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HomeMy WebLinkAbout05-04-2010 workshop ~ City Council of Peachtree City Workshop Minutes of Meeting May 4, 2010 6:30 p.m. The City Council of Peachtree City met in a workshop on Tuesday, May 4, 2010, at 6:30 p.m. Council Members in attendance were: Mayor Don Haddix, Vanessa Fleisch, Eric Imker, Kim Learnard, and Doug Sturbaum. The purpose of the workshop was to discuss benefits/options for government retirement plans. City Manager Bernard McMullen told Council that the meeting was to present the facts about the City's retirement plan. Financial Services Director Paul Salvatore introduced Clark Weeks of Weeks Retirement Services, the City's actuary. A copy of Weeks' PowerPoint presentation is included in the meeting file. ,.... Weeks said the goal of the presentation was for Council to have a good fundamental understanding of how the City's plan worked and how much it cost. The goals for a retirement plan were to provide an attractive incentive when hiring new employees, improve employee retention, make early retirement possible for physically demanding jobs, and to provide sufficient assets to retire at the normal retirement age. Governments tended to have an older average hire age than private industry. Weeks went over the features and benefits of the defined contribution plan [DC or 401 (a)] and the defined benefit plan (DB). He explained that a DB plan gave retired employees a certain percentage of pay per year of service and the benefit was defined. The City gave employees 2% of final average earnings per year of credited service. If they worked for 20 years, they would get 40% of their pay upon retirement. The retirement pay was based upon the average ofthe last five years of service. Salvatore said the benefit was determined by a formula. Weeks continued that a DC plan allowed employees to put a certain percentage of their pay in an account each year, and the retirement pay would be from the deposits and subsequent return on investment income on the account. It was similar to a savings account. Sturbaum asked how many people actually read and figured a prospectus. Weeks said he did not know, continuing that traditional wisdom was that people understood DC plans better than DB plans. Sturbaum said that, in a volatile market, it was hard to keep up with the fluctuations and decide where to move the money. Imker asked Weeks to explain what "vesting" meant. Weeks said that at a certain point, the City said the account was the employee's. Vesting delayed the time someone was entitled to a benefit. The City vested at five years. If an employee left at four years and 364 days, they would leave with nothing. McMullen clarified that there were two different vesting periods. Public Safety employees were vested at 10 years. ,.... City Council Workshop May 4, 2010 Page 2 Weeks continued that everyone thought DB plans were good now. For private companies, pension plans were bad due to government overregulation. A DC plan was equally valuable to all employees, and everyone got the same dollar benefit every year relative to what they had eamed. A DB plan was more valuable to longer service employees and more expensive to have for older employees. Investments were not pooled in a DC plan, while they were for DB plans. There were currently no costs to the City for the 40l(a)s; the employee paid the administrative costs for DC plans. The City paid the consultants and the administrative fees for the DB plan. A DC plan could not facilitate early retirement. Haddix asked if either of the plans had a tendency to drive the base wage up more than the other. Weeks said the pension was a benefit tool. If the benefit package was weak, the City would have to offer higher wages if offering less for retirement. He added that 80% of government employees had DB pensions compared to 18% of the private sector, which was probably less due to the government regulation of private pensions. Imker asked why the federal government regulated private retirement so much. Weeks referred to the Employee Retirement Income Security Act (ERISA), which regulated pension plans. Imker asked why private companies did not go with DB plans. Weeks said that ERISA assumed companies would stay in business forever. He continued that of the 100 companies on the Dow Jones Industrial Average in 1900, only 25 were still around in 2000. Since 2000, five of those 25 had either gone or had accepted government bail-outs. Corporations did not last forever, but - governments basically did. Imker said he did not understand why governments chose at the rate four to one to go with DB plans. Weeks said his belief was because governments lasted forever and ERISA and overregulation. Weeks said it was a matter of opinion. Every pension plan was different and adapted to the specific circumstances of the employer. Salvatore added that governments also had a longer time to make up losses, while private companies might not. Imker clarified that the private companies found the DB plan to be less expensive in the long run. Weeks said that could be the reason. Imker said he still did not have his answer, and he did not think he would get it at this meeting. Weeks said that most people looking for a government job were also looking for a DB plan. Weeks noted that the City's 2009 budget for pension contributions was $1.4 million. There was a deferred expense of $400,000 that was not in the 2009 budget, so the total plan cost was $1.8 million or 16.4% of the pension payroll. The structural plan expense was $900,000. The structural plan expense was the cost for 2009, based on the 20-year average. The sources for the other $900,000 included $460,000 in adverse plan experience, which was bad asset retum from 2000 - 2008. The remaining $440,000 was basically an amortization of a couple of benefit changes made in the early 2000s and from moving to a better assumption set when the City left GMA. The centerline of cost for the current plan was $900,000. ~ Weeks continued that the reason for the $460,000 cost was because investment returns were 1.6% per year for the current asset allocation from 2000 - 2008. The same portfolio would have produced a 1.2% return during the Great Depression. Weeks said one of the reasons the pension City Council Workshop May 4, 2010 Page 3 ",,-., ! expense was up was because the financial climate from 2000 - 2008 was the same as occurred , i' during the Great Depression. It was solely attributable to investment performance. Weeks compared the City's plan to several other Class B cities (25,000 - 49,999 population) - Hapeville, Sandy Springs, Milton, Alpharetta, Cartersville, and Johns Creek. He noted that, on average, 2% was the typical formula used by the cities with DB plans. All of the cities but Hapeville and Cartersville had DC programs. There were two different pieces to DC programs - the employer fixed contributions, which the City did not have, and employer match, which was 2% for the City compared to 5% for Sandy Springs, Alpharetta, and Johns Creek. The expense for the City was 9.6% of payroll, compared to 15.5% for Sandy Springs and Johns Creek. Weeks said that, in terms of structural cost, the most expensive benefit plans were DC plans among the City's peers. Weeks continued that the City matched 1 % of the employee's 2% contribution in the 401(a) plan. If an employee saved 4% of pay, then the City matched 2%. He added that not everyone saved 4% of their pay, so the City would never put 2% of payroll in a 401 (a) plan because not every employee contributed the maximum amount. The assumption ofthe program was that the employer matched contributions were based on 70% employee participation. He expected the City's plan to cost 1.4% of payroll, noting that the City actually had less than 60% employee participation. Salvatore said the government tried to leverage its dollars to get employees to put in their own money to help meet the goal of having sufficient assets to retire. r- } , Administrative Services Director Nikki Vrana said that, per the Class B city comparison, the City was not out of line with the benefits it offered. The reason for retirement plans was to get an edge up on other jurisdictions since the City's salaries were lower. The salary and compensation packages together enabled the City to attract and retain quality employees. Weeks compared the cost of an unreduced DB plan to the cost for the City to provide the same benefit in a DC plan. In order to meet a certain formulated benefit in a DC plan, everyone had to get the money. The cost was the employees could keep it if they quit. In a DC plan, an employee at age 25 would have to put in approximately 13.5% of pay for an entire career to retire at age 55. An employee starting at age 45 would have to put in 17% of pay until retirement at age 55. A DB plan would cost an employee 0.1 % at age 25 if retiring at age 55. Under a DB plan, an employee hired at age 45 retiring at age 55 would cost 28.5%. Weeks said the reason the numbers for a DB plan were lower was because people quit and a relatively small percentage of people hired at age 25 would retire from the City. Weeks noted that the costs for retirement at age 65 were lower for both DB and DC plans since there were more years and a longer period of discount to get there. It was also less expensive to pay a lifetime benefit at 65 than 55. Weeks continued that the average age of a City employee was 43. The replacement cost for a DC plan that replicated the benefits of a DB plan for retirement at age 55 would cost 19.5% of payroll. Retirement at age 65 would cost 13.8% of payroll. The average DB cost was 8.2%. City Council Workshop May 4, 2010 Page 4 ~ " ' Weeks said it was impossible to change benefits and not have any benefit loss, reduced costs, and support the goals of a retirement plan. Vrana asked Weeks to discuss vesting specifically for a DC plan. Weeks said it was all over the board, and there was no right answer. Some plans vested at one year, and some vested at seven years. Imker asked if employees were immediately vested in the DC plan. Vrana said they were, and Weeks added there was a one-year waiting period before an employee was eligible to participate. Vrana added that employees who left after participating in the DC plan could take that money when the left City. With a DB plan, employees who left at three years (prior to becoming vested) left with nothing. The City would be giving away more money with a DC plan, and there would be less incentive for people to stay with the City. The City wanted people to stay longer than the vesting period. ~, Fire Captain Ron Mundy told Council he had been a member of the retirement committee that worked on the current plan when it was accepted by the City. He noted that retirement pay was based on the top five years of pay, which was often the last five years for most employees. It was based on accrued years of credited service. The 2% benefit factor had been in effect as long as he had been an employee of the City, which had been 27 years. When the current plan was adopted, the committee asked Council to consider increasing the benefit factor to 3% to help attract employees. The Council at that time said they wanted a plan that included participation from the employees, and the DB plan was born with the City contributing 2% to an employee's 4%. At that time, the DB was a 457 plan. Since that time, the City determined that there would be a greater cost (tax) savings to the City with a 40l(a), so the plan changed from a 457 to a 401 (a). The City was in the bottom of the spectrum of the seven Class B cities that returned the survey when looking at the percentages of the DB plan, as well as the contribution match by the City. The employees worked for less because they wanted to be in the City for a career. Mundy noted that Fairburn was not mentioned in the survey, but many City employees left to go to Fairburn because Fairburn allowed employees to put up to $7,500 per year into a DC plan that the city matched dollar for dollar, as well as a 2% DB plan. Mundy said the reason for retirement at 55 for Public Safety employees was due to the decreased life expectancy of those employees, which on average was 10 years less than the general population. McMullen said the purpose of the workshop had been to present the facts about the City's retirement plans due to the difficult decisions that had to be made for the FY 2011 budget. There being no further business to discuss, the meeting adjourned at 7:32 p.m. aJk~ Don Haddix, Mayor ~