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Commission Memorandum Retirement Plan Pensonm MIAMI BEACH Ciry or Miaml Beach 1700 Convention Center Drive Miami Beach Florida 33139 wwwmiamibeachFlgov COMMISSION MEMORANDUM 70 Mayor Matti Herrera Bower and Members of the City Commission FROM Jorge M Gonzalez City Manager -DATE March 2 2009 SUBJECT DISCUSSION OF THE MIAMI BEACH EMPLOYEES RETIREMENT PLAN AND THECITY SPENSION FUND FORFIREFIGHTERS AND POLICE OFFICERS IN THE CITY OF MIAMI BEACH ALTERNATIVES Attract and Maintain aquality workforce Ensure expenditure trends are sustainable over the long term BACKGROUND At the May2-3 2008 City Commission retreat the Mayor and City Commission discussed various issues related to the Citys budget Since nearly seventy percent 706 of the Citys General Fund operating budget is allocated to salaries and benefts the City Commission discussed ways to possibly contain and reduce personnel expenditures As a result the City Commission requested that the Administration explore and analyze alternatives to the Citys current pension plans particularly the Florida Retirement System FRS Below is a summary of the two 2 current pension plans that exist in the City 1 the Miami Beach Employees Retirement Plan MBERP and 2 the City Pension Fund for Firefighters and Police Officers in the City of Miami Beach Plan Fire and Police Pension Miami Beach Employees Retirement Plan MBERP The following is an outline of the benefits afforded to the employees covered by the MBERP and differences that exist between the MBERP and the Fire and Police Pension Plan All members of MBERP must be members of the plan for at least five 5 years in order to be considered vested and therefore eligible for benefits There are two 2 tiers of benefts for members of the MBERP depending on when the employee began working forthe City The following are the bifurcation dates by employee group which created these two 2 tiers of benefits Communications Workers of America CWA -February 21 1994 American Federation of State County Municipal Employees AFSCME -April 30 1993 GovernmentSupervisor sAssociation GSA -August 1 1993 Unclassified employees -October 18 1992 Others employees -August11993 City Commission Workshop Memorandum March 2 2009 CMB and FRS Pension Comparisons Pege 2 of 8 For those members hired prior to the respective bifurcation dates referenced above the normal retirement date is age fifty 50 and the member contribution isten percent 10h of earnings For those hired after the brfurcetion date the normal retirement date is age fifty- five 55 and the member contribution is eight percent 86 of earnings Overtime pay is included in pensionable earnings for those pre-bifurcationmembers included in the AFSCME CWA and GSA salary groups with aten percent 10cap Overtime pay is not included in the pensionable earnings of pre-or post-bifurcation Othersor Unclassified employees or for any post-bifurcation AFSCME CWAorGSA members All vested members who attain thenormal retirement date are eligible to participate in a three 3 year Deferred Retirement Option Plan DROP which is a feature of the plan just added on January 28 2009 with an effective date of February 82009 While partiapating in the DROP a member s monthly pensionbenefit is paid into the DROP account and accrues gains and losses during the DROP period based on the member s investment choicesUpon separation from employment the DROP account balance isdistributed tothe member As of this writing several employees have expressed interest in enrolling in the DROP but the MBERP Board has not met since any applications werefiled so no employees have officialty entered the DROP as of today The pension benefit for each vested member is determined by a formula consisting of the Final Average Monthly Earnings FAME of the member their number ofyears ofservice and a mutiplier The FAME is the average of the two 2 highest years of a member s earnings Themultiplier varies depending on the hire date of the employee For those AFSCME CWA GSA and Others employees hired prior to the respective b rfurcetion dates themutiplier is three percent 3 per year of service for the first fifteen 15 years and four percent 4per year thereafter For Unclassified employees hired prior tothe bifurcation date the multiplier is four percent 4 per year for all years of service prior to the bifurcation dates and three percent 3 per year thereafter For all employees hired after the respective bifurcation dates the mutiplier isthree percent 3 per year of service The maximum pension amount anemployee can receive is also based on date ofhire For those pre-brfurcetion employees in theAFSCMECWA GSA and Others salary groups the maximum pension amount that can be received is ninety percent 90 of their FAME For all other members it is eighty percent 80 of their FAME All vested MBERP members are eligible tobuy back up to two 2years of military or related experience for which they are not receiving nor are they eligible to receive a retirement benefit This is included in their years ofservice with the City in the final pension benefit calculation Additionally each vested member may apply for anon-service or service connected disabilityshould they find themselves in such a situation With the MBERP Board review and approval a member may begranted anon-service conneded disability of at least35This means that the employee with anon-service connected disability will receive at least35oftheir FAME or their actual accnied retirement benefit if k is higher than 35The percentage applied for a service connected disability varies depending on the employee shire date For those AFSCME CWAGSA and Others employees hired prior to the respective bifurcation dates the benefit is 75 0 oftheir FAME or their accruedretirement benefit if k is higher For all others it is 65 k of their FAME or their accruedretirement benefit if k is higher All retirees receiving a pension from MBERP no matter their hire date receive a two and one half percent 25 annual Cost of Living Adjustment COLA for their pension benefk beginning oneyear after retirement City Commission Workshop Memorandum March 2 2069 CMB and FRS Pension Comparisons Page 3 of 8 Citv Pension Fund for Firefighters and Police Officers in the City of Miami Beach Plan Fire and Police Pension An outline of the benefits afforded to the employees covered by the City Pension Fund for Firefighters and Police Officers in the City of Miami Beach Fire and Police Pension is provided below All members of the Fire and Police Pension must be members of the plan for at least ten 10 years in order to be considered vested and therefore eligible for benefits The normal retirement age is age fifty 50 or where their age and years of service combined equals a total of seventy 70 Rule of 70 with an employee contribution of ten percent 10 of their salary All vested members who attain normal retirement age are eligible to participate in a three 3 year Deferred Retirement Option Plan DROP While participating in the DROP a membersmonthly pension benefit is paid into the DROP account which accrues gains and losses during the DROP period based on the membersinvestment choices Upon separation from employment the DROP account balance is distributed to the member The pension benefit for each vested member is determined by a formula consisting ofthe Final Average Monthly Salary of the member their number of years of service and a multiplier The Average Monthly Salary is the average of the two 2 highest years of earnings or the last two 2 years of earnings whichever produces the higher benefit Overtime pay is included as part of the salary but is limited by a formula to no more than seventy 70 of the difference between the memberspay rate at retirement and the maximum pay rate of the next highest rank The mutiplier is three percent 3kper year of service for the first fifteen 15 years and four percent 4k per year thereafter The maximum pension amount that can be received is ninety percent 906of the employees Average Monthly Salary All vested members are able to buy back years of service for experience such as probationary time with the City preemployment military service preemployment related experience and an additional multiplier subject to certain caps and restrictions This is included in their years of service with the City in the final pension benefit plculation Additionally each vested member may appty for anon-serviceor service connected disability should they find themselves insuch asituation With the Fire and Police Pension Board review and approval a member may be granted anon-service connecteddisability after five 5years of service with their monthly accrued benefit For a service connected disability the benefit iseighty-five 85oftheir FAME or their accrued retirement benefd iFitis higher Retirees receiving a pension from the Fire and Police Pension receive atwo and one half percent 25 annual Costof Living Adjustment COLA for their pension benefit Members of the Fire and Police Pension Plan have anadditional benefit that those members ofthe MBERP do not have an early retirement option Members may retire after age fifty 50 with fifteen 15 years of service but the multiplier and maximum benefits are different than if an employee were to take anormal retirement Members ofthe Fire and Police Pension Plan also participate in a supplemental share plan which is funded by insurance premium taxes received pursuant toChapters 175 and 185 Florida Statutes Florida Statutes Chapter 175 defines the Fire share plan and Florida Statutes Chapter 185 defines the Police share plan and the methodology for funding for each plan The Fire share plan is funded from property tax insurance premiums The Police City Commission Workshop Memorandum March 2 2009 CMB and FRS Pension Comparisons Page 4 of 8 share plan is funded from casualty insurance premiums Each year the premium tax monies are allocated to share accounts maintained for each police officer and firefighter and the accounts earn interest overtime Upon retirement police officers and firefighters receive a distribution of their share account balance in addition to their DROP distribution and monthly pension benefit Last year the City received approximately 17 million in premium tax revenues for the Fire share plan and approximately 05 million for the Police share plan In the Fire share plan those revenues are divided amongst all plan members according to a formula based on years of service As of July 2007 those members of the Fire share plan who have the most years of service had on average over 100000 in their accounts In the Police share plan the revenues are also divided amongst all plan members according to a formula based on years of service As of July 2008 those members of the Police share plan who have the most years of service had on average 50000 to 60000 in their accounts Again upon retirement these police officers and firefighters receive a distribution of their share account balance In addition to the approximately 17 million that went to the Fire share plan and the 005 million that went to the Police share plan approximately 120000 went directly to the Fire and Police Pension Fund to fund certain benefits for all members Of the approximately 180 or so jurisdictions that have fire and police pension plans in Florida there are approximately eighteen 18 that have share plans Of the remaining jurisdictions that do not have share plans most use the premium tax revenues to directly fund the pension plans instead of having those premium tax revenues allocated to share accounts for each individual plan member There are a number of alternatives available to the City for consideration regarding possible pension alternatives Of these alternatives one 1 possible altemafive isjoining the Florida Retirement System and another alternative is continuing to operate the Citys own pension plans but making certain adjustments so as to realize savings Joining the Florida Retirement System brings with it certain benefits and costs which are discussed in greater detail below Even though the Florida Retirement System has its pros and cons whether or not the City should join will require additional analysis before a recommendation can be made Based on information from the Citys pension attorney and the Citysactuary d is likely thatjoining the Florida Retirement System will actually result in higher pension costs for several years vary on but then have greater savings to the City over the long term In analyzing the data the key questions wilt be 1 How much more will the cost be to the City in the early years 2 How many years will it take before the City begins to realize savings And 3 How long will those long term savings exceed the cost of those early years Instead of joining the Florida Retirement System or implementing any other pension alternative the City could choose to make adjustments to both current pension plans Miami Beach Employees Retirement Plan and the City Pension Fund for Firefighters and Police Officers in the City of Miami Beach Plan to reduce costs and generate savings Some of these options under this scenario range from reducing or altering certain benefits amending eligibility requirements and adjusting the source of funding employer versus employee contributions More dramatic adjustments to the plans include closing the current plans off to any new employee and creating a different benefit or alternate retirement plan for these City Commission Workshop Memorandum March 2 2009 CMB and FRS Pension Comparisons Page 5 of 8 new employees The more the dramatic the adjustment to the plans the more there is a likelihood that greater savings will be generated These options have not been fully analyzed by City staff the Citys pension attorney and the Citys actuary to determine any cost andor savings or legal implications The City Commission did request that an analysis of the Florida Retirement System be completed and a summary of this analysis is presented below with further discussion scheduled to take place at the March 2 2009 City Commission Workshop Florida Retirement System FRS The Florida Retirement System FRS was established by and may be amended only by the State legislature It was intended to provide a retirement plan for Florida government employees More than 800 agencies and more than 660000 state and local government employees participate in FRS As a condition of joining FRS the City would have to participate in Social Security for all employees who participate in FRS The Citys decision to join FRS would be irrevocable absent a change in State law FRS has both a defined contribution plan and a defined benefit pension plan Employees elect to participate in one or the other at time of hire and have aone-timeoption to switch atany time before retirement FRS Investment Plan -The defined contribution plan is referred toas the FRS Investment Plan Members direct the investment oftheir plan accounts in a variety of investment options This plan is very similarto thedefined contribution 401a plan the City has There is a one year vesting period after which employees own all of the contributions totheir account plus minus any eamings lossesEmployees do not contribute anythirg tothe plan all contributions are made by the employer Employer contributions vary depending on the type of employee For instance the employer contribution for general employees iscurrently nine percent 9 while the employer contribution for special risk employees police officers corrections officers firefighters and emergency medical workers istwenty percent 20 FRS Pension Plan -The FRS Pension plan works the same way as the City spension plans The differences are in the formulas and particular details An outline ofthe benefits afforded to the members of the FRS Pension Plan is provided below These details are also presented in a table format for comparison purposes in Attachment A along with the benefits for the MBERP and Fire and Police Pension Members ofthe FRS Pension Plan are separated into Basses For the purposes ofthis discussion there are four 4 Gasses tobe concerned with 1Elected Officials 2General Employees 3 Senior Management and 4Special Risk Special Risk is defined the same as it is for the FRS Investment Plan police officers corrections officers firefighters and emergency medical workers All members ofthe FRS Pension Plan must participate in FRS for at least six 6 years in order tobe considered vested and therefore eligible for benefits The normal retirement agevaries depending on the class of FRS membership For Elected Officials Senior Management and General Employees thenormal retirement age is age sixty-two 62or after thirty 30 years of service regardless of age For Special Risk employees the normal retirement age isage fifty-five 55 orafter twenty-five 25 years ofserviceregardless of Cily Commission Workshop Memorandum March 2 2009 CMB and FRS Pension Comparisons Page 6 of 8 age Employees do not contribute to the FRS Pension Plan The FRS Pension Plan is funded solely through employer contributions Members of the FRS Pension Plan are eligible to participate in a five 5 year Deferred Retirement Option Plan DROP upon reaching normal retirement age The pension benefit for each vested member of the FRS Pension Plan is determined by a formula consisting of the Average Final Compensation AFC of the member their number of years of service and a multiplier The AFC is the average of the five 5 highest years of earnings The multiplier varies depending on the class of FRS membership For General Employees it is one point six percent 16 of AFC per year of service for Senior Management employees it is two percent 26 of AFC per year of service for Elected Officials and Special Risk it is three percent 3 of AFC per year of service The maximum pension amount that can be received is 100hof the employeesAFC All vested members of the FRS Pension Plan are able to buy additional years of FRS service credit for periods of past City employment military service approved leaves of absence and non-FRSgovernmental employment subject to certain caps and restrictions This is included in their years of service in the final pension benefit calculation Additionally FRS members are eligible for service-connected andnon-service disability benefitsshould they become disabled A member may begranted anon-service connected disability aftereight 6years of service with abenefit of at least twenty-five 25 of AFC ortheir monthly accrued benefit if higher General employees who suffer a service connected disability receive a benefit offorty-two percent 42 6 of AFCor their accruedretirement benefit if it is higher Special Risk employees receive aservice-connected disability benefit ofsixty-five 65ofAFCor their accrued retirementbenefit if higher Retirees receiving a pension from the FRS Pension Plan receive a three percent 3 annual Cost of Living Adjustment COLA to their pension benefit Members of the FRS Pension Plan have an additional benefit that those members of the MBERP donot have an early retirement option Members may retire early but with a five percent 5hreduction per year for each year thatthe early retirement date is earlier than the normal retirement age for their class Merping Citv Pension Plans into the Florida Retirement Svstem There are various options for the City to consider with regard to moving to FRS 1 The City could close its current pension plan s MBERP Fire and Police Pension or bothto new members All employees hired on or after the date the City joins FRS would be required to join FRS Current employees would be allowed to stay in the City pension plan orjoin FRS The closed City plan s would continue to operate for those whoremained until thelast benefits are paid to the last retiree beneficiary Current employees could elect to receive arefund oftheir member contributions from the City plans and could then buy back their service under FRS Vested members could chose to migrate into FRS and buy back their years of service with the City under FRS but would have to waive their right to receive any benefits under the City plan s Vested members could also choose to migrateto FRS but not buy back their years of service with the City These vested employees would receive a pension from the City for their years of service under the City plan s and a pension from FRS once vestedunder FRS for their years of service under FRS City Commission Workshop Memorandum March 2 2009 CMB and FRS Pension Comparisons Page 7 of 8 2 The City could also freeze or terminate its current pension plans MBERP Fire and Police Pension or both and require all employees to become members of FRS If the current City pension plansare terminated the plan would be liquidated and all members would become immediately fully vested in the Citys plan with their accrued benefR even if they otherwise would not be vested in the plan For example a member of the MBERP with two 2 years of service would have a right to a benefd based on two 2 years of service in the MBERP plan based on hisher average compensation at the date of the MBERP plan termination ie2 years x 3multiplier 6 of the average of their best two 2 years of earnings under MBERP That benefit could be paid out in a lump sum rolled over to an IRA or other qualified plan or annuities could be purchased If there are insufficient plan assets to fund police and firefighter benefits upon termination of those plans the City would be responsible for any deficiency Members of a frozen plan would be entitled to their accrued benefit under the plan as of the date the plan is frozen but the benefit would be paid out when the member is eligible to retire The plan could remain in operation until the last benefits are paid to the last retireebeneficiary There are two 2 significarrt issues in current state law which should be considered regarding the transition of current City police officers and firefighters to FRS 1 FRS Past Service for Police Officers and Firefighters Under current law the benefit rate for the past service of FRS special risk members is limited to two percent 2 of average final compensation for each year purchased The two percent 2 past service rate for special risk members is considerably less than the current three percent 3 benefR rate for special risk employees and this creates an obstacle for the transition of police officers and firefighters into FRS Most local pension plans provide a benefit of three percent 3h per year of service such as the City of Miami Beach for the first fifteen 15 years of service Many municipal employees will not give up the three percent 3k benefit under the current local City of Miami Beach plan to only accrue a two percent 2 benefit for those same years under the FRS Pension Plan 2 Chapter 175185 Premium Tax Revenues Currently the City receives a rebate of the State excise tax on property and casualty insurance premiums for use solely on police and firefighter pensions These are often referred to Chapter 175 and 185 funds as those are the chapters of Florida Statutes that govern the use of the funds The Division of Retirement has taken the position that once a city joins FRS for police officers or firefighters even if it maintains its current retirement plan for police officers and firefighters who elect to continue participating in the City plan it will not be eligible for any future distributions of premium tax revenues pursuant to Chapters 175 and 185 Florida Statutes Since nearly all of the more than 2 million in premium tax revenues the City receives each year goes directly to the police and firefighter share plans police and fire unions can be expected to oppose any effort to join FRS It should be noted that there is legislation now being considered by the legislature that would address both of the above problems In addition legislation has been filed to close the FRS Pension Plan to all new agencies and only allow new agencies to enroll in the FRS Investment Plan City Commission Workshop Memorandum March 2 2009 CMB and FRS Pension Comparisons Page 8 of 8 CONCLUSION It should be noted that the information presented above is for discussion purposes at the March 2 2009 City Commission Workshop and has not yet been fully analyzed as to make a final recommendation As most issues regarding pensions are highly technical and complicated the assumptions made by the Citys actuary will dramatically affect the results of the analysis As the options are further refined and the City focuses on which specific alternatives to pursue a better and more definitive estimate of potential and probable costs andor savings will be provided to the City Commission and ultimately a fully analyzed set of options and recommendations from the Administration Four 4 of the five 5 of the Citys existing labor agreements will expire on September 30 2009 Fraternal Order of Police FOP International Association of Fire Fighters IAFF Communications Workers of America CWA and Government Supervisors Association GSA and the agreement with the American Federation of State County and Municipal Employees AFSCME will expire on April 30 2010 Any decision made with regard to altering the Citys current defined benefit pension plans for those employees whose classifications are represented by a union will have to be bargained with the respective unions as part of the collective bargaining process Jim Linn of Lewis Longman Walker outside counsel assigned to deal with pension issues for the City of Miami Beach will review pension plan details the processes that would have to be followed to migrate any or all of the Citys current or future employees into the FRS system and the consequences that follow along with any of the possible options and will discuss further with the City Commission at the March 2 2009 City Commission Workshop Similarly Steve Palmquist from Gabriel Roeder Smith and Company GRS the Citys pension actuary will also be present at the Commission Workshop on March 2 2009 to discuss the cost implications associated with migrating any or all of the Citys current or future employees into the FRS system However it should be noted that GRS finalized the actuarial valuation data for MBERP only in the middle of January 2009 for the plan year covering October 1 2007 through September 30 2008 The calculations of the cost implications for FRS migration were started shortly after that As of the February 19 2009 meeting of the Fire and Police Pension Board the actuarial valuation data forthe same plan year has not been finalized and not until after that date did GRS start to work with the Fire and Police Pension actuary to begin to analyze the data GRS is in the process of calculating all of this data but it is unlikely that all of the pertinent data to calculate the full cost implications for merging both City plans with FRS will be available for a full discussion at the 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