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FRS & Pension Developments 40 th Annual Florida Public Employer Labor Relations Association Conference February 1

FRS & Pension Developments 40 th Annual Florida Public Employer Labor Relations Association Conference February 11, 2014 James W. Linn & Glenn E. Thomas. Significant Pension Developments.

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FRS & Pension Developments 40 th Annual Florida Public Employer Labor Relations Association Conference February 1

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  1. FRS & Pension Developments 40th Annual Florida Public Employer Labor Relations Association ConferenceFebruary 11, 2014James W. Linn & Glenn E. Thomas

  2. Significant Pension Developments • Scott v. Williams – Florida Supreme Court upholds legislation reducing Florida Retirement System benefits and instituting 3% employee contribution • 2013 Retirement Legislation • Florida Division of Retirement reinterpretations of Ch. 175 & 185 (police and firefighter pension plans) • 2014 Retirement Legislation - Preview

  3. Florida Retirement System • 623,011 Active Participants • 334,682 Retirees and Beneficiaries • Over 1,000 participating agencies (including 396 counties and county agencies, 259 special districts and 185 cities) • Assets = $140 billion as of 6/30/13 • Liabilities = $161 billion as of 6/30/13 • Funded Ratio = 86.9%

  4. Local Government Pension Plans • 492 Local Government Defined Benefit Pension Plans in Florida • 111,267 Active Participants • 78,975 Inactive Participants (retirees and terminated vested) • Approximately $24 billion in plan assets as of 9/30/2012 (but liabilities = nearly $30 billion) • 300 plans (61%) are funded at or below 80% • 187 plans (39%) are funded above 80%

  5. Pension Funding LawPart VII, Ch. 112, Florida Statutes • Public defined benefit pension plans must be funded on a “sound actuarial basis” • This means the cost of current benefits cannot be shifted to future taxpayers. • Employer is ultimately responsible for paying current pension costs (“normal cost”) plus payment to amortize unfunded liabilities over period of not more than 30 years. • City bears the risk of pension fund investment losses.

  6. Pension Cost Components 1. Normal Cost – ongoing cost of benefits, with no UAAL (unfunded actuarial accrued liability) 2. UAAL Amortization Payment to cover past: • Actuarial losses • Plan improvements • Changes in actuarial assumptions & methods

  7. Pension Cost Components • In many cities the UAAL amortization payment exceeds the normal cost of the plan: Normal CostUAAL Amort.Total Cost 16% 28.5% 44.5%

  8. Pension Cost BreakdownExample • Normal Cost: $ 4.47 million (16.0% of payroll) • Amortization: $ 7.96 million (28.5% of payroll) • Total Required: $12.4 million (44.5% of payroll) • Members Pay: -$ 1.4 million ( 5% of payroll) • Net City Cost: $11 million (39.5% of payroll) [Annual City cost per employee = $ 25,166]

  9. Pension Legacy Cost - The UAAL Issue Why have unfunded liabilities grown even in years of good investment performance? • Because actuarial losses have exceeded investment gains. • Many plans have had consistent actuarial losses in recent years. • Actuarial losses occur when actual experience does not meet assumptions in areas such as: • investment earnings • salary increases / payroll growth • mortality • turnover • retirement rates

  10. Pension Reform Legal Guidelines • Changes in retirement benefits and employee contributions are mandatory subjects of collective bargaining. • Accrued pension benefits (benefits earned in the past) cannot be reduced or taken away. • Future benefits can be reduced for current employees who have not reached retirement status. • City is ultimately responsible for unfunded pension liabilities, even if current plan is terminated or frozen, or all employees are laid off or transferred to another employer.

  11. Williams v. Scott • Union challenge to 2011 legislation reducing FRS benefits and mandating a 3% employee contribution • FRS changes: • Employee contribution: 3% • No COLA for service after 7/1/11 (was 3%) • Delayed normal retirement age* • Regular: age 65 or 33 years* (was age 62 or 30 years) • Special Risk: age 60 or 30 years* (was age 55 or 25 yrs) • Average final compensation: highest 8 years* (was high 5) •  8 year vesting period* (was 6 years) • DROP interest = 1.3% for members who enter DROP after 7/1/11 (was 6.5%) *Apply to employees who first join FRS on or after 7/1/11

  12. Williams v. Scott • Resounding 4-3 decision • FRS preservation of rights clause not intended to bind future legislatures from prospectively altering benefits for future service • Legislature could mandate 3% employee contribution prospectively • No unconstitutional taking • No impairment of collective bargaining – facial challenge

  13. 2013 Retirement Legislation Passed: • SB 534 – Public Pension Plan Disclosure • HB 1810 – FRS Contribution Rates Did Not Pass: • SB 458 / HB 1399 – Police & Firefighter Pension Plans • HB 7011 – Florida Retirement System

  14. 2013 Legislation SB 534 – Public Retirement Plan Disclosure – passed. Creates new reporting requirements for local government defined benefit pension plans. • Long-term funded ratio of the plan calculated in compliance with GASB 67 and 68, including the market value of plan assets, the value of the plan’s actuarial liabilities, and the amount of any unfunded accrued liability; • Dollar value of any unfunded accrued liability; • Number of months or years for which the current market value of assets are adequate to sustain the payment of expected retirement benefits; and

  15. 2013 Legislation SB 534 (cont.) • Recommended contributions to the plan stated as an annual dollar value and a percentage of valuation payroll, using actuarial assumptions and cost methods specified in the legislation: • Entry Age Normal actuarial cost method. • Assumed rate of return two percent less than the plan’s assumed rate of return. • RP-2000 Mortality Tables • Asset valuation method -- market value less the value of DROP accounts; • Actuarial accrued liabilities, excluding the value of DROP accounts; and • All other assumptions and methods used by the local plan in its latest valuation.

  16. 2013 Legislation SB 534 (cont.) • Plan sponsor must publish the required information, on any website that contains budget or actuarial information relating to the plan. Local government plans also must provide the information on any municipal website when tentative budgets are published. • Required information for reporting purposes only – not for determining plan funding requirements.

  17. 2013 Legislation HB 1810 -- FRS Employer Contribution Rates Effective 7/1/13 -- passed: • Regular Class – 6.95% (was 5.18%) • Special Risk: 19.06% (was 14.9%) • Senior Mgt – 18.31% (was 6.49%) • Local Elected Officers – 33.03% (was 10.23%) • DROP – 12.84% (was 4.33%)

  18. 2013 Legislation SB 458 / HB 1399 – Police & Firefighter Pension Plans – did not pass • Would have revised rules on use of Ch. 175/185 premium tax revenues • Would have required a greater portion of premium taxes to be used for enhanced benefits for police officers and firefighters

  19. 2013 Legislation HB 7011 – Florida Retirement System – did not pass • would have closed FRS defined benefit pension plan to new members, and required all new hires to participate in defined contribution plan • passed House; defeated in Senate on 22-18 vote

  20. Ch. 175/185 Police & Fire Pension • Chapters 175 & 185, F.S. provide for a rebate of the state excise tax on property and casualty insurance premiums to cities and fire districts that have firefighter and police pension plans. • Premium taxes are paid by all taxpayers. • The premium tax monies must be used exclusively for fire and police pensions, and the local pension plan must comply with the requirements of Chapters 175 & 185.

  21. Ch. 175/185 Premium Taxes Old Interpretation • “Excess” premium tax monies can only be used for new “extra benefits.” • If benefits are reduced below 1999 level, plan loses eligibility for future premium taxes. • Premium tax money that can be used for extra benefits is first year dollar cost. As payroll grows, cost of extra benefits shifts to employer.

  22. Ch. 175/185 Premium Taxes New “Naples” Interpretation • Plan eligible for future premium tax revenues as long as Ch. 175/185 minimum benefits are met (can be less than 1999 benefits). • If cost of Ch. 175/185 minimum benefits is more than “additional” premium taxes (i.e., taxes above the 1998 amount), all premium tax revenues may be used to reduce the City’s required contributions. • City and union can negotiate use of accumulated excess premium tax monies.

  23. Ch. 175/185 Premium Taxes Old Interpretation • If local government joins FRS, plan no longer eligible for Ch. 175/185 premium tax revenues

  24. Ch. 175/185 Premium Taxes New “Palm Beach Gardens” Interpretation • If employer joins FRS and some current employees elect to stay in employer’s pension plan, plan can continue to receive Ch. 175/185 premium tax revenues until fully funded or all benefits are paid out

  25. 2014 Legislation SB 246 / HB 509 – Police & Firefighter Pension Plans • Revises rules on use of Ch. 175/185 premium tax revenues • requires a greater portion of premium taxes to be used for enhanced benefits for police officers and firefighters

  26. 2014 Legislation – SB 246 • First, the amount of premium tax revenues received for 1997 must be used to fund the benefits in existence on March 12, 1999

  27. 2014 Legislation – SB 246 • If plan has supplemental plan (“share plan”) - premium tax revenues in excess of 2012 amount and any accumulation of past excess PTR must be used as follows: • If funded ratio is less than 80%: • 50% to pay actuarial deficiency • 50% for “special benefits” (i.e. share plan) • If funded ratio is 80% or more: • all PTR above the 1997 amount must be used for “special benefits” (i.e. share plan)

  28. 2014 Legislation – SB 246 • If plan does not have supplemental plan (“share plan”) - premium tax revenues in excess of 2012 amount and any accumulation of past excess PTR must be used as follows: • If funded ratio is less than 80%: • 50% to pay actuarial deficiency • 25% for base benefits • 25% for “special benefits” (i.e. share plan) • If funded ratio is 80% or more: • 50% to pay actuarial deficiency • 50% for base benefits

  29. 2014 Legislation – SB 246 • Premium tax revenues may not be used to fund new defined benefits after March 1, 2013, except defined benefit plans created after March 1, 2013 may contain a defined benefit component funded by up to 50% of the premium tax revenues.

  30. 2014 Legislation – SB 246 • Current plan benefits may still be reduced, but only if the plan continues to meet the required minimum benefit provisions under Chapters 175 and 185. • However, if the employer contribution is reduced by reducing benefits, 25% of the reduction must be used to fund actuarial deficiencies. • Additional premium tax revenues that are used to fund actuarial deficiencies may not be considered by the plan actuary in determining the employer contribution.

  31. 2014 Legislation – SB 246 • Requires every police and firefighter plan to have a defined contribution component by October 1, 2014. • If a plan was created by a special act of the Legislature the plan has until July 1, 2015 to comply. • Any supplemental plan in existence on March 1, 2014 will be deemed to comply with this provision.

  32. 2014 FRS Legislation House and Senate leaders have publicly called for further FRS changes: • Hybrid DB + DC or “cash balance” plan for new hires • New plan would not apply to Special Risk members

  33. Pension Reform Options • Join FRS • Set up Defined Contribution (DC) plan • Reduce Benefits for New Hires • Reduce Benefits for All Employees • Hybrid Plan • Increase Employee Contributions and/or Cost-Sharing

  34. Key Concepts • “Close” – existing plan closed to new members; current members stay in existing plan until they retire or leave the city; future employees join new plan. • “Freeze” - accrued benefits of current employees in existing plan “frozen” and paid out at retirement; all current and future employees join new plan. • “Terminate” – existing plan liquidated; accrued benefits paid out to plan members; City responsible for any deficit; all current and future employees join new plan.

  35. Join FRS for New Hires Advantages Disadvantages No immediate savings -- may take many years to achieve cost savings; City still must pay off current plan liabilities Lose premium tax revenues immediately Portability – City employees can move to another FRS employer and take their pension with them State legislature sets benefits and contributions • Reduced cost over time (FRS rates are going up) • Standardized FRS benefits • 3% employee contribution • Portability – easier for City to attract employees from other FRS agencies • Gets City out of pension business (eventually)

  36. Join FRS for All Employees Advantages Disadvantages Current City pension plans must be terminated or frozen City still must pay off current plan liabilities Lose premium tax revenues immediately Portability – City employees can move to another FRS employer and take their pension with them State legislature sets benefits and contributions • Reduced city cost in shorter time (but FRS rates are going up) • Standardized FRS benefits • 3% employee contribution • Portability – easier for City to attract employees from other FRS agencies • Gets City out of pension business (eventually)

  37. Reduce Benefits for New Hires (2 Tier Plan) Advantages Disadvantages No immediate savings -- may take many years to achieve cost savings Creates lower level of benefits for new hires New hires can be expected to press for greater benefits City stays in pension business • Reduced cost over time • Current employees keep current benefits • Can be designed to keep premium tax

  38. Reduce Future Benefits for All Employees Advantages Disadvantages Reduces future benefits for current employees (employees keep what they have already earned) City stays in pension business • Immediate cost savings • Reduces UAAL • Same benefits for all employees going forward • Can be designed to keep premium tax

  39. Defined Contribution Plan Advantages Disadvantages Employees bear investment risk Possible that DC benefits will run out while employee is still alive No inflation protection (COLA) Portability – employees can easily move to another employer and take their DC balance with them Loss of premium tax revenues • Predictable employer costs • City does not bear investment risk • Appeals to younger, mobile employees • Portability – DC account balance may be “rolled over” to an IRA or other retirement plan • Lower admin. Costs • No actuarial liabilities

  40. Hybrid Plan • DB plan plus separate DC plan • DB plan provides guaranteed “base” benefit (eg. 1.25%) • DC plan reduces risk and cost to City • DB plan plus DC plan – variable DC contribution • If DB cost goes up, city contribution to DC plan goes down • “Variable Annuity” DB Plan • If DB cost goes up, DB benefit goes down (eg. multiplier reduced from 2% to 1%) • Hybrid plan results in sharing of risk and cost between the City and employees

  41. Increase Employee Contributions or Cost - Sharing • One percent increase in employee contribution = one percent reduction in City contribution • Legal issue: Ch. 175/185 says employee contributions can be increased only if union agrees (but equivalent pay reduction can be imposed). • Cost sharing: if City contribution goes up, employees pay one-half of increase

  42. Questions? Please send questions to Mr. Linn at: jlinn@llw-law.com or Mr. Thomas at: gthomas@llw-law.com

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