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PTAC Report
REPORT Introduction The Pension Technical Advisory Committee (PTAC) appreciates and gratefully acknowledges the dedication and input of City of Atlanta employees. The PTAC expresses special thanks to the Chairman of the City's 2001 Pension Task Force who spoke to the PTAC during public forums and provided documents and an important perspective on the City's pension plans. In addition, we thank the members of the General Employees' Pension Plan, the Police Pension Plan and the Fire Fighters Pension Plan who also appeared before the committee providing valuable research and information. Any omission of specific recommendations made to the PTAC should not be construed as being without merit but rather should be considered only after substantial review and with full knowledge of the accompanying financial impacts and only within that context. The PTAC is comprised of management professionals with expertise in pension plan administration and risk management. We were humbled by the task set before us and have struggled to make meaningful and impactful recommendations. Our recommendations are submitted to you with the caveat that the process was not ideal. The PTAC understands the urgency of the City's need for a quick response. However, the PTAC's review suggests that in the past, certain pension plan decisions may have had unintended consequences. Our concern, therefore, is greatly heightened because pension plan changes produce substantive and continuing financial impacts that are realized far into the future. Therefore, we urge the Administration and City Council to consider our recommendations within a greater context. Pension discussion should be part of an overall total compensation package. While an important factor, the pension plan is not a stand-alone factor in employment decisions. With consensus, we acknowledge that salary is the most important factor in the employment decision. In addition, we urge the City to determine its goal in providing retirement income as a percent of salary for the retirement needs of its employees. (See Recommendation #2, Page 10) The PTAC urges the City to set a goal that identifies its targeted share of its retiree's retirement income. Retirement income is often viewed as a 3-legged stool with portions of the whole coming from the employer(s), government (Social Security) and, the employee. The policy is needed no matter what the targeted percent, i.e., 10%, 50%, 60%, 80%, 90%, etc. Without a stated policy or goal, the City's pension plan decisions determine its policy in an ad hoc and inconsistent manner. Without a stated goal employees, will continue to seek and the City will be encouraged to grant ever-increasing retirement benefits. At this time, the three defined benefit pension plans provide different percents of salary for different groups without benefit of knowing what target percent the City seeks to achieve. Further, in reviewing our recommendations, please know that in the global community, pensions are noted as a looming crisis. As discussed in the cover story of Business Week July 19, 2004, "The Benefits Trap", "Defined benefit plans and retiree health insurance were once all but universal at large companies. Today experts can think of no major company that has instituted guaranteed pensions in the past decade...a well-matched 401(k) often costs no more than 3% of payroll, a typical defined-benefit plan can cost 5% to 6% of payroll." Many government sponsored defined benefit plans are higher than the above. However, we note this information because the City of Atlanta's pension contribution rates as of 2003 are general employees 20.18%, police 23.33%, fire fighters 24.3% and some of the rates are projected to increase by at least 50% in the near term. A cover story in Global Finance July/August 2004 "Pensions the Impending Crisis," states: "Three facts are widely agreed upon. Most states (countries) will shortly be unable to afford to adequately provide for their workers' retirement; individuals appear to be failing to make suitable plans to fund their own retirements; and it is not possible to rely on corporations to provide long-term pension schemes that they, also administer... The Organization for Economic Cooperation and Development ...is urging its members to promote fundamental changes in behavior and attitudes in order to promote a longer working life. It is concerned that if working lives are not extended then living standards of retirees and workers alike will fall." As the ratio of retired people to working-age people continues to increase, there will be fewer people to support more retirees. In countries that still rely heavily on state-funded pension schemes, which are dependent upon taxation for their funding, this seemingly unsolvable equation is at the core of the looming pensions crisis."
History Since 1924, City of Atlanta pension plans have provided designated employee groups with retirement benefits. The initial pension plan provided a benefit that equaled 1/2 the average monthly salary not to exceed $150 per month and employees were eligible to retire as pensioners at age 65. The City's pension plans were enacted as Act(s) of the General Assembly of the State of Georgia at a time when the average male life expectancy was approximately 48 years. The early 20th century did not envision a society wherein the demographics would suggest retirees might exceed workers or where workers would live long enough to reap retirement benefits. If they became pensioners, the assumption was that the likely benefit payout period would be relatively short.
Over numerous decades, the defined benefit plans for general employees, police, and fire fighters, respectively, were amended and retirement benefit formulas changed. The amendments and changes were generally to enhance benefits for a respective employee group or for United States Internal Revenue Code compliance. In 2001, Atlanta closed its General Employees Pension Plan to new City hires and created a defined contribution plan for this employee group. These actions were to reduce future costs. Subsequently, however, the benefit formulas in the police and later fire fighters pension plans were changed thereby increasing costs.
The Charge In early 2004, the City of Atlanta set out certain facts with respect to its retirement plans and their accompanying benefits, to wit: "The City of Atlanta provides retirement benefits for its full-time, permanent employeesthrough three defined benefit pension funds and a defined contribution plan.
1. The Firefighter's Pension Fund provides retirement benefits for uniformed members of the Fire Department through a defined benefit plan. 2. The Police Officers Pension Fund provides retirement for uniformed members of the Police Department through a defined benefit plan 3. The General Employees Pension Fund provides retirement for all other employees of the City employed prior to July 1, 2001, through a defined benefit plan. Certain employees of the Atlanta Board of Education are also members of this fund. 4. The Defined Contribution Plan covers general employees of the City (all other than uniformed police and fire) hired since July 1, 2001. Each of the four plans has different benefits and different qualification provisions. City employees do not participate in Social Security. Uniformed fire and police personnel are eligible to participate in state retirement funds, which supplement their City pensions.
A number of changes have been made to the retirement plans over time. Disparity between the benefits among the three defined benefit plans has increased. Employees and City leaders have raised a number of questions relative to the City's pension offerings. Some of these questions include:
The City is establishing the Pension Technical Advisory Committee to provide the City with an objective review of its retirement plans, and to make recommendations for improvements and other changes. The commission will be asked to help answer the above questions, as well to provide insight into the "state of the art: of retirement plan management in both the private and public sectors. It is anticipated that the commission will draw upon the expertise of its members, hear from City employees and employee groups, and, with assistance of City staff, gather data from other pension systems. The commission will be appointed by the Mayor, and will be asked to report their conclusions jointly to the Mayor and the City Council within ninety days."
The Committee The six-member Pension Technical Advisory Committee (PTAC) is comprised of pension, retirement, and risk management experts from both the private and public sectors. The members are listed below: Ms. Cecelia Corbin Hunter, Chair Past Director, Employees' Retirement System of Georgia Mr. Scott Fremer, Vice President, Retirement Services Wachovia Bank Mr. Greg Marshall, Manager, Pension and Capital Accumulation Plan Administration, The Southern Company Mr. Bruce Palmer, Ph.D., Retired Chair, Department of Risk Management & Insurance, Robinson College of Business Georgia State University Mr. Mitch Paull, Chief Financial Officer, Aaron's Rents, Inc. Mr. Bob Regus City Administrator City of Alpharetta
The Process The Pension Technical Advisory Committee held its first meting on April 21, 2004 and its final meeting on August 11, 2004. To meet the time requirements stipulated in the City's charge, a 10-week process was scheduled for reviewing Atlanta's pension plans. The process included access to and meetings with plan actuaries; plan participants; Mayor and Members of Council; Chief Financial Officer; Commissioner of Human Resources; leadership of police and fire, and other interested parties. Input has been received through public forums, which were scheduled and held at Atlanta City Hall; information was also received by the Department of Finance and forwarded to the committee. The PTAC further reviewed information, researched issues and deliberated certain critical pension issues. Recommendations The following represents the recommendations the Pension Technical Advisory Committee brings forth for consideration by the City of Atlanta against the charge outlined in the creation of the Pension Technical Advisory Committee. Our recommendations represent our consensus within the context of the process. In each instance, implementation of the recommendations is dependent on further review and analysis. The PTAC identified and responded to nine issues related to the pension plans. 1) Process for Making Changes
The PTAC recommends adoption of a two-year process for instituting changes with a financial impact to the City's pension plans.
Proposed changes to existing pension and other retirement plans should be carefully studied prior to their actual adoption and implementation. Once an increase in the benefit schedule or the vesting schedule is implemented, for example, it is exceedingly difficult, if not impossible, to rescind the change at a later time. If the City's financial circumstances were to worsen, making it difficult to continue to properly fund any of its defined benefit plans, it would have limited acceptable alternatives. To allow for a deliberate process for making changes, it is recommended that the City adopt a process that parallels the approach that the state of Georgia uses with respect to proposed changes to its retirement plans. Specifically, retirement plan changes that have a financial impact must undergo a two-year process for introduction, review and adoption. The PTAC believes it is imperative that the City analyze and understand the long-term implications of retirement benefit changes prior to their adoption. See Exhibit A “Georgia Public Standards Act”
2) Income Replacement Targets The PTAC recommends that the City set a policy that determines its targeted percent of an employee's retirement income. Research suggests that workers who retire at normal, full-retirement, age 65, on average need 70-80 percent of their pre-retirement income to maintain their standard of living during their initial year of retirement. The exact percentage of income needed by a specific worker will vary according to the levels of income (and other) taxes they pay, pre-retirement saving levels, whether they have employer- or government-provided medical coverage during their retirement years, along with other important factors. As the City of Atlanta seeks to provide a pension benefit to retired employees, in that context, the City should determine the percent of a retired workers pre-retirement salary that it by policy determines it should contribute. At this time, for some employee groups, in retirement, their City benefit will equal 80% or more of their previous salary. Generally, an employer is responsible for providing a percent of the total retirement income required, other government programs provide a percent and the employee contributes a percent through voluntary savings. Inasmuch as the City of Atlanta does not participate in Social Security, the potential coverage for a similar benefit could be provided by the City matching a voluntary contribution in the IRC 457 Deferred Compensation Program up to a designated percent. Since the state of Georgia provides supplemental retirement benefits for certain employee groups, i.e., police and fire fighters, when determining the City's target percent, the calculation should include those additional benefit options.
3) Parity a.) To ensure comparability of benefit, the PTAC recommends the City review contribution levels of all employee groups. b.) The PTAC recommends that high priority be given to addressing pension-related issues for General Employees hired after July 1, 2001. Parity across the three plans (police, fire fighters, and general employees) is a critically important issue for many of the City's workers. The PTAC believes that, generally, pension plan parity across the City's entire workforce is a desirable goal. In examining the parity issue, it is recommended that retirement benefits from all sources (City of Atlanta, state of Georgia, federal government) be considered.
The PTAC also recognizes that differences in labor markets may constitute justification for separate plans with different benefit accrual and/or employee contribution rates. It is possible that, even if the degree of competition varies across labor markets, a single pension plan could be provided all City workers, with any tight labor conditions reflected solely through higher wages. In addition, the physical requirements of certain jobs could potentially support different normal (and, possibly, early) retirement provisions across differing segments of the total workforce. The PTAC does not possess any hard data to support or refute either of these possibilities and, thus, offers no opinion on whether there is legitimate justification for maintaining different benefit accrual rates and/or different normal retirement ages as presently exist. The employee contribution rate for all City of Atlanta pension plans is 6% or 7% depending on survivor benefit. However, the benefit multiplier is significantly higher for police and also fire fighters. Clearly, those groups are receiving a higher benefit for the same contribution. One consideration would be to lower the contribution rate for general employees with a strong recommendation that those funds be redirected with a match by the City to a defined contribution plan. Please see attached model Exhibit B. The PTAC's most overriding concern and recommendation, relates to the pension coverage of general employees hired on or after July 1, 2001. The PTAC believes that their exclusion from the General Employees Defined Benefit plan with pension coverage provided under a contributory defined contribution plan is a wholly inadequate solution. Unlike their colleagues covered under the defined benefit plan, new general employee hires do not have any employer-provided disability coverage and the plan's survivors' (death) benefits, most likely, would be highly inadequate if death occurred within 5-10 years of initial employment when their account balances would be relatively small. The absence of disability benefits and low levels of survivors' benefits is a particularly glaring issue given that City workers do not participate in the federal Social Security program.
The Committee recommends the following for post July 1, 2001 hires: (1) Enrollment in Social Security (OASDI) or the establishment of a comprehensive set of retirement, disability, and survivors' benefits that approximates, or replicates, the benefits provided under OASDI. Although there continues to be considerable debate about the future of Social Security, a primary advantage of enrolling this employee group in OASDI, as opposed to the creation of a OASDI-replicate plan, is that OASDI benefits are completely portable from one employer to another, with no loss of coverage or accrued benefits.
While a strong argument could be made that new hires (including post-2001 General Employee hires currently on the payroll) should be simply added into the existing defined benefit plan covering pre-2001 General Employee hires, the "combination plan" approach recommended above is preferred as it provides more equitable treatment between long-service employees who ultimately retire from the City of Atlanta and those employees who leave the City prior to vesting or "cash in" their vested defined benefits at termination of employment (thereby forfeiting all employer‑ funded benefits. Other advantages of the recommended approach include employees taking individual responsibility (via the defined contribution plan) for meeting a portion of their retirement income needs and the opportunity for significant "wealth creation," on a tax-favored basis, through participation in the defined contribution plan. To this point, the above recommendation has been limited to general employees hired on or after July 1, 2001 due to the urgency and high priority that should be given to addressing retirement plan coverage for these workers. In addition, however, it is recommended that this combination plan arrangement also be established for new police and firefighters hired after some future date yet to be determined and that an option be given to current police and fire fighters of switching from the current defined benefit plan to the new "combination plan." As such, the "combination plan" arrangement as the "plan of choice" will, after an extended period of time, ultimately cover all eligible City of Atlanta employees, achieving parity across job classifications which currently does not exist in the current structure of three distinctly different defined benefit plans. 4) Amortization of Unfunded Liabilities a.) The PTAC recommends that the City of Atlanta consider other methods of funding its unfunded liability. b.). A funding approach be a stand-alone decision and not necessarily a means to fund new benefits. The City's current method for funding its unfunded liability is the most conservative method allowed under Georgia law. While the PTAC believes it is important that the City put in measures to mitigate the growth in its contribution requirements, it further recommends that a funding approach be a stand-alone decision and not necessarily a means to fund new benefits. The PTAC sees no rationale for maintaining the City's current 40-year terminal amortization of funding. See Exhibit C Southern Actuary Report dated February 20, 2003.
5) 5) Pension Plan Governance It is recommended that a review of pension board governance be made so as to identify best practices as they relate to administration and disability approval. Time did not permit an in-depth analysis of this issue. However, a cursory review suggests that the City should consider combining the three boards to create greater efficiencies and economies.
6) 6) Employee Education/Counseling The PTAC recommends that the City of Atlanta increase employee education with respect to pension administration and short and long-term benefits. The City of Atlanta should provide a formalized substantial counseling and education program with measurable goals. The education program should be an annual reviewable process accomplished using various media to reach diverse employee groups. The information should be consistent and emphasize personal financial planning and responsibility for retirement goals. It is important that employees understand their pension benefits both leading up to and applying for retirement benefits.
7) Vesting The PTAC recommends that the City reduce the vesting schedule on its defined benefit plans. The period of time required for full vesting in the three (3) defined benefit plans is 15 years. This is a somewhat slow vesting pattern in comparison to the vesting schedules utilized in many of the surrounding jurisdictions. The additional cost to the City of adopting a faster vesting schedule could be reasonably estimated through an actuarial cost projection. The cost would depend on existing turnover patterns and the extent to which turnover rates might change after adoption and implementation of a faster vesting schedule. Faster vesting likely would be attractive to all employees; however, any additional "real" benefit would accrue only to vested employees who terminate their employment prior to normal or early retirement age and who do not forfeit the City's portion of the benefit through a "cash out" of their employee contributions. Currently, many terminating City employees choose to cash in their defined benefit plan, receiving a return of employee contributions (with interest), and thereby forfeiting the employer-provided portion of the vested accrued defined benefit. It should also be noted that while conceptually important, the actuarial (or "present value") of a vested accrued benefit is typically rather small when employment termination occurs at younger ages. In summary, providing for faster vesting within the City's defined benefit plans increases the value of the plan to terminating employees potentially at a relatively small cost. Faster vesting provides no additional economic value (or benefit) to employees who remain with the City until retirement.
8) Best in Class The PTAC recommends that the City examine its salary structure and increase salaries where appropriate as part of a "total compensation approach" to establishing both salaries and benefit programs. The City of Atlanta espouses a philosophy to be a first choice employer and/or best in class. The PTAC concludes that a pension benefit is one part of a matrix that can lead to the desired designation. "Best in Class" by definition would require being above average. The PTAC believes that the key to being a preferred employer is couched in the context of "total compensation", which is defined to include both direct pay (wages) and various employee benefit programs including pensions, medical, disability and life insurance benefits, vacation and sick leave programs, etc. The PTAC concurs that to achieve the designation of Best in Class or Employer of Choice would require that the City's salary structure be higher than others in the class while also offering a benefits package that is perceived to be at or above the average in the class. Salaries should be commensurate with the work required. Other important components to be evaluated in a comprehensive review include:
The City of Atlanta has a very low, 6%-7%, attrition rate, which is primarily attributed to retirements. Only 2% - 3% of its employees seek other jobs. The committee concludes that in many categories, the City is ahead of or in the median of the market with municipalities in the metropolitan region. A defined benefit plan alone does not represent a best in class pension plan. The defined benefit plan rewards primarily long-term employees who retire from the City after meeting the plan's normal (or early) retirement age. The PTAC is concerned about the City's ability to pay for a 3% annual benefit accrual for all future police and fire fighters. One option for consideration would be to have a more equitable plan for all employees, which provides for greater portability of benefits. See earlier discussion on Parity for full description of recommended plan.
9) Drop Plans The City's charge to the PTAC asked whether other benefit approaches, i.e., "Drop" plans should be considered. The committee had limited discussion on this issue. The PTAC does not recommend consideration of a Drop Plan. Further, we believe before any action is considered with respect to Drop Plans, the City should review and research the information contained in a recent The New York Times, nytimes.com article. The May 5, 2004, article "Some Cities Struggling to Keep Pension Promises" by Mary Williams Walsh provides an in-depth discussion of the difficulties certain major cities are experiencing as a result of adopting a Drop plan. A copy of the article is attached. See Exhibit D.
Submittal The recommendations in this report represent the PTAC's collective best thinking with respect to the pension plans offered by the City of Atlanta for its employee groups. The report is respectfully submitted to The Honorable Shirley Franklin, Mayor and The Honorable Members, Atlanta City Council. August 17, 2004 Cecelia Corbin Hunter, Chair Scott Fremer Greg Marshall Bruce Palmer Mitch Paull Bob Regus
Note: Referenced attachments and exhibits are available only in hard copy. Please contact Randy Bundy to view. »
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