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HomeMy WebLinkAbout2003 01 27 Regular H - 5 Pension Plan - Employee Benefits 012703 REGULAR H 5 PENSION PLAN Page I of 5 COMMISSION AGENDA ITEM H-5 CONSENT INFORMATIONAL PUBLIC HEARING REGULAR X January 27, 2003 Meeting MGRR M IDEPT Authorization REQUEST: City Manager requesting the City Commission to approve Section 4 of the proposed rewrite of the City's Pension Plan providing for the purchase of employee benefits by City employees. PURPOSE: This agenda item is needed for the Commission to authorize pension plan provisions that allow City employees to purchase pension plan benefits. CONSIDERA TIONS: Buy Back and Buy In Provisions. The recommended amendments attempted to address the issue of buy back and buy in provision common to most pension plans, but silent in the City's plan documents. Buy Back Provisions. Section 12 of the proposed pension resolution allows employees who were not employees at the time the Floor Off-set defined benefit plan was adopted by the City on October 1, 1997 to purchase years of prior governmental service in other governmental organizations for which they did receive a benefit at the full actuarial basis, including payment of all employee and employer contributions, interest assumptions (9%), and past service liability costs. The intent of this recommendation is to allow employees to voluntarily purchase pension benefits for years in which they were not able to vest their previous governmental employment. This is common in governmental plans. Buy In Provisions. Section 4 ofthe proposed pension plan resolution is intended to cure a unique situation involving the City Manager and Police Chief who were stranded in the system due to unique circumstances. This proposal created a dying class situation, that is 012703 REGULAR H 5 PENSION PLAN Page 2 of 5 a policy directed to cure a situation that when cured will go away. The members of the dying class of employees are the City Manager and the Police Chief. This unique situation arose from the following conditions. 1. When the City Manager and the Police Chief were recruited to the City the City did not have a defined benefit plan. The City had a 401 (a) money purchase defined contribution plan that was limited to a 3% per year contribution from the City. The City Manager desired to contribute more than 3% per year to a 401(a) money purchase type plan due to the benefits offered by this type plan and elected to join the International City Management 401 (a) money purchase defined contribution plan. The City provided the City Manager with the sum of 3% which the City Manager could contribute to the LC.M.A. Plan. The City Manager chose the I.C.M.A. Plan because it allowed up to 20% of his income to be contributed to the plan rather than being limited to the 3% of the City plan. As planned, the City Manager chose to defer salary in order to invest substantially more than 3% of salary to the LC.M.A. Plan. 2. On October 1, 1997 the City Manager, in response to the Commission's directive, prepared a new pension plan for City employees. The Floor Offset Plan was unique in its design and provided for an efficient transition from a combined contribution plan to a defined benefit plan. The attorney preparing the plan documents for the Floor Offset Plan was asked to provide a means for the City Manager and Police Chief to be able to buy into the plan at some future date. This presented an interesting dilemma. The pension documents included all employees in the plan. However, there was a Florida Law preventing employees from being in two plans at one time, (i.e. 'anti-double dipping law"). As such, the City Manager and Police Chief became non-contributing members of the plan. The City Manager and Police Chief were included until such time anticipated new Federal Law removing these restrictions on multiple plan memberships would be enacted, which was in 2001. The purpose of the new Federal law was to encourage savings and diminish the Federal Governments role in assisting a growing retirement population. On October 1, 2000 the City Commission agreed to honor a referendum of City employees to implement a full defined benefits pension plan. The same State Law prevented the City Manager and Police Chief from benefiting under the plan. On June 7, 2001 the Federal E.G.T.R.R.A., Economic Growth and Tax Relief Reconciliation Act of 2001, was signed into law. As anticipated the law removed barriers to private sector and Federal employees being involved in multiple plans as a 012703 REGULAR H 5 PENSION PLAN Page 3 of 5 measure of encouraging savings for retirement and reducing the Federal Government's burden in providing for a growing retirement population. On October 1, 2001 the State law was changed to be consistent with the Federal Law, removing the limitation on participation in multiple retirement plans. The City's pension attorney and pension actuary were instructed to develop the methodology for allowing the City Manager and Police Chief to be changed from a non-contributing membership status to full membership status, and a methodology for allowing employees with past governmental employment for which they received no benefit to purchase benefits for those years in the City plan. As explained previously, these two methods are provided for in the pension resolution and are recommended as follows: a) The City Manager and Police Chiefbe able to purchase years of service on the same basis that all other employees were brought into the plan on October 1, 1997 and October 1, 2000, but which was denied to them due to a unique set of circumstances. b) All employees be able to purchase benefits for prior years of governmental service outside the City of Winter Springs for which they received no benefit on a full actuarial basis. 012703 REGULAR H 5 PENSION PLAN Page 4 of 5 PERTINENT QUESTIONS Ouestion: Why did the City Manger and Police Chief opt out of the City's 401(a) money purchase defined contribution plan that was in effect when they joined the City? Answer: The City's plan was very limited and one of the causes of excessive employee turnover. The International City Management Association's 401 (a) money purchase plan was fully portable throughout the United States but most importantly allowed the City Manager and Police Chief to invest much higher levels of their compensation in the 401 (a) money purchase defined contribution plan. Question: Why didn't the City Manager and Police Chief just invest in both plans? Answer: A State Law would not allow a governmental employee in Florida to be a member of two plans. Ouestion: When the City adopted the Floor Offset Plan on October 1, 1997 why didn't the City Manager and Police Chief get out of the I.C.M.A. plan and join the City plan? Answer: The new Floor Offset Defined Benefit Plan rolled employee contributions previously paid in the old 401(a) money purchase plan into the new plan. Since the City Manager and Police Chief's 401 (a) money purchase defined contribution plan contributions were paid into the I.C.M.A. plan rather than the City 401 (a) money purchase defined contribution plan, there was no lawful way to roll these funds in the new Floor Offset Plan. Additionally, since the City Manager was paying more money into the I.C.M.A. plan than the City plan would allow and state law would not allow him to be in both plans at the same time. Therefore, he had little choice but to remain in the I.C.M.A. plan until the law changed. Question: Is the City being asked to make the City Manager and Police Chief financially whole due to declining investment in their individual plans associated with the decline of the Stock Market? Answer: It is unfortunate this erroneous pOSItIOn was advanced in the December 9, 2002 Commission meeting. As explained before, the only reason the City Manager and Police Chief were not included in the City's defined benefit plan was due to legal restrictions that were removed on October 1, 2001. Question: If the City Manager and Police Chief had a choice to enter the defined benefit plan and chose not to, why should they be allowed to join now? Answer: As we explained, the City Manager and Police Chief did not have an opportunity to be full members of the City's defined benefit plan due to Florida Law. That law has now changed making it possible. Question: Does a defined benefit plan shift the liability for funding shortfalls from employees to the employers? 012703 REGULAR H 5 PENSION PLAN Page 5 of 5 Answer: As far as the City of Winter Springs is concerned, this will not be the case if the City Commission follows the City Manager and Pension Board of Trustees' recommendations limiting the City's contribution to 8% of salary and having any shortfalls funded by increased employee contributions. Question: Will adding the City Manager and Police Chief to the pension plan increase the pension plan past service liability? Answer: Every time a new employee is added to the City's employment it increases the past service liability in absolute number of dollars. However, it should not increase the proportional past service liability since the new employee will be making contributions like all other employees which are designed in the plan to keep the plan financially sound. Therefore, in the case of the City Manager and Police Chief the absolute amount of the past service liability will go up. However, proportionately it will not increase the burden of the past service liability beyond that of any other new employee. Question: Will inclusion of the City Manager and Police Chief in the City pension plan reduce the financial soundness of the plan or cause the contribution rate to increase? Answer: No, as shown in Tables 1 and 2 the inclusion of the City Manager and Police Chief will have little impact on the soundness of the plan. Additionally, if increases in employee contributions are required to overcome declining earnings from the recent decline in the Stock Market, the City Manager and Police Chief will be required to pay the same increases as any other employee. FUNDING: Funding for these additional provisions to the pension plan would be as described herein. RECOMMENDA TIONS: It is recommended that the City Commission'approve resolution Number 2002-39 and the City's Pension Plan Documents providing employees the ability to purchase pension plan benefits. ATTACHMENTS: Attachment "A" Attachment "B" COMMISSION ACTION: ATTACHMENT A CITY MANAGER/POLICE CHIEF Analysis of Buy-In Impact on Amortized Liability Plan Year Ending September 30,2003 Total Past Service Liability Employee Contribution Ratio to Employment Rate City Contributions Retro to Employment Date 9% Interest Rate to Employment Date City ManaQer Police Chief Total $146,196 $78,334 $224,530 $13,282 $9,468 $22,750 $44,746 $32,014 $76,760 $15.661 $11,496 $27.157 $73,689 $52,978 $126,667 $72.507 $25.356 $97 .863 Less Employee Buy-In cost Net Plan Increase in Amortized Past Service Liability Past Service Liability Contribution prior to inclusion of City Manager/Police Chief. As a percentage of covered payroll ending 9/30/02 = $6,945,747 $235,991 3.4% Past Service Liability Contribution after inclusion of City Manager/Police Chief. As a percentage of covered payroll ending 9/30/02 = $7,128,138 $244,866 3.4% * The Plan is actually gaining earnings by the City Manager and Police Chief buying in retroactively due to the fact that both are paying the full 9% interest earning for the period when the Fund has actually earned only an average of .48% since 10/01/2000. ATTACHMENT B CITY MANAGER/POLICE CHIEF Analysis of Buy-In Impact on Required Contribution Rates Plan Year Ending September 30, 2003 Before Inclusion City ManaQer/Police Chief After Inclusion City ManaQer/Police Chief Estimated Actual Contributions for period ending 9/30/03 Contribution Required for period ending 9/30/03 Estimated $ Surplus (Deficit) %Employee/ (Deficit) $928,000* $928,000 $0 0% 956000** $956.000 $0 0% Current Contribution Rate 11% 11% Estimated Recommended Contribution Rates Effective October 1 , 2003 11% 11% * Based on 88% of 9.5K budgeted payroll. ** Based on 92% of 9.5K budgeted payroll. (Projected payroll is normally higher due to salary increases and new participants) a) The impact of the City Manager and Police Chief on Contribution Rates is insignificant. b) The need for additional contributions is a product of declining interest earnings and other experience under the plan differing from the actuarial assumptions and not necessarily the number of people in the plan. c) There is no crisis in the financial soundness of the plan. A favorable earnings rate in the last half of FY 03 could result in no requirement for increases in contribution rates in fiscal period 2004. It is recommended that no increases be contemplated until we complete the current fiscal period and have an opportunity to analyze the results.