Transcript 2013 v. 2014 Budget Overview

Pension Benefits Reform
Presentation to Memphis City Council
Executive Session
March 18, 2014
Quintin Robinson Director of Human Resources
1
Presentation Overview
• City of Memphis Pension issues and why we need reforms
• Administration’s recommendation of a separate pension
plan for unvested employees/new hires
• Impact of Administration’s proposed pension reforms
• Present written Ordinance detailing proposed retirement
plan for Council review/adoption at a later date
• Questions?
2
Why Pension Reform?
• Employees deserve a retirement plan that is fully funded
• Current plan unsustainable - $709M in Unfunded Liability
• One-sixth of City budget required to fund pensions
• Pension obligations drain dollars needed for core services
• A bill in the legislature requiring the city to pay its full Actuarially
Determined Contribution, also commonly referred to as the ARC
• Rising pension obligations threaten city’s credit rating
3
Retirement Plan Options
Pension/Defined Benefit Plan (DB)
• Employee pays percentage of salary into DB Plan each pay period
• City pays pension benefit to employee from start of retirement through end
of life, and to surviving qualified beneficiary (if any)
• Benefit calculated based on set formula including age, years of service,
return multiple
Defined Contribution Plan (DC)
• Employee pays percentage of salary into DC Plan each pay period
• City pays percentage into employee DC Plan each pay period
• Employee determines how to invest DC funds with assistance from
professional money managers
• Retiree receives benefits until DC funds depleted
Hybrid Plan
• Combination DB and DC
4
City Recommends DC Plan for
Unvested Employees and New Hires
• Employees with less than 10 years of pension credible service would
move to 401(a) Defined Contribution Plan effective July 1, 2015
• Of the 6135 participants in the city’s pension plan, approximately
2,428 (40%) are unvested
• All vested employees would remain in the legacy DB pension plan
• Memphis would join Atlanta, Phoenix and Tucson, Az., and other
local governments that have adopted DC Plans. The State of
Tennessee also has a DC in its mix of retirement plans for state
employees.
5
Advantages of Adopting DC Plan
Advantages to employee
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Starting balance (seed money) from DB Plan
33% increase in city contributions
Contributions are portable
Automatic vesting in City’s match for current employees
Employee controls how assets are invested
Additional contributions can be made to 457 Plan up to IRS max, $17,500
Ending balance can be taken as lump sum or annuity
Advantages to City
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DB Plan unfunded liability drops immediately upon adoption of DC
No unfunded liability associated with DC plans
Fixed contribution allows city to better plan and budget
Securing future retirement benefits for city workers and their families
Retirement Plan is comparable to most employers’ plan
Next generation would not be saddled with growing pension debt
6
Transition Plan
• Once approved by council, the city would issue an RFP for a thirdparty plan administrator
• Allow approximately 12 months for vendor selection process to start
and implementation of new DC Plan
• Unvested employees would continue accruing benefits and service
time in the DB Plan until last day in that plan
• Each unvested employee’s account balance in DB Plan would be
calculated by PwC and become seed money for their DC Account
7
City of Memphis Retirement Highlights
1978 DB PLAN
Min. Ret. Min. Years of
Age
Service
Multiplier
PUBLIC SAFETY
None
25
2.50%
GENERAL
None
25
2.50%
2012 DB PLAN
Min. Ret. Min. Years of
Age
Service
Contribution
EE 8%/ER 6%
EE 8%/ER 6%
Vesting
Total
Contribution
10 Years
14.00%
10 Years
14.00%
Multiplier
Contribution
Vesting
Total
Contribution
PUBLIC SAFETY
52
25
2.25%
EE 8%/ER 6%
10 Years
14.00%
GENERAL
62
25
2.25%
EE 8%/ER 6%
10 Years
14.00%
Multiplier
Contribution
Vesting
Total
Contribution
None
EE 8%/ER 8%
Six Months (new hires) *
16.00%
2015 DC Plan (401a)
GENERAL AND PUBLIC SAFETY
Min. Ret. Min. Years of
Age
Service
None
None
Defined Contribution Plan Highlights
1.* Employees transferring from DB to DC will have immediate vesting in DC. New Employees
vest after 6 months
2. No loans or hardship withdrawals from DC
3. Employees can add contributions (up to the $17,500 IRS limits) to their 457 accounts
8
Pension Reform Ordinances
• Draft Ordinance closing the legacy DB Plan to new
entrants (employees/elected officials), and transferring
out all unvested employees.
• Draft Ordinance that establishes account balances for
unvested employees and allows for the transfer of those
balances from the DB to new DC.
• Draft Ordinance establishing the rules and plan design
features for new DC Plan
9
Questions
10