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003-2009 Recent Questions Regarding the DROPr~:~-,~,t e-~ m MIAMIBEACH Office of the City Manager TO: Commissioner Edward L. Tobin FROM: Jorge M. Gonzalez, City Manager DATE: January 14, 2009 SUBJECT: Recent Questions Regarding the DROP 2flfl~ .,~r~'~ I~ ~~ i I#~ 2 9 ~~~ 9 l.•g - r,J V~~ iL~ i_~i'4i MEMORANDUM no.003-2009 This memorandum is in response to your recent a-mail regarding questions about the Deferred Retirement Option Plan (DROP) following the discussion by the City Commission at the December 10, 2008 City Commission meeting. Since you posed a number of questions, I am listing each of those questions below with the response following the question: Question #1 "You are recommending that we give the CWA union the DROP program for which they have been lobbying. This pension benefit is something that the CWA has wanted for almost a decade. Why are we giving them this coveted perk prior to negotiating their new contract which is up for renewal and negotiation in three or four months?" Response to Question #1 The Communications Workers of America (CWA) sent a memorandum to the Mayor and City Commissioners in early 2008 asking the City Commission to explore the possibility of amending the current CWA collective bargaining agreement to - include a DROP. The Administration responded with a Letter to the Commission (LTC) on February 28, 2008 recommending to the Commission that the CWA request to reopen the contract and negotiate a DROP benefit not be granted. Notwithstanding, this item was however referred to the Finance and Citywide Projects Committee and was first discussed by the Committee at the May 29, 2008 Finance and Citywide Projects Committee meeting. At this meeting, the Administration again recommended the CWA request to reopen the contract and negotiate a DROP not be granted. Notwithstanding again, the Committee directed the Administration to meet with the CWA, along with Commissioner Weithorn, to further discuss and conduct additional analysis so that the Finance and Citywide Projects Committee could consider the DROP implementation at a future Committee meeting. The meeting with Commissioner Weithorn, representatives from the Administration and from the CWA took place on June 10, 2008. As a result of this meeting, the Administration and CWA worked jointly with staff from the Miami Beach Employees' Retirement Plan to collect and analyze additional pension related data. This item was again discussed at the September 16, 2008 Finance and Citywide Projects Committee. The members of the committee discussed the item thoroughly and even though there appeared at the time (according to the data available at that time) that there would be a slight financial impact in implementing a DROP, the benefits seemed to outweigh the cost and Memorandum Regarding DROP Questions Page 2 of 6 the Committee asked the Administration to secure an actual cost estimate and actuarial valuation report from the City's actuary (Gabriel Roeder Smith and Company) to determine the exact fiscal impact of adding a DROP for all City employees. The City's actuary provided this actuarial valuation report to the City on October 30, 2008 which details the financial impact of adding a three (3) year DROP program. The valuation report, as well as an analysis by City staff, was provided with the December 10, 2008 City Commission agenda item. As a reminder, the City's actuary estimated that over a six (6) year period, the anticipated savings to the City (again, according to the City's actuary), assuming that 33% of eligible participants enter the DROP, would be approximately $1.8 million. The savings are greater if a greater percentage of employees enter the DROP and the savings are lower if a smaller percentage of employees enter the DROP. Question #2 "When is the CWA contract expiring?" Response to Question #2 The Contract period for the current CWA contract is October 1, 2006 through September 30, 2009. Question #3 "Is there atraditional/customary/contractual time period when the contract gets negotiated?" Response to Question #3 There is no standard or official timeframe as to when to begin to negotiate a union contract nor when agreement is reached, but ideally it should be priorto the expiration ofthe current contract. Some union contracts, like the current contracts with the FOP, AFSCME and GSA, were negotiated and ratified prior to the expiration of the contract period, while others, like the current contracts with the IAFF and CWA, were not ratified until after the contracts expired. With the CWA in particular, the negotiations traditionally have been protracted and have taken anywhere between 24 to 36 months to negotiate and ratify a contract. The 2003-2006 contract negotiations lasted two-and-one-half (2.5) years and included a full impasse proceeding that resulted in nine (9) days of Special Magistrate impasse hearings and three (3) days of City Commission meetings and deliberations. The ratification occurred on December 7, 2005, which means that there were less than ten (10) months remaining in that Contract that was just approved. The 2006-2009 Contract was approved on September 5, 2007; almost twelve (12) months into the bargaining period. Question #4 "I understand that the Administration has in the past recommended against the DROP for this group of employees. Why?" Response to Question #4 There are several pros and cons to having a DROP in place. One of the arguments in not implementing a DROP is obviously the possible cost and/or fiscal impact a DROP may have to an organization. Based on data available previously and based on the DROP provisions We are committed to providing exceNenr public service and safety !o all who liva, work, and play in our vibrant, tropicol, hrsroric communi~y. Memorandum Regarding DROP Questions Page 3 of 6 requested, there did seem to be a cost to the City, and given the budget cuts the City has had to make in the past few years, the Administration was looking for cost savings, not implementing programs that would have a cost. Based on the recent actuarial study conducted and based on the revised provisions of the proposed DROP however, the actuary's estimates indicate that there would most likely be a savings to the City employer required contribution if a DROP were implemented per the actuary's estimates. Another reason that a DROP is not seen as favorable is that having a DROP in place may actually provide an incentive to some employees whom the organization would benefit if they separated from the City when they reach retirement age to stay for an additional three (3) years. Alternatively, the ability to retain valuable employees with vast institutional knowledge may outweigh the perceived adverse effects. From an employee morale perspective, a DROP is likely to have a positive impact on the workforce and from a succession planning perspective, a DROP is very helpful as it allows for smoother transitions to take place for those positions. Question #5 "At the Dec. 10, 2008 commission meeting someone mentioned a potential savings of $1.8 million to the city. What is your understanding of the savings, and over what time period?" Response to Question #5 The $1.8 million anticipated savings to the City is based on the actuarial study for the first six (6) years after the implementation of the DROP, assuming that at least 33% of currently eligible participants enter the DROP upon implementation. The savings are actually greater if a greater percentage of employees enter the DROP and the savings are lower if a smaller percentage of employees enter the DROP. The chart below summarizes the savings (indicated in the last column) to the Employer Annual Required Contribution (ARC). The Employer Annual Required Contribution is the annual amount the City is required to contribute each fiscal year to fund the retirement benefits of all employees in the Miami Beach Employees' Retirement Plan. Valuation Date Employer Annual Required Contribution (ARC) - With No DROP Employer Annual Required Contribution (ARC) - Assumin 33% Enter DROP Savings to the Employer Annual Required Contribution ARC October 1, 2007 $12,863,823 $12,560,375 $303,448 October 1, 2008 $12,227,010 $11,846,960 $380,050 October 1, 2009 $9,584,713 $9,200,707 $384,006 October 1, 2010 $10,812,541 $10,394,670 $417,871 October 1, 2011 $13,290,241 $13,147,228 $143,013 October 1, 2012 $15,282,620 $15,100,833 $181,787 The total anticipated savings over a six (6) year period actually equals to $1,810,175 million. We are committed to providing excellent public service and safey !o all who live, work, and play in our vib+ont, ;ropicoi, historic community. Memorandum Regarding DROP Questions Page 4 of 6 Question #6 "The actuary who calculated the numbers associated with the DROP which the CWA has fought so hard to get was hired by the CWA. Shouldn't we have an independent expert of our own give us an opinion about the potential downside to the city?" Response to Question #6 Gabriel Roeder Smith & Company (GRS) is the actuary used by the Miami Beach Employees' Retirement Plan. The CWA hired GRS because they are the City's actuary and they are the consultants and actuaries who are most familiar with our retirement plan. Question #7 "We spoke in our retreat back in May 2008 about switching our police and fire pension system to the State of Florida retirement system? Who is working on that conversion?" Response to Question #7 In addition to myself, the Director and staff from the Office of Budget and Performance Improvement (OBPI) and the Director and staff from the Human Resources Department are working with the City's pension attorneys, actuary, and with representatives from the Florida Retirement System (FRS) on exploring and analyzing the possibilities that might be available with FRS. We are also analyzing pension costs from the past ten (10) to twenty (20) years versus projected costs on a going forward basis so that we can compare against our own plan performance and employer costs. I intend to discuss and share this data when fully analyzed with the Commission at an upcoming Commission Workshop in the near future. Question #8 "Can you provide a progress report with the pros and cons of switching to the State of Florida retirement system? Please include in the progress report whether or not all Miami Beach pension eligible employees will be eligible for the conversion?" Response to Question #8 As mentioned in the response to question #7, staff is still analyzing the data and I will provide an update as soon as we have information to report. Question #9 "What fiscal impact if any will there be to the city when converting over to the State of Florida retirement system?" Response to Question #9 The data is still being analyzed. Question #10 "Will this CWA DROP Program add any additional fiscal impact to the City?" We are committed to providing excellent public service :anc~ sofety ro all 'who live, work, grad play in uur vibrant, tropical, historic community. Memorandum Regarding DROP Questions Page 5 of 6 Response to Question #10 As proposed, all City employees (not just CWA employees) will be eligible to participate in the DROP once they reach normal retirement age. As mentioned in the response to question #5, according to data provided by the City's actuary, implementing a DROP would most likely save the City on the employer annual required contribution and likely not have any additional fiscal impact to the City. It is difficult to estimate the actual savings, and/or costs, to the employer annual required contribution since it depends on the actual number of eligible employees who enter the DROP. According to the analysis conducted by Roeder, Smith & Company (GRS), the savings in the first year after implementing the DROP could be as much as $985,227 if 100% of the eligible employees elect to enter the DROP to an actual cost to the City of $32,352 if none of the eligible employees elect to enter the DROP. Over a six (6) year period, the anticipated savings to the City, assuming that 33% of eligible participants enter the DROP, is approximately $1.8 million. Again, the actual savings are greater if a greater percentage of employees enter the DROP and the savings are lower if a smaller percentage of employees enter the DROP. Question #11 "One claim the experts made in the December 10, 2008 Commission agenda summary that I did not understand and would like clarification on is the claim that this DROP saves the City its 2.5% COLA contribution into the pension plan. It seems that is only half the story because we are still obliged to pay 3% COLA to active employees. In light of this, how does the DROP save money?" Response to Question #11 According to the City's actuary, if a DROP were implemented, the City would likely see a savings not because of the retiree Cost of Living Adjustment (COLA) but because of the savings to the employer annual required contribution (as described in the response to question #5). There actually is a savings though to the COLA paid by the City if a DROP were in place. While the employee is in the DROP period (could be up to three (3) years), the defined benefit plan two-and-one-half (2.5) percent COLA (the COLA that all retirees receive which the employee would otherwise be entitled to as a retiree) would be deferred and the employee would not receive this two-and-one-half (2.5) percent COLA at all while they are in the DROP. If the employee actually retired and separated from the City, that employee would be eligible to receive thetwo-and-one-half (2.5) percent COLA each year. The following example might help to clarify the confusion regarding the retiree COLA versus the COLA active employees receive: If employee A retires and separates from the City, employee A would receive his pension benefit and is entitled to a retiree two-and-one-half (2.5) percent COLA each year. Assuming the City replaces employee A with employee B, employee B is now eligible to receive the same COLA all other active employees receive. Although the City Commission has not approved any COLA for the 2009-2010 Fiscal Year, assuming that the City Commission did hypothetically approve a three (3) percent COLA adjustment for active employees, then the City is paying the two-and- one-half (2.5) percent COLA to the retiree (employee A) as well as the three (3) percent COLA to the active employee (employee B). If there were a DROP and employee A entered the DROP, employee A would forfeit the retiree COLA and instead receive the COLA all other active employees receive. So there actually is a savings to the City with a DROP because the City is only paying one (1) COLA (to employee A if a DROP were in place) versus two (2) COLAs -one (1) for employee A (who is retired) and another one (1) for employee B (who is an active employee). We are committed to providing excellent public serti~ice and safey ro all who live, work, and play m our vibrant. tropical, hisroric community. Memorandum Regarding DROP Questions Page 6 of 6 Conclusion I would be happy to meet with you to discuss any additional questions you may have or clarify the answers to any of the responses to the questions you have already raised. Please feel free to let me know if you would like to meet to discuss further. cc: Mayor Matti Herrera Bower Vice-Mayor Jonah Wolfson Commissioner Victor M. Diaz, Jr. Commissioner Saul Gross Commissioner Jerry Libbin Commissioner Deede Weithorn JMG/ri F:\cmgr\$ALLWORGEGON\MEMOS\Response to DROP Questions.doc We are committed ro providing excellent public service and sofety to all who live, work, and play in our vibront, tropical, historic community.