HomeMy WebLinkAbout2000 05 02 Regular
MEMORANDUM
DATE: May 1, 2000
TO: Board of Trustees
FROM: Ronald McLemore, City Manager
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SUBJECT: Possible Changes to Employee Pension Plan
Please consider the following during your meeting of May 2, 2000: ..
BACKGROUND
During the past two years, city employees - particularly employees of
the Police and Fire Departments - have expressed dissatisfaction with
benefit levels of the current pension plan. They have surveyed benefit
levels in other jurisdictions and have found that cities and counties in
the surrounding area generally provide higher benefit levels, with the
costs usually paid totally by the employee.
CURRENT PLAN
The city's current plan provides that employees contribute 20/0 of
their compensation, with the city contributing 80i<l, to a combined
defined benefit/defined contribution plan. The city's contribution is
split evenly, with 40/0 going to each side of the plan.
When an employee becomes eligible for retirement, an average of the
three highest years of earnings is calculated, and the employees pension
is then determined by multiplying 20/0 times the number of years of
service times the average compensation. The result is the employees
annual benefit entitlement, paid on a monthly basis.
As a rough example, if an employee worked for the city for 20 years
and retired with an average compensation of $30,000, his/her yearly
entitlement would be 20/0 times 20 years (400/0) times $30,000, or
$12,000 per year ($1,000 per month).
The defined contribution funds are used as an "offset" whereby the
employee may elect to increase the monthly benefit by using those
funds, or he/she may take those funds in cash.
CONSIDERA TIONS
The attached spreadsheet was prepared by our plan actuary, and
explains the available options to increase the 2 % per year of service
credit to 30/0, and the cost impact of each.
Current Plan
A. The current plan requires the satisfaction of an initial unfunded ,.
liability, which is a cost of plan administration. The next three
percentage columns explain the breakdown of employee and
employer contributions as explained above.
Options Under the Current Plan
B. Raising the benefit to 3% beginning on 101/01/2000 and going
forward would continue the unfunded liability, and require an
increase of 2.30/0 of compensation contribution to the defined
benefit plan.
C. A 30/0 benefit applied to an employee's total years of service would
require an increase of 6.10/0.
Proposed Plan Design
(Note: Under the following two options, the defined contribution
plan would be discontinued, and the account balances would be rolled
into the defined benefit plan pool of funds, satisfying the unfunded
liability.)
D. Under this option - and considering the contents of the above note
- employees would get a 30~ benefit starting 10/01/2000 and going
forward. The increase in payroll costs would be 1 o~.
E. A 30/0 benefit for all years of service would require a 4.90~
increase in payroll costs.
Other considerations are contained in a supplemental piece of
correspondence from our actuary, which is attached.
RECOMMENDATION
It appears that the best option to recommend to the City Commission
would be Option "D" which satisfies requests for an increased benefit
level at the least amount of cost.
cc: Gene DeMarie, Dir. of General Services
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Page 2
C. Effect of increasing the benefit from 2% to 3% per year (either retro or just going forward)
1. Enhances program for employees. especially fire and police.
2. Reduces the reasons for having two plans. The money purchase plan account
balance was projected to surpass 60% of compensation floor benefit under the defined benefit
plan for the younger employees (at some point in their future), but it is not as effective in
surpassing 90% of compensation. This means the defined benefit plan will be "picking up"
more of the responsibility in funding employees' future benefits. Under the current plan design,
it was anticipated the defined benefit plan would eventually be unneeded. This would not be
the case with a 3% per year formula (retro or going forward). Consequently, using just the
defined benefit plan would probably meet the needs of the employees and employer more
effectively.
D. Handling of employee contributions and 100% vested employee account balance. Opti~ns
are:
1. Employee accounts and contributions "forfeited" upon conversion and placed on the
same vesting schedule as employer contributions. No payouts until retirement permitted.
2. Convert the current 100% vested employee account balance to a "paid up benefit" (Le.
employee accrued benefit) due at retirement. This will always be theirs. If you are feeling
really generous, you can allow for distribution of this account if under $5,000.00.
3. Convert current 100% vested employee account balance to paid up benefrt at
retirement and add to it the amount purchased with employee contributions (only) each year.
This would eliminate the fear of them "losing" their 2% contribution to the plan. Payouts of
amounts under $5,000.00 also can be added here.
I hope this helps with this part of the discussion. If you need assistance or have any
questions, please give me a call.
w~tZ~
Sandra R: Turner, CPC OPA
cc: Ron McLemore, City Manager
Enclosures
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