2018 COLA Presentation June 28, 2018 Thomas Hartwell

2018 COLA Presentation The Retirement Board’s primary responsibility is the preservation of basic benefits promised to employees and retirees. Andover’s ability to pay future pension contributions is unsustainable. Massive tax hikes and reduction of services will be required to allow scheduled increases in annual pension payments. Serious reforms, including a reduction or elimination of COLA benefits, is required to ensure basic benefit promises are kept.

Massachusetts Statute The COLA which any such system may grant, pursuant to Chapter 32, Section 103(c) and effective July 1, 2017 will thus be 2%. Pursuant to Section 103(i), a Retirement Board, with proper notice to the legislative body, may elect to increase this percentage up to 3%, at a duly called meeting.

Andover’s unfunded pension liability $138.5M $90.M $40.5M $14.9M

Conditions generally prescribed for the Board to consider on whether or not to reduce/cut COLAS Sustainability - Ability of Andover to maintain level of pension contributions to meet its obligations. Solvency – Andover having assets to meet all obligations with near certainty. Funding Ratio – The pension plan should have a strategy in place to attain a funded status of 100% over a reasonable period of time. The plan sponsor (Andover) should have the financial means to make the necessary contributions to meet this strategy.

Sustainability Andover’s 2019 budget projects deficits for FY 2020 – FY 2023 of approx. $21.7 million (1). Deficits will be reduced by approx. $3.5 million due to the new pension contribution schedule. Deficits beyond 2023 will increase exponentially . Projected Retirement/Health insurance/OPEB cost will approach $100 million (1) by year 2032, crowding out town’s ability to maintain basic services without significant tax increases and/or reduction of services. Andover’s new retirement contribution schedule for next 15 years will be approx. $267 million compared to $64 million for the prior 15 years, a 417% increase.

Solvency Andover owes more than it owns. Andover’s liabilities exceeds its assets by over $80 million (2). Andover’s negative net worth is expected to increase going forward into the future. Andover is faced with funding $250+ million in capital projects (schools, public safety, etc.) and deferred maintenance. No assistance can be expected from the State which has a negative net worth of over $80 billion (3).

Funding Ratio S&P, for public plans, assigns a “strong” rating for funding levels above 90%; a rating of “above average” for levels between 80% and 90%; “below average” for funded levels 60% to 80%; and “weak” below 60%. On a market value basis, Andover’s funding ratio is 51%. Despite 9+ years of a bull stock market where the Dow Jones Industrial Average increased by over 300%, Andover’s funding ratio only increased 5% from 46% in 2009. Andover’s funding ratio was 65% in 2007, prior to the 2008 stock market crash. Andover has one of the lowest funding ratios in the State. The average funding ratio for public plans nationally is 72%

COLA Recommendation Annual COLA increases should be limited to the annual Social Security increase on the first $12,000, up to a maximum of 3%. Social Security announced a 2% increase for 2018. Once the pension plan is fully funded, tying COLA increases to Social Security increases would be eliminated.

References (1) Town of Andover Tri-Board Presentation 12/6/17 (2) Andover’s net positon was obtained from the town’s 6/30/17 financials and reduced by: a)deferred charges (principally pension assumption adjustments) that will be applied to net position over the next several years, and b) the portion of the OPEB unfunded liability not on Andover’s balance Sheet at 6/30/17, net of the OPEB Trust fund not recorded on the balance sheet. Accounting rules requires the full OPEB unfunded liability be recorded on the balance sheet by 6/30/18. (3) From the 2017 Commonwealth of Massachusetts financial report.