City of Alexandria, Virginia
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MEMORANDUM
DATE: OCTOBER 22, 2013
TO: THE HONORABLE MAYOR AND MEMBERS OF CITY COUNCIL
FROM: RASHAD M. YOUNG, CITY MANAGER /s/
DOCKET TITLE:
TITLE
Consideration of a Resolution to Amend the City of Alexandria Firefighters and Police Officers Pension Plan. [ROLL-CALL VOTE]
BODY
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ISSUE: Consideration of proposed changes to the Firefighters and Police Officers Pension Plan in lieu of the proposed two percent employee contribution rates increase beginning in Fiscal Year (FY) 2014.
RECOMMENDATION:
That City Council adopt the attached resolution (Attachment 1) which amends the City of Alexandria Firefighters and Police Officers Pension Plan and restates the Plan Document to combine the 2009 Plan Document Restatement and all the post-adoption amendments into one document.
That City Council accepts the combination of:
1) Benefit changes,
2) Modifications to the definitions, administration, and design of disability component of the retirement plan,
3) A Memorandum of Agreement, and
4) Employer/employee cost sharing of increases in pension and disability costs
as a non-cash substitute for the two percent increase in employee contribution rates proposed and adopted in the City's Fiscal Year 2014 budget.
BACKGROUND: In 2011 the City Council, in response to the rising cost of the City's retirement plans, appointed an advisory board to review options to address the increases. The Ad Hoc Retirement Benefit Advisory Group recommended keeping the defined benefit plan structure if an adjustment mechanism was put in place. City Council accepted the recommendation of the Ad Hoc Retirement Benefit Advisory Group and asked representatives from the Firefighters and Police Officers Pension Board to meet to recommend to Council an appropriate adjustment mechanism. A subcommittee met in the summer of 2012 and considered several alternatives including a proposal to share increased future costs. The Firefighters and Police Officers Pension Board met and passed a resolution recommending that the City management work in concert with the City employees' representatives, who are Plan members, to jointly and cooperatively develop a sustainable funding model that ensures the long term viability and fiscal health of the Firefighters and Police Officers Pension Plan (Plan).
The Firefighters and Police Officers Pension Board subcommittee did not reach a consensus for a solution prior to the council recommended deadline for the submission of the proposal. Therefore, the City Manager's Fiscal Year 2014 budget included a two percent employee contribution rate increase. There are similar changes in place in the Virginia Retirement System (VRS) for General Schedule employees. A workgroup consisting of management and Employee Association Leaders was formed to find an alternative to the proposed two percent employee contribution rate increase. The workgroup considered a large number of potential alternatives to the proposed contribution rate increase. They worked with the Plan's attorney and actuary to ensure the proposals are consistent with the Plan Documents, legal and actuarial best practices. The actuaries determined the potential cost savings of the proposed changes. The Employee Association Leaders have met with their chiefs and membership throughout the process. While the dollar value of the specific changes does not equate to two percent in the first year, the combination of plan changes and the support of the public safety officers to prevent disabilities and support participants when they are injured will address some of the long-term costs that may have caused some of the increases in the plan.
DISCUSSION: Upon review and discussion of the options, the workgroup recommend the proposed changes listed below. The changes have been carefully reviewed and many other alternatives have been considered.
The proposed changes of the Fifth Amendment are summarized below. The attached List of Changes Made by the Fifth Amendment (Attachment 2) is a more detailed summary along with the Proposed Plan Changes Chart (Attachment 3) which was sent to Participants and presented to the City Council Employee Pension/Compensation Committee. The proposed Fifth Amendment is also included (Attachment 4).
Plan Changes
· Plan Changes that Affect All Participants
1. Change the definition of Disability in the Plan Document to occur when an injury or illness prevents the employee from performing the duties of a sworn Police Officer or Firefighter. Currently disability occurs when the employee cannot perform the duties of the job to which they are assigned.
2. Add a definition of Alternate Employment that allows a disabled participant to be placed in an alternate job. Currently a disabled participant would receive a disability benefit.
3. A new cost sharing mechanism is implemented. The City of Alexandria will fund the initial obligation at a rate of 16.75 percent of salary until fully funded in 2029. The employee contribution rate will remain at 8.00 percent until Fiscal Year 2017. Increased costs after that date, including future contribution rate increases, will be shared by the City and employees based on the current contribution ratio of 2/3 City share and 1/3 employee share. This cost sharing is for gains and losses, based on the current benefit structure. The determination of who pays for changes for any new benefit changes would have to be discussed at the time the benefit change is proposed.
· Service Connected (Partial and Total) Disability
1. Recalculate the disability benefit at Normal Retirement Date using average monthly compensation based on rank and grade at time of disability for disability on or after 10/23/2013. Currently the disability benefit at Normal Retirement Date is recalculated using average monthly compensation based on rank and grade at disability including salary scales for the most recent 48 months.
2. Limit Cost of Living Adjustment (COLA) to five years after initial eligibility for COLA for all Service Connected Disability. Currently COLA adjustments continue until the benefit equals twice the original amount.
3. Incorporate an earnings offset for all participants who apply for disability on or after 10/23/2013. Currently the Plan has no earnings offset however the Plan did have an earnings offset from 1981 to 2002.
· Non-Service Connected Partial Disability
1. Increase the eligibility requirement for a Non-Service Connected Partial benefit to ten years of credited service. Currently, eligibility for the Non-Service Connected Partial Disability requires five years of service credit.
2. Change the Non-Service Connected Partial Disability benefit to 2.5 percent times years of credited service for current employees who apply for disability on or after 10/23/2013. The benefit is capped at 50 percent (20 years of service). Currently, the Non-Service Connected Partial Disability benefit is 50 percent of average salary.
3. Remove the COLA for Non-Service Connected Partial Disability for current employees who apply for disability on or after 10/23/2013. Currently, the Non-Service Connected Partial Disability benefit has a COLA provision.
4. Incorporate an earnings offset for all participants who apply for disability on or after 10/23/2013. Currently the Plan has no earnings offset however the Plan did have an earnings offset from 1981 to 2002.
· Non-Service Connected Total Disability
1. Change the Non-Service Connected Total Disability benefit to 2.5 percent times years of credited service for current employees who apply for disability on or after 10/23/2013. The benefit is capped at 50 percent (20 years of service). Currently, the Non-Service Connected Total Disability benefit is 50 percent of average salary.
2. Remove the COLA for Non-Service Connected Total Disability for current employees who apply for disability on or after 10/23/2013. Currently, the Non-Service Connected Total Disability benefit has a COLA provision.
3. Incorporate an earnings offset for all participants who apply for disability on or after 10/23/2013. Currently the Plan has no earnings offset however the Plan did have an earnings offset from 1981 to 2002.
· New Hires on or after October 23, 2013
1. Employees hired on or after 10/23/2013 will not be eligible for Non-Service Connected Disability.
2. Change service retirement benefit accrual rate to 2.5 percent times years of credited service for employees hired on or after 10/23/2013. The 30 year cap is removed for new hires so that there is no limit on the number of years accruing retirement benefits. The DROP is eliminated for those hired or rehired on or after 10/23/2013.
As required by the Plan, participants had a 60-day notice period and the opportunity to participate in meetings where the City's Pension staff, management and Employee Association Leaders explained these proposed amendment and answered questions. The Employee Association Leaders also hosted a vote of all active membership and 63 percent of the active membership participated in the vote. The result of the vote is that 83 percent of the members who voted in the survey supported the proposed pension plan changes.
Memorandum of Agreement
As the workgroup discussed the increases in the pension plan costs, the group agreed that it was important the Police and Fire departments be a part of the changes needed to address increases in the disability plan portion of the pension. The workgroup has developed a Memorandum of Agreement to be signed by the City, the Fire and Police Chief and the leaders of the Employee Associations who have been involved in these discussions. This Agreement states a mutual understanding by all the groups listed above on the following items:
· Plan Changes, including a cost sharing mechanism - as detailed in the changes to the plan document (see Attachment 2, Attachment 3 and Attachment 4)
· Monitoring and Review - there is an agreement for the workgroup to reconvene annually to review the actuarial valuation and any progress. The workgroup will also be kept up to date on the Plan's investment performance. The workgroup will also monitor the Plan's funding progress and reconvene at least once every two years to review the funding progress.
· Wellness - a wellness program will be enhanced to encourage employee health and wellness. A part of the enhanced wellness program will include physicals for all participants. The wellness program may differ between the two departments.
· Jobs and Recalls - The Police and Fire Chiefs will place disabled workers into alternate jobs within their department. Both chiefs have provided a list of jobs where disabled workers could be placed. That list of jobs is included in Attachment 6 - Alternate Employment Job List.
· Review Board - a pilot program will establish a review board that will consist of management representatives and firefighter and police officer representatives. This review board will participate in the disability application process. The pilot program will exist for a period of four years with a review of performance and effectiveness in two years.
· Salary - salary for disabled workers placed in alternate employment will continue at the rank and grade the disabled worker was receiving prior to disablement.
Plan Document Restatement
The January 1, 2009 Restatement was adopted by City Council on November 12, 2008. Amendment One, Two, Three, and Four were adopted in 2010, 2011, and 2012. The proposed Plan Amendment Restatement is included (Attachment 5).
Typically, plan amendments do not include the entire text of the underlying Plan Documents they amend. Instead, they only contain the sections of the document that they alter. As a plan evolves over time, the original Plan Document plus a series of plan amendments govern it, making it awkward to manage. Combining the Plan Document and all its amendments into one document will simplify plan management. The Plan Document has been restated to include all changes from all amendments 1-5.
FISCAL IMPACT: The fiscal impact on the City and the plan participants can be split into categories: current & future impacts as well as split into quantifiable and tangible cost changes and not currently quantifiable or intangible costs.
As a result of the proposed benefit changes for current employees, the current total contribution rate to the Plan will decrease 1.15 percent. With expected salaries of $33 million, this leads to a decrease in the pension contribution of $380,000 in FY 2014. These savings have already been included in the FY 2014 budget. While this amount is lower than the amount budgeted decrease in FY 2014, the FY 2014 contribution was calculated prior to making the changes recommended here. Because the long term changes to the plan will lower the required contribution to the plan, no additional payments will be made in FY 2014. Over five years the savings is expected to be $2.1 million. Over twenty five years the savings are expected to be $15.8 million.
As a result of proposed benefit changes for new hires, decreased costs to the plan are minimal in the first several years, but should increase as the number of employees hired after October 22, 2013 increases:
Year Savings
1 less than $0.1 million
5 $0.1 million
25 $1.0 million
There are a number of intangible cost impacts associated with the Memorandum of Agreement. Changes to the definition of disability, physical requirements and identifying additional public safety related jobs for disabled workers are some best practices that decrease disability costs when employees are committed to their success. There are also significant incentives and structural changes to manage disability utilization. It will take several years before costs may go down.
ATTACHMENTS:
Attachment 1: Resolution
Attachment 2: List of Section Changes Made by the Fifth Amendment
Attachment 3: Proposed Plan Changes and Plan Change Comparison Chart
Attachment 4: Amendment and Restatement of the City of Alexandria's Firefighters and Police Offices Pension Plan
Attachment 5: Plan Document Restatement
Attachment 6: Alternate Employment Job List
STAFF:
Laura Triggs, Chief Financial Officer
Steven Bland, Retirement Administrator
Christopher Spera, Deputy City Attorney