PensionReform: P i R f EffectiveStrategiesfor ReducingCityPensionCosts R d i Cit P i C t

FloridaLeagueofCities 2010AnnualConference 2010 A lC f

August20,2010 JamesW.Linn J W Li

Theydontcallitthethirdrailfornothing
2

BigPicture g Floridacitiesarefacingextremechallengesof: decliningrevenuesand increasingcosts increasing costs Oneofthelargestandfastestgrowingcosts facingmanycitiesisthecostofemployee facing many cities is the cost of employee pensionplans. FY 2010 11 FY201011pensioncontributionsinmanycities i t ib ti i iti willbe30%,40%even50%ofpayroll(ormore)
3

Impactofthe EconomicTsunami Impact of the Economic Tsunami Most public pension plans had investment losses Mostpublicpensionplanshadinvestmentlosses ofbetween10%and15%fortheyearending 9/30/08. 9/30/08 Mostpublicpensionplanshadmodestgains (1%to5%)fortheyearending9/30/09. (1% 5%) f h di 9/30/09 Mostpublicpensionplanshaveaninvestment earningsassumptionofbetween7.5%and8.0%. WhatdoesthismeanforFloridacities?
4

Impactofthe EconomicTsunami Impact of the Economic Tsunami Citypensioncontributionsareexpectedto increaseeachyearforthenext45years increase each year for the next 4 5 years unlessinvestmentreturnissignificantlygreater than8%forseveralyears. h f l Why?Mostpublicpensionplanshavea4or5 yearsmoothingperiodforrecognitionof losses. Mostplanshavesubstantialunrecognizedlosses y thatwillbeaccountedforinthenextfewyears.
5

5YearSmoothing 5 Year Smoothing Example

Assumedrateofreturn=7.5% Actualreturn=minus12.47% Actuarialloss=minus19.97% [(minus7.5%)+(minus12.47%)]=minus19.97% / 19.97/5=3.99 Minus3.99%willberecognizedeachyearforthenext 5years y Result:Citycontributionswilllikelyincrease unlessactualreturnexceeds11.49%(7.5%+3.99%) ( )
6

PensionCostComponents Pension Cost Components 1. NormalCost ongoingcostofbenefit,with 1 Normal Cost ongoing cost of benefit with noUAAL(unfundedactuarialaccruedliability) 2.UAALAmortizationPayment Actuarial losses Actuariallosses Planimprovements

PensionCostComponents Pension Cost Components In man cities the UAAL amorti ation pa ment InmanycitiestheUAALamortizationpayment exceedsthenormalcostoftheplan: NormalCost 18% UAALAmort. 25% TotalCost 43%

PensionLegacyCost TheUAALIssue Pension Legacy Cost The UAAL Issue

UAAL=PensionDebt [likeavariablehomemortgage;butpaymentsand principlecanincrease] UAALhasgrownsignificantlyinrecentyears,and h f l d isexpectedtocontinuetogrowinthefuture B l th it i BylawthecityisresponsibleforfundingtheUAAL ibl f f di th UAAL evenifemployeesarelaidoffortransferredto otheremployers other employers evenifthecurrentpensionplanisclosed, frozenorterminated frozen or terminated
9

PensionLegacyCost TheUAALIssue Pension Legacy Cost The UAAL Issue

Whyhaveunfundedliabilitiesgrowneveninyears ofgoodinvestmentperformance? f di t t f ? Becauseactuariallosseshaveexceeded investmentgains. investment gains Actuariallossesoccurwhenactualexperience doesnotmeetassumptions: does not meet assumptions: salaryincreases/payrollgrowth mortality turnover retirementrates ti t t

10

Ch.175/185PremiumTaxes: GoldenHandcuffs
Chapters175&185,F.S.provideforarebateofthe stateexcisetaxonpropertyandcasualtyinsurance premiumstocitiesthathavefirefighterandpolice pensionplans. Thepremiumtaxmoniesmustbeusedexclusively forfireandpolicepensions,andthelocalpension planmustcomplywiththerequirementsofChapter plan must comply with the requirements of Chapter 185.
11

Ch.175/185PremiumTaxes: GoldenHandcuffs
Ch.175/185premiumtaxesinexcessofthe1998 amountmustbeusedforextrabenefits Ifextrabenefitsarepartofpensionformula,cost shiftstocityovertime Thisbenefitwontcostcityanything reallymeans: thisbenefitwontcostcityanythinginthefirstyear
12

Ch.175/185PremiumTaxes: PossibleOptions
ImplementSharePlan withexcesspremiumtax revenuesinsteadofformulabenefit(shareplan= revenues instead of formula benefit (share plan definedcontributionaccountontopofpension) Stop/Restart reduce benefits to Ch 175/185 Stop/Restart reducebenefitstoCh.175/185 minimums,thenimmediatelyrestoretopriorlevel; oldbenefitsabovetheminimumsbecomeextra benefits;nowexcesspremiumtaxrevenuecanbe usedtohelppayforoldbenefits.
13

WhatAretheOptionstoReduce CityPensionCosts? Ci P i C ?
No silver bullet No silverbullet KeepcurrentCitypensionplan,but: Reduce benefits and/or Reducebenefits,and/or Increaseemployeecontributions Terminate freeze or close current pension plan and Terminate,freezeorclosecurrentpensionplan,and setupalowercostplan Changing actuarial assumptions & methods is not Changingactuarialassumptions&methodsisnot reform merelytradesshorttermreductionsfor additionallongtermcost
14

KeyConcepts
Close existingplanclosedtonewmembers; currentmembersstayinexistingplanuntiltheyretire b i i i l il h i orleavethecity;futureemployeesjoinnewplan. F Freeze accruedbenefitsofcurrentemployeesin db fit f t l i existingplanfrozenandpaidoutatretirement;all currentandfutureemployeesjoinnewplan. current and future employees join new plan Terminate existingplanliquidated;accrued benefitspaidouttoplanmembers;Cityresponsible benefits paid out to plan members; City responsible foranydeficit;allcurrentandfutureemployeesjoin newplan.
15

LegalGuidelines
Changesinretirementbenefitsandemployee contributionsaremandatorysubjectsofcollective ib i d bj f ll i bargaining. Accruedpensionbenefits(benefitsearnedinthe past)cannot bereducedortakenaway. Futurebenefitscan bereducedforcurrent employees. Cityisultimatelyresponsibleforunfundedpension liabilities. li biliti

16

ShortandLongtermSavings
Significant shortterm savings require reduction in Significantshort termsavingsrequirereductionin unfundedliabilities. Onlywaytoreduceunfundedliabilitiesisthrough y y g planfreezeortermination. Longtermsavingsrequireareductioninbenefits g g q and/orstructuralchange(i.e.,newplan). Itispossibletoachievebothshortandlongterm savingsbycombiningplanfreeze/terminationwith benefitreductionsornewplan.
17

PensionReformOptions p JoinFRS SetupDefinedContribution(DC)plan ReduceBenefitsforNewHires(2Tier) ReduceBenefitsforAllEmployees Reduce Benefits for All Employees IncreaseEmployeeContributions

18

Join FRS
Advantages Standardizedbenefits Noemployeecontributions (currently) ( tl ) Portability easierforCity toattractemployeesfrom p y otherFRSagencies GetsCityoutofpension business(eventually) b i ( ll ) Disadvantages
FRSmaycostmoreinshort term City still must pay off current Citystillmustpayoffcurrent planliabilities Lossofpremiumtaxrevenues Portability employeescan movetoanotherFRS employerandtaketheir employer and take their pensionwiththem Statelegislaturesetsbenefits andcontributions d ib i 19

JoinFRS Join FRS

2problemsforPolice&Fire: Loss of premium tax revenues Lossofpremiumtaxrevenues Pastservicerate=2%

20

DC Plan
Advantages Predictable employer costs Predictableemployercosts Citydoesnotbear investmentrisk Appealstoyounger,mobile employees Portability DCaccount balancemayberolledover toanIRAorotherretirement plan Loweradmin.Costs Noactuarialliabilities Disadvantages Employeesbearinvestmentrisk Employees bear investment risk PossiblethatDCbenefitswill runoutwhileemployeeisstill p y alive Noinflationprotection(COLA) Lossofpremiumtaxrevenues Portability employeescan easilymovetoanother easily move to another employerandtaketheirDC balancewiththem 21

ReduceBenefitsforNewHires (2TierPlan)
Advantages Reducedcostovertime Current employees keep Currentemployeeskeep currentbenefits Disadvantages Noimmediatesavings maytakemanyyearsto achievesignificantsavings Createslowerlevelof benefitsfornewhires benefits for new hires Ch.175&185legalissue Citystaysinpension City stays in pension business 22

ReduceBenefitsforAllEmployees p y
Advantages Immediatecostsavings Same benefits for all Samebenefitsforall employeesgoingforward Fewerlegalissues canbe imposedthroughcollective d h h ll bargaining Disadvantages Reducesfuturebenefitsfor currentemployees (employeeskeepwhatthey havealreadyearned) City stays in pension Citystaysinpension business

23

IncreaseEmployeeContributions p y Eachonepercentincreaseinemployee p p y contribution=onepercentreductioninCity contribution Legalissue:Ch.175/185saysemployee contributioncanbeincreasedonlyifmembers contribution can be increased only if members agreeandforbenefitincrease(butminimal increasepossible) increase possible)

24

PensionReform: 2009Legislation
FloridaRetirementSystem Eliminatehealthsubsidy passedHouseonly p y p .25%employeecontribution passedSenate only ReduceDROPinterest passedbutvetoed Increaseemployercontributionratesto addressunfundedliabilities passedbut vetoed CloseDBplan discussedbutnoaction
25

PensionReform: 2009Legislation
LocalGovernmentRetirementPlans billsfiledbutdidnotpass: Reducemaximumbenefitfrom100%to70%,80% or90%ofavg.finalcomp. Redefineavg.finalcomp.(basepay;excludeOT) Require5yearcostprojections q p y Requireexperiencestudiestoreviewaccuracyof assumptions Cityoversightofpensionboardexpenses
26

PensionReform: 2009Legislation
Ch.175&185FirefighterandPolicePlans
billsfiledbutdidnotpass: Requirethatmajorityofpensionboardnotbeplanmembers Allownegotiationofincreasedemployeecontributions withoutincreasedbenefits Redefine extra benefits Redefine extrabenefits Allowcitiestomeetminimumbenefitrequirementsinthe aggregate AllowcitiestojoinFRSorestablishmultiple,2tierorDCplan withoutlossofpremiumtaxes 27

PensionReform: WhatFloridaCitiesAreDoing

Stuart(2007) AllEmployees terminated all City pension plans terminatedallCitypensionplans joinedFRSforallemployees purchasedpastservicecreditunder FRSforallemployees p y

28

PensionReform: WhatFloridaCitiesAreDoing

Ft.Lauderdale(2007) General Closed general employee pension plan Closedgeneralemployeepensionplan Setupdefinedcontributionplanfor newhires hi

29

FloridaCitieswithDCPlans ForGeneralEmployees F G lE l
City EmployerContribution EmployeeContribution Belleview 7.5%+upto2.5%matchVoluntaryupto2.5% CapeCoral 12% 8% Cinco Bayou 4% 4% Milton 7% 10% Deland 7.5% 5% Ft.Lauderdale 9.0% 0 Ft.WaltonBeach 5%+upto2.5%match5%+upto2.5% Gulfport 12% 0 KeyBiscayne 12% 6% 30

FloridaCitieswithDCPlans ForGeneralEmployees F G lE l
City EmployerContribution EmployeeContribution Employer Contribution Employee Contribution LakeAlfred 14.3% 5% MountDora 6%+upto4%matchUpto4%voluntary Mount Dora* 6% + up to 4% match Up to 4% voluntary NorthLauderdale 13% 5% Palmetto 15% 5% Pinecrest 13% 7% PortSt.Lucie 10.5% 0 WestPalmBeach 7.5%/9.5% 7.5%
*Effective 10/1/10 Effective10/1/10

31

PensionReform: WhatFloridaCitiesAreDoing

CoralGables(2009) Police Increased employee contributions by Increasedemployeecontributionsby policeofficersby5% R d d Reducedpensionableearnings i bl i (excludeOTinexcessof300hrs.and lumpsumpaymentsforcomp.time)
32

PensionReform: WhatFloridaCitiesAreDoing

Naples(2009) Fire Stop & Restartimplemented; Stop&Restart implemented; premiumtaxesCitycanusetooffset Citypensioncontributionsincreased City pension contributions increased from$776Kto1.67millionperyear SharePlansetupwithexcess p premiumtaxrevenues
33

PensionReform: WhatFloridaCitiesAreDoing
Hollywood(2009) Fire Reduced13th checkbenefitforcurrentemployees p g p y Reducedpensionableearningsforcurrentemployees (excludecomp.timeandbloodtimepayouts;70%cap onvacationleavepayouts;noOTinexcessof300hrs. over3yearaverage) ) Reducedbenefitsandemployeecontributionsfor newhires(2tierplan) hi (2 ti l ) SharePlanforallemployeesfundedwithincreases inpremiumtaxrevenues in premium tax revenues
34

PensionReform: WhatFloridaCitiesAreDoing
PortOrange(2010) Fire [NotYetImplemented] Reducedwagesby6%(imposedinlieuofincreaseinemployee pensioncontribution) Reduced pension benefits for current and future employees Reducedpensionbenefitsforcurrentandfutureemployees Pushbacknormalretirementdate Reduce pensionable earnings (exclude OT) Reducepensionableearnings(excludeOT) Extendfinalaveragingperiodfrom3to5years Reducemaximumbenefitfrom90%to80% ReduceCOLA ReduceDROPearnings 35

PensionReform: WhatFloridaCitiesAreDoing
PalmBay(2010) Fire [AtImpasse NotYetImplemented] Wagefreeze ReducefuturepensionbenefitstoCh.175minimums 2% b 2%benefitmultiplier fi l i li Normalretirement age55w/10yrsserviceor age52w/25yrs.service age 52 w/25 yrs service Pensionableearnings=fixedmonthlycomp(excludingOT) 5yearfinalaveragingperiod y g gp NoCOLA/nosupplement Allfuturepremiumtaxrevenuegoestoshareplan 36

PensionReform: WhatFloridaCitiesAreDoing
MiamiBeach(2010) General [TentativeAgreement NotYetImplemented] Wagefreeze Pensionchangesforcurrentemployees: Increaseemployeepensioncontributionby2% y g gp (p ) 5yearfinalaveragingperiod(phasedin) Reducedpensionbenefitsfornewhires(2Tier)
37

PensionReform: WhatFloridaCitiesAreDoing
Miami(2010) AllEmployees [Financialurgency declared changesnotyetimplemented] Wagefreeze Freezecurrentpensionplans;accruedbenefitsof currentemployeesfrozen Allcurrentandfutureemployeesgotodefined contribution(DC)plan
38

KeyQuestionsforCities y Whatarethecitysprojectedpension contributionseachyearforthenext5yearsifno changesaremadeandallassumptionsaremet? Whatarethecitysprojectedpension y g contributionsforthenext20yearsifnochanges aremadeandallassumptionsaremet? Canthecityaffordtheprojectedcontributions? Can the city afford the projected contributions? Ifnot,whatlevelofpensioncontributionscan thecityafford? the city afford?
39

Questions?

40