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CMB Considerations for Joining the Fla Retirement System Presentation by James W. Linn March 25, 2009“Helping Shape Florida’s Future”®City of Miami Beach:Considerations for Joining theFlorida Retirement SystemMarch 25, 2009James W. Linn “Helping Shape Florida’s Future”®22Florida Retirement System (FRS)• More than 600,000 state and local government employees and 800 agencies participate in FRS• FRS was established and may be amended only by the state legislature.• The City’s decision to join FRS is irrevocable. “Helping Shape Florida’s Future”®33Florida Retirement System• FRS contains two retirement plan options: - a defined benefit plan (“Pension Plan”), and- a defined contribution plan (“Investment Plan”). • Upon joining FRS, an employee can elect to participate in one plan or the other.• FRS members can also make a 2nd election. “Helping Shape Florida’s Future”®44Florida Retirement System•FRS Pension Plan –benefits are based on a fixed formula: years of service x avg. final compensation x benefit multiplier• Risk of loss is on system/employers• The overwhelming majority of FRS members are in the Pension Plan. “Helping Shape Florida’s Future”®55Florida Retirement System•The FRS Investment Plan – benefits are based on funds contributed to individual member accounts, plus investment earnings or losses [like a 401(k) plan]• Members may direct the investment of their plan account in a variety of investments.• Risk of loss is on employees. “Helping Shape Florida’s Future”®66FRS Participation RequirementsA local government may elect to participate in the Florida Retirement System at any time, for any of 3 employee groups:•General Employees• Police Officers• Firefighters “Helping Shape Florida’s Future”®77FRS Participation Requirements• Joining FRS means a change in pension benefits which is subject to collective bargainingwith unions.• As a condition of FRS participation, social security coverage is mandatoryfor all employees who join FRS. “Helping Shape Florida’s Future”®88FRS Contributions•FRS -funded solely by employer contributions. • Contribution rates set by the legislature based on annual actuarial reports.• Current FRS Pension Plan contribution rates:¾regular (general employees) –9.85%¾senior management –13.12%¾special risk –20.92%¾elected officials –16.53% “Helping Shape Florida’s Future”®99FRS Contributions• Current FRS Investment Plan contribution rates:¾regular (general employees) –10.41%¾senior management – 12.37%¾special risk –22.49%¾elected officials –17.77% “Helping Shape Florida’s Future”®1010FRS Contribution Rates will Probably Increase• FRS has suffered significant investment losses in the past year.• Difference between FRS and most local government pension plans: FRS was fully funded (had a surplus) as of July 2008.• FRS contribution rates will likely increase over the next few years, from 4% to 8% (estimated). “Helping Shape Florida’s Future”®1111Transition to FRS: 2 Approaches1.Terminate or freezecurrent City plan(s) - all employees join FRS.2. Close current City plan(s) to new members— all new hires join FRS; members of closed City plan(s) may elect to stay in City plan or join FRS. “Helping Shape Florida’s Future”®1212FRS Transition• If current City pension plans are closed, all current plan members have individual right to elect to stay in City plan, or join FRS• FRS statute provides additional “referendum” for police and fire; but this is typically handled through collective bargaining process. “Helping Shape Florida’s Future”®1313FRS TransitionWhat Effect on City Retirees?• By law, retirees have a vested right to the pension benefits in place at the time they retire.• Retirees from City plans would continue to receive the same pension benefits as now.• City required to continue funding closed pension plans until all benefits are paid.• City retirees do notmove to FRS. “Helping Shape Florida’s Future”®1414Terminate or Freeze Current City Plan• Current plan would terminate or benefit accruals would be frozen on a date certain.• All members would become fully vested in their accrued benefit.• Loss of future premium tax revenues ($2.3 million per year that now goes mainly to police/fire share plans).• All employees would become members of FRS. “Helping Shape Florida’s Future”®1515Terminate or Freeze Current City Plan• Police/Fire plan termination -- pension board determines how accrued benefits are to be distributed (present value paid in cash lump sum, substitute trust, annuities, etc.).• City must pay any deficiency (difference between plan assets and termination liability – estimated to be more than $181 millionas of 12/31/08). “Helping Shape Florida’s Future”®1616Terminate or Freeze Current City Plan• General employees plan termination –assets are distributed in accordance with plan.• “In the case of termination of the plan, the rights of all members to benefits accrued to the date of such termination, to the extent then funded, shall be non-forfeitable.” “Helping Shape Florida’s Future”®1717Terminate or Freeze Current City Plan• General employees plan termination –litigation likely if plan assets are not sufficient to cover value of accrued benefits.• Although court decision on termination of police/fire plan was based on different law, there is a reasonable chance that courts would reach similar result in termination of general plan. “Helping Shape Florida’s Future”®1818Close Current City Plan• Current City plan would be closed to new members on date City joins FRS.• Closed City plan continues in operation until the last benefit is paid out.• Members of closed City plan can elect to stay in City plan or join FRS.• All employees hired after date City joins FRS become members of FRS. “Helping Shape Florida’s Future”®1919FRS Past Service Credit• An employee who joins FRS cannot obtain credit under FRS for past service with the City for which the employee will receive a benefit from a City pension plan.• In other words, if you elect to join FRS you cannot get credit under FRS for any service with the City that entitles you to a benefit under the City plan. “Helping Shape Florida’s Future”®2020FRS Past Service Credit• If City plan is terminated or frozen, all members of the plan become vested in the benefit accrued to date of termination/freeze.• The members would then be entitled to a benefit from the terminated City plan.• Because they will receive a benefit from the City plan, the members are not eligiblefor past service credit under FRS, unless… “Helping Shape Florida’s Future”®2121FRS Past Service Credit• In order for members of the City plan to be able to join FRS andobtain credit under FRS for their years of service with the City, they would have to waive their right to receive benefits from the City plan. • They would then receive a refund of their member contributions (with interest), but nothing more, in order to be eligible to obtain credit for their past City service under FRS. “Helping Shape Florida’s Future”®2222FRS Past Service Credit• To allow vested members of the City pension plan to obtain past service credit under FRS, the City plan would have to be amended to permit members to opt out and waive their right to a benefit under the City plan.• No one can be compelled to waive their right to a benefit under the City plan. “Helping Shape Florida’s Future”®2323FRS Past Service Credit• Past service credit under FRS may be purchased by the City, by employees, or by a combination of both.• State law does not permit the local government to purchase upgraded past service credit on behalf of elected officers. “Helping Shape Florida’s Future”®2424FRS Past Service Credit• If the City intends to purchase past service credit for employees who elect to join FRS, this must be specified in the FRS participation agreement at the time the City joins FRS. “Helping Shape Florida’s Future”®2525FRS Past Service Credit Special Risk Benefit “Glitch”• Although the FRS special risk benefit rate is 3% of AFC for each year of service, the benefit rate for the past service of special risk members is limited to 2% of AFC for each year purchased. “Helping Shape Florida’s Future”®2626FRS Past Service Credit Special Risk Benefit “Glitch”• The “past service glitch” is a major obstacle to cities that want to join FRS for their police officers and firefighters. Most local pension plans provide a benefit to police officers and firefighters of 3% per year of service. “Helping Shape Florida’s Future”®2727FRS Past Service Credit Special Risk Benefit “Glitch”• Most members will not elect to give up their right to a 3% benefit under the City plan to obtain for a 2% benefit under FRS. • As a result, most members will elect to stay in the City plan after the city joins FRS, which increases the pension costs borne by the local government. “Helping Shape Florida’s Future”®2828Pending Legislation(HB 673/SB 1572)• Corrects Special Risk past service “glitch”• Amends Chapters 175/185 to allow Cities that join FRS to continue receiving premium tax revenues for closed fire/police pension plans “Helping Shape Florida’s Future”®2929Pending Legislation(SB 534)• Closes FRS Pension Plan to new members effective 1/1/10.• All employees who join FRS on or after 1/1/10 would participate in the FRS Investment Plan [like a 401(k)]. “Helping Shape Florida’s Future”®30FRS Benefit Comparison(Fire/Police)Benefit FRS Miami BeachVesting Period6 years 10 years Normal Retirement Age55+6 yrs svc or25 yrs svc at any age50+10 yrs svc orRule of 70 (age + service = 70)Average Final CompensationHighest 5 yrs Highest 2 yrs30 “Helping Shape Florida’s Future”®31FRS Benefit Comparison(Fire/Police)Benefit FRS Miami BeachNormal RetirementBenefit Amount 3% x AFC x yrs of svc(100% max.)3% 1st15 yrs4% thereafter(90% maximum)Normal Form of BenefitSingle Life Annuity10 yrs certain & life thereafter31 “Helping Shape Florida’s Future”®32FRS Benefit Comparison(Fire/Police)Benefit FRS Miami BeachCost of LivingAdjustment (COLA)3% per year 2.5% per yearDeferred Retirement Option ProgramYes – 5 yrs Yes – 3 yrs32 “Helping Shape Florida’s Future”®33FRS Comparison(Fire/Police)Contributions FRS Miami BeachEmployee Pension ContributionNone 10%Employee Social Security Contribution6.2% NoneCity Pension Contribution20.92% 50 %City Social Security 6.2% NoneTotal Contribution 33.32% 60%33 “Helping Shape Florida’s Future”®34FRS Benefit Comparison(General Employees)Benefit FRS Miami BeachVesting Period6 years 5 years Normal Retirement Age62+6 yrs svc or30 yrs svc at any age50 or 55 + 5 yrs svcAverage Final CompensationHighest 5 yrs Highest 2 yrs34 “Helping Shape Florida’s Future”®35FRS Benefit Comparison(General Employees)Benefit FRS Miami BeachNormal RetirementBenefit Amount 1.6% x AFC x yrs of svc(100% max.)3% x FAME x yrs of svc; or 3% 1st15 yrs and 4% thereafter(80% or 90% maximum)Normal Form of BenefitSingle Life Annuity50% joint and survivor annuity payable to spouse or partner35 “Helping Shape Florida’s Future”®36FRS Benefit Comparison(General Employees)Benefit FRS Miami BeachCost of LivingAdjustment (COLA)3% per year 2.5% per yearDeferred Retirement Option ProgramYes – 5 yrs Yes – 3 yrs36 “Helping Shape Florida’s Future”®37FRS Comparison(General Employees)Contributions FRS Miami BeachEmployee Pension ContributionNone 8% or 10%Employee Social Security Contribution6.2% NoneCity Pension Contribution9.85% 21.57 %City Social Security 6.2% NoneTotal Contribution 22.25% 29.57% or 31.57%37 “Helping Shape Florida’s Future”®3838Joining FRS – Advantages • Competitive benefit structure for police/fire• Provides portable pension benefit • Reduces City pension costs in long-term; but total City pension costs could increase in the short term • Gets City out of pension business• Reduces and eventually eliminates actuarial funding obligations “Helping Shape Florida’s Future”®3939Joining FRS – Disadvantages • Total City pension costs will likely increase for several years; cost savings may not occur for 10-15 years • Benefit structure for general employees not as good under FRS• Control over pension benefits and cost shifts to legislature