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Sponsored by: Corbridge
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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
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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 $985,970.26 (since interest will be paid to other City
funds rather than to the State of Alaska).
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CITY OF SEWARD, ALASKA
RESOLUTION 2006-99
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NOW THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE
CITY OF SEWARD, ALASKA, that:
Section 1. The City Manager is hereby authorized to submit payment to the State of
Alaska Division of Retirement and Benefits in the amount of$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
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Vanta Shafer, Mayo
AYES:
NOES:
ABSENT:
ABSTAIN:
Dunham, Valdatta, Schafer, Thomas, Bardarson, Shafer
None
Lorenz
None
ATTEST:
(City Seal)
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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.