Fort Walton Beach Council agenda — 12-08-2010 - regular — reading text

Executive Summary The City of Fort Walton Beach currently provides a defined benefit pension plan for its general employees. Under the current City pension plan, benefits are based on a formula that includes a member's years of service, average earnings and a benefit multiplier. A general employee with 25 years of City service can retire and receive a pension benefit equal to 68. 75% of final average earnings ( based on the best 5 years of the last. 15 years of service), payable for the rest of the member's life. A general employee who retires with 25 years of service and final average earnings of $ 40,000 receives a monthly pension of $ 2, 229 ($ 27,500 annually), with an annual cost of living adjustment of up to three percent. The City pension plan also includes disability benefits, death benefits, and survivor benefit options. -- The City currently contributes $ 1. 26 million annually to the general retirement fund 14. 87% of payroll). Employees contribute 5% of their compensation to the fund in addition to the City's contributions. Under state law, the City is required to fund the plan on a " sound actuarial basis." This means that the total cost of the plan is determined using actuarial assumptions and cost methods based on mortality, turnover, payroll growth, inflation, investment return and other factors. The City must pay additional amounts into the pension plan if actual experience does not meet the actuarial assumptions of the plan. One of the key actuarial assumptions is the rate of return on pension fund investments. The current investment return assumption is 8 %. If the actual return is less than 8% in a fiscal year, an actuarial loss occurs which, if not offset by actuarial gains in other areas, results in increased required contributions to the pension fund. The City pension fund, like virtually all pension funds, has suffered significant investment losses over the past 14 months. During the fiscal year ending September 30, 2008, the fund lost 16. 6% of asset value. For the quarter ending December 31, 2008, the fund lost another 13% of asset value. These investment losses will be spread out over the next five years. This means the City can expect increasing pension costs for the next two fiscal years, and unless investment return significantly improves, increased costs for the next five years. This report provides an overview of the benefit structure and cost of the current City pension plan, reviews the structure and cost of defined contribution retirement plans, and examines several possible options for defined contribution plans. Specifically, the following options will be evaluated: 2. 5% employee contribution / 5% City contribution. 4% employee contribution / 8% City contribution. 4% employee! contribution / 4% City contribution; plus an optional additional employee contribution of up to 4 %, and a City match of the additional employee contribution [ total possible employee contribution = 8 %; total possible City contribution = 8 %]. 62-  General Employees' Retirement Plan Summary of Key Provisions Normal Retirement Date: Age 62 with 10 years of service. Normal Retirement Benefit: for employees who had 10 or more years of service on April 5, 1999, choice of: 2. 75% x years of service x final average earnings, but benefit cannot exceed 75% of current earnings; or 2. 5% x years of service x final average earnings, but benefit cannot exceed 100% of current compensation. employees with less than 10 years of service on April 5, 1999: 2. 75% x years of service x final average earnings, but benefit cannot exceed 75% of current earnings] Normal Retirement Examples: An employee with 25 years of service and final average earnings of $40,000 can retire at age 62 with an annual pension of $27, 500 for life, plus an annual cost -of-living adjustment of up to 3% per year. An employee with 30 years of service and final average earnings of $50, 000 can retire at age 62 with an annual pension of $37, 500 for life, plus an annual cost -of-living adjustment of up to 3% per year.. Early Retirement Date: Age 52 with 10 years of service. Early Retirement Benefit: Normal retirement benefit reduced by 3% for each year that early retirement precedes the normal retirement date. Standard Form of Benefit: Life annuity. This provides a monthly benefit to the member for life. Vesting: Members become vested in the pension plan upon attaining 10 years of service with the City. [ City manager, Finance Director and department heads become 100% vested after 5 years of service.] Final Average Earnings: a member's compensation averaged over the highest 5 years of the last 15 years of City employment prior to retirement. Earnings are based on a member's monthly salary or basic rate of pay excluding overtime, bonuses, leave payouts and any other form of additional compensation. 63- Disability Definition: any physical or .mental condition that totally and permanently prevents a member from performing substantially all of the requirements of any job for which he may be suited by reason of education, training or experience, either with the City of Fort Walton Beach or any other employer. Disability Benefits: Line -of -Duty Disability: 50% of current earnings, or accrued benefit if greater. Not -in Line of Duty Disability: for vested employees only, 40% of current earnings. Disability benefits are payable until the member's recovery from disability, age 65 if disability occurs prior to or at age 60), 5 years after becoming disabled ( if disability occurs after age 60), or death. Disability benefits are not subject to cost of living adjustments. Death Benefit Before Retirement: if an employee has 2 or more years of service and dies before retirement, the beneficiary receives 50% of the benefit the employee would have received had he /she lived to age 62, based on current earnings at the date of death. If an employee dies with less than 2 years of service, the beneficiary receives a refund of the employee' s contributions, plus interest. Death Benefit After Retirement: subject to optional benefit form selected by the member (if any). Cost of Living Adjustment: Annual adjustment of up to 3% based on the Consumer Price Index increase for the preceding year. The cost of living adjustment does not apply to disability benefits. 64-  Cost of General Employees' Retirement Plan For Fiscal Year Beginning 10/ 1108: Required City Contributions: $ 1, 268, 260 ( 14. 87% of payroll) Employee Contributions: $ 426, 396 ( 5. 00% of payroll) Total Contributions: $ 1, 694,656 ( 19. 87% of payroll) Projected Cost for the Next 5 Years: Like most pension plans, the City's General Employees' Retirement Plan has suffered significant investment losses over the past 14 months. During the fiscal year ending September 30, 2008, the fund lost 16. 6% of asset value. The assumed rate of return on City pension plan investments is 8 %. This means the City plan had an actuarial loss based on investment performance of 24. 6% for FY 2007 -2008. The plan actuary uses a 5 year smoothing method for investment gains and losses, which means 20% of the FY 2007 -08 loss (- 4. 92 %) will be recognized each year for the next five years. The City pension plan had investment losses of 13% for the quarter ending December 31, 2008. If investment losses for FY 2008 -2009 are in this range, the resulting actuarial loss ( -21 %) would be recognized at 20% per year ( -4.2 %) for each of the five years beginning in FY 2010 -2011. Thus the combined actuarial loss attributable to the investment losses occurring in FY 07 -08 and FY 08 -09 would be more than - 9% for each fiscal year beginning October 1, 2010. Even if actual investment return is a positive 8% for each of the 3 fiscal years beginning October 1, 2010, the City's required pension contributions can be expected to increase significantly as a result of the back -to -back investment losses in FY07 -08 and FY08 -09. 65-  Establishing a Defined Contribution Plan for General Employees What is a Defined Contribution Plan? A defined contribution or " DC" plan would provide an individual account for each participant. The DC plan benefit is not based on a formula, but on the amounts contributed by the employer and employee plus ( or minus) investment gains and losses. Governmental defined contribution plans are similar in many respects to the 401( k) plan that have been adopted by many private sector companies. Under a DC plan, employer contribution rates are typically set at a specified level, and employees may be allowed to contribute an additional amount, up to the maximum allowed by law (currently $ 16, 500; or $22, 000 if over age 50). A DC plan can be funded entirely by. employer- contributions, or by a combination of employer and employee contributions. Employee contributions can be made in pre -tax dollars. The trustee of a DC plan may be responsible for investing plan assets, or the plan may permit participants to direct their own investments. Investment returns are credited to participant accounts, and participants bear the risk of investment loss. Amounts that are directly attributable to employee contributions are fully vested at all times, while the right to funds attributable to employer contributions is governed by the plan' s vesting schedule. Generally, if a participant leaves before being fully vested, the non- vested amount of employer contributions and earnings is forfeited and reallocated to the remaining participants' accounts. Defined Benefit Plan Contrasted A defined benefit ( "DB ") plan, like the City's current plan, provides a specified pension benefit upon an employee's retirement, typically based on a formula that includes some combination of compensation, years of service, and a benefit multiplier. The employer is required to contribute the amount necessary to ensure that the promised benefits will be available to employees when they retire, and that the plan is funded on a sound actuarial basis. Contributions to a DB plan are determined using actuarial assumptions and cost methods based on mortality, turnover, payroll growth, inflation, investment return, and other factors, and are calculated to spread the funding of promised benefits over the work -life of the participants. The employer may have to pay additional amounts into a defined benefit plan if actual experience does not meet the actuarial assumptions of the plan. Under a DC plan, employer contributions usually fixed are and by established ordinance. DC plans; typically cost less than DB plans because targeted benefit levels are lower in most DC plans. The same targeted benefits cost more in a DC plan because DC plan participants typically vest earlier and are able to receive greater benefits before retirement than members of a DB plan.