of $6,819,601, despite the City’s added payments toward this unfunded liability. By paying off this liability, we will close our SGH account with PERS and consider our payment agreement with PERS to be satisfied. The City’s General Fund is not in a position to retire this debt, currently maintaining an undesignated fund balance (reserve) account balance of approximately $1,500,000 equal to 1.8 months’ worth of expenditures and transfers-out. Since the General Fund is required to cover any deficits arising in other funds, and is called upon to meet unforeseen needs and emergencies, administration does not recommend depleting General Fund reserves to meet this debt, but is in favor of establishing a loan from other City funds to the General Fund, in order to pay this debt. The Hospital Debt Service Fund is also not in a position to retire any of this debt, currently maintaining a cash balance of $224,258, with an estimated balance at 12/31/06 of $600,000. The highest annual debt service on the outstanding hospital bonds is $878,500, which is the amount that the City has established as a goal for reserves in Hospital Debt Service Fund. Clearly, withdrawing funds from this source is not prudent at this time. The Administration supports the General Fund borrowing from other City funds in order to retire this debt, to safeguarding against potential increased liability costs, without jeopardizing the financial stability of the General Fund. Our recommendation is to borrow $1,250,000 from the Motor Pool Internal Service Fund, and $458,125.70 from the Electric Fund Major Repair and Replacement Fund. This debt will be repaid over 20 years at 5.25% interest. CONSISTENCY CHECKLIST: Where applicable, this resolution is consistent with the Seward City Code, Charter, Comprehensive Plans, Land Use Plans, Strategic Plan and City Council Rules of Procedures. FISCAL NOTE: Annual debt service payments from the General Fund will be $134,705 versus payments to the State of Alaska of $211,449, for annual cash flow savings of $76,744. Over the life of the loan, General Fund interest payments will be $54,743 lower by borrowing funds internally (the savings would be higher except we are extending the loan payoff from 13 to 20 years). Since interest earnings will be paid to other City funds rather than to the State, the City’s total cost savings will be $985,970.26. Approved by Finance Department ______________________ RECOMMENDATION: Council approve Resolution 2006-__ authorizing the City Manager to pay the total amount of $1,708,125.74 to the State of Alaska Public Employees Retirement System, representing the final payoff of the Seward General Hospital unfunded PERS liability. This resolution further authorizes inter-fund loans over 20 years at 5.25% from the Motor Pool ($1,250,000.00) and the Electric MRRF Fund ($458,125.70), to the General Fund, to cover this cash payoff to PERS.