Submitted by Dave Lott
April 28, 2014 9:42 a.m.
This is a 4-part series centered on the City of Fernandina Beach’s pension plans currently under review by the City Manager, City Attorney, and the City Commission. In January 2012 the City Commission approved retaining a legal firm specializing in municipal pension programs to advise the City on potential legal options for the pension programs. Subsequently, the City Manager was authorized to identify and retain an actuary which has been done. The actuary will provide the financial impact analysis that any modifications to the plans might have — both short-term and long-term.
Since then, there has been little visible activity on discussions about possible reforms to the City’s pension plans although it always seems to be mentioned as a key issue during election campaigns and I am sure this coming election will be no exception. My understanding is that the slow pace has not been due to a lack of effort, but due to the time that has been required to reconcile the calculations by the City’s actuary to those of the actuarial firm used by the pension boards. While the strong performance of the stock market over the last two years has resulted in big increases in the valuation of the pension program’s assets, the cost of the pension programs remains a significant budgetary issue and any significant changes will have to be agreeable to the City’s unions as part of their collective bargaining agreements.
Part 1 of the series provides an informational background about the City’s current pension plans and their overall structure. Part 2 examines the investment performance of the plans and their financial impact on the overall City’s budget. Part 3 will look at general options that might be available to the City along with a discussion of the trade-offs each provides. Finally, Part 4 will identify the key questions the Commission, involved City staff, its independent advisors, citizens and the Pension Boards are likely to ask as they determine their future course of action.
As to pension programs, it comes down to the saying, “Pay me now or pay me later.” Those are the choices that will likely face the City Commission as it deals with the ever increasing impact of the City’s two pension plans on the General Fund future budgets. In the current 2013-14 Budget, the City’s share of funding the pension funds totals $2.7 million; an increase of $157,000 (6%) over the 2012-13 budgeted amount.
The City-contribution amount represents 17.6% of total 2013-14 budgeted personnel expense. Before examining the options available to the Commission to modify the plans should they so desire, it is important and beneficial to identify the key components of the current plans and their structure.
The City has two pension programs: one for police and fire-rescue personnel and the other for the general employees. While having many similarities, the plans are quite distinct in a number of ways. Each plan has its own Board of Trustees who has a fiduciary responsibility solely to the fiscally safe and sound operation of the plan; NOT to the City, the plan’s participants or the City’s taxpayers. While they certainly can be advocates for the plan’s participants, they cannot lose sight of their primary responsibility to make recommendations on how to strengthen the plan and what benefit changes are needed in order to keep the plan actuarially sound. Such a relationship with the city’s officials can be, but doesn’t have to be, an adversarial one.
In the case of the Police-Fire Board, one member is appointed by each department, two members by the City Commission and then the four members select a fifth member who is ratified by the Commission.
The General Employee’s Board is filled in a similar manner with two members selected by the United Brotherhood of Carpenters (UBC) local union membership, two members appointed by the City Commission and the fifth member selected by the four others. The Board members are given training opportunities to help them be better carry out their responsibilities.
While both Boards use the same investment advisors and legal counsel for cost efficiencies, they are free to choose different representatives should they choose to do so. Both Pension Boards engage an independent consultant who provides quarterly comparative results – giving a report card, if you will – on the investment manager’s performance. Both Boards hold scheduled quarterly meetings, generally on the same day, with their investment and legal representatives to review performance and handle various administrative matters related to their respective plan. These matters range from modifying the strategy of the invested funds to authorizing payment of bills. These noticed meeting are open to the public and are held at City Hall.
Both pension programs are “defined benefit” programs which means that the members are guaranteed a designated level of benefit once they become eligible to receive such benefits. The level of annual benefit is calculated using three factors: (1) number of years of service; (2) average annual salary or compensation received during a defined period; and (3) a multiplier.
The benefit amount can be adjusted based on if the member elects to have a “survivor” or “guaranteed” benefit whereby a pension payment will continue for some period of time in the event of the death of the member. Let’s use the example of an employee retiring with 20 years of service, an average annual salary of $56,000 and the multiplier is .0275 (2.75%). Their annual benefit would be calculated as 20 x 56,000 x .0275 or $30,800/year. For the City programs, the multiplier for the Police/Fire program is .0325 (3.25%) and .0275 (2.75%) for the General Employee plan.
Neither program has a Cost of Living Adjustment (COLA) provision for payments to retirees; however the City Commission can authorize a COLA adjustment at their discretion – an action thought to be highly unlikely. The last COLA adjustment was made in October 2000 for both programs for a one-time increase of 1.5%.
While all participating employees are 100% vested in their Plans after six (6) years of service, there are differences between the plans as to when an employee can start drawing on their pension. The more hazardous occupation of the Police/Fire personnel allows them to become eligible sooner or with fewer years of service. The timeframes for each plan are shown in the table below:
Funding for the plans comes from three sources: the earnings from the funds in the investment pool; the contributions by the employees; and, the contribution by the City. The Police-Fire fund also receives some funding from the State. The employee contributions are a fixed percentage of salary and are covered under the City’s separate collective bargaining agreements with the Police, Fire-Rescue and UBC unions. The Police/Fire employee contribution rate is 7.7% of their salary and the General Employees contribution is 6.5%.
In Part 2 of this series, the performance of the plan’s investments over the last four years will be reviewed with a discussion about how that performance impacts the City’s overall financial responsibilities.
Editor’s Note: Dave Lott has been a management consultant specializing in consumer banking and payment systems for 30+ years. As a former 11 year resident of the City, Dave has served on numerous City advisory committees. Dave served as Interim City Manager. He currently resides in Atlanta, Georgia.
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Thank you so much for this informative article. We look forward for the forthcoming ones.
Putting this into a slightly different perspective, a vested employee who works for the Police or Fire will receive a retirement of 100% of their annual salary after 30.1 years seniority while a General Employee must work for 36.6 years to receive 100% of their annual salary.
For comparison, I worked in the private sector for 35 years and receive a retirement pension approximately 20% of my salary at retirement, and with no continuing medical or other benefits, and this includes both corporate and employee contributions.
To be fair, I re-read the article and need to make a modification of my comparison above. I found this sentence:
“The benefit amount can be adjusted based on if the member elects to have a “survivor” or “guaranteed” benefit whereby a pension payment will continue for some period of time in the event of the death of the member.”
When I retired several years ago from the private (corporate) sector, we did not have the option of choosing to receive all or a percentage of our due pension payments. We were required to have what they called a 65/35 split. In other words, I receive 65% of my 100% pension, and if I predecease my wife, she will receive a reduced benefit of 35% of the 100% pension for the remainder of her life. That would mean that my 100% pension would be approximately 31% of my annual salary (average over the last 5 years) instead of the 20% I referenced above.
I am anxiously waiting for an explanation of how the municipal pensions funds can be “made whole” and further how they can be self sustaining given the relatively stagnant municipal job growth but upwardly trending wages and compensation.