Workshop to examine city retirement plans
By Sarah Latham Carr
May 27, 2013
The Ocala City Council, looking to cut pension costs, is conducting a workshop Wednesday to discuss changes to the General Employees Retirement Plan for city workers effective Oct. 1.
The council made changes to pension benefits for general employees at its April 16 meeting, which disappointed many employees who hoped the changes would affect only new hires. That is not the case. Now council members have to decide how to implement the unorthodox changes they approved. [EXPAND Read more]
Depending on a current employee’s status — years of service, age and whether they are vested or not — they may have retirement plan options from which to choose. Some may be able to stay in the current defined benefit plan with no changes. Some may be able to go into a hybrid defined benefit plan that offers a lesser, fluctuating benefit, along with fluctuating employee contributions. Others may be able to go into a defined contribution plan, where the benefit is unknown and depends on market forces. Contributions to the defined contribution plan also could fluctuate depending on the market.
Now that actuary and pension attorneys have examined the changes, there are issues to address before the changes can go forward.
“It’s fairly complex,” City Manager Matthew Brower said. “No other organization has done it.”
A number of questions have arisen involving vesting schedules for the defined contribution plan. Vesting is the unconditional right an employee has to the pension benefit, which usually is based on completing a certain number of years of service.
There also are questions about what options will be available for non-vested employees who have not yet worked long enough with the city to meet the required number of years to be entitled to pension benefits.
Most questions that have arisen concern the fluctuating contribution rates to be paid by both the city and employees to the defined benefit/variable hybrid plan and the defined contribution plan.
The council also will have to determine the adjustable multiplier rate for the defined benefit plan.
The city is hoping to share the risk of rising pension costs with employees by being able to vary the multiplier that determines an employee’s benefits and varying the amount of contributions the city is responsible for paying and the amount of contributions the employee is responsible for paying.
“The administration would be challenging,” said Cindy Kelley, the city’s deputy director of the Office of Budget and Finance, about how to manage variables that could affect the contribution rates by the city and employees, who could be in multiple plans, but also the multiplier in the hybrid defined benefit plan, all of which would be subject to market forces.
To calculate a person’s retirement benefits, a formula generally uses a person’s years of service, age and a multiplier, which is a percent allowed by the plan. One multiplies the age by the service and by the multiplier to arrive at the benefit.
A defined benefit plan has a guaranteed benefit based on a set formula of service, age and multiplier. The employer generally accepts the risk of a fluctuating market.
A hybrid defined benefit plan, such as the one the council selected, offers a guaranteed benefit based on a multiplier that fluctuates with the market. Contributions by the employer and employee also fluctuate based on the market. The idea is that the city and employee share the market risk. After an employee retires, the retirement checks also can fluctuate.
A defined contribution plan is one that an employee contributes to and is often matched at a certain percent by the employer. The employee decides where the money is invested and takes the risk based on a fluctuating market. A 401(k) plan is an example of a defined contribution plan. However, the contributions to the city’s proposed defined contribution plan could fluctuate if total contributions needed to fund both plans is not sufficient and more funding is needed.
Because the cost to fund the pension plans continues to escalate, the city is looking for ways to cut expenses to hold the line on spending and keep the plans viable. This year, it will cost the city $11.96 million, or 41.5 percent of payroll, to fund the General Employees Retirement Plan. Next year, the city’s contribution is expected to grow to $14.39 million, or 51.6 percent of payroll.
Besides the General Employees Plan, the city funds retirement plans for police and fire personnel. At some point, the council will look at ways to reduce the cost of those plans as well.
In April, the council voted to freeze the current General Employees Retirement Plan, a defined benefit plan, effective Sept. 30 and replace it by giving current employees, depending on their status and with certain exceptions, the option of joining a hybrid defined benefit plan with a guaranteed but lower benefit for their future service or a defined contribution plan, where employees would bear most of the risk.
New employees would be eligible only for the defined contribution plan.
Current employees within five years of their normal retirement date may be grandfathered into the current defined benefit plan with no changes. They would continue to contribute 8.18 percent of pay and retain the 2.55 percent multiplier used to calculate benefits.
Benefit and contribution levels will change for members not grandfathered in but who wish to remain in a defined benefit plan. They will have a hybrid plan. Council now has to select the multiplier and how high or low the multiplier may vary. It also must set the range of the city’s contribution to the defined plan and range for employee contributions.
Changes to any of those rates, which are based on how well or poorly the market performs, could affect retirement checks.
By federal law, any pension benefits an employee has earned up to Sept, 30, when the current plan will be frozen, are guaranteed and may not be reduced. Retirees and grandfathered employees will continue to receive the 3 percent cost of living adjustment. The COLA will end Oct. 1 for everyone else. [/EXPAND]