FY2011 Employee Pension information, WATCH for changes in Pension Reform for FY2012

Rick Anderson's Pension Memo to Council
MEMORANDUM October 5, 2004
TO: Chairperson Debi Starnes and Members, Finance/Executive Committee
FROM: Rick Anderson
SUBJECT: Pension Issues Discussion Paper

Enclosed is a discussion paper I prepared on pension issues.

I think it is important to recognize the origins of the current issues of disparity among the city's four retirement plans, and for the city to take a thoughtful and comprehensive approach to determining the objectives it wants to accomplish through the provision of retirement plans to its employees. I have laid out a suggested process to accomplish that in this paper.

If I can provide additional information or clarification, please let me know. encl.

cc: Mayor Shirley Franklin Council President Lisa Borders

Janice Davis

CITY OF ATLANTA RETIREMENT BENEFITS

The city of Atlanta first offered retirement benefits to its employees nearly eight decades ago, based upon the principle of providing income for employees when they are too old to work or become disabled from being able to work.

In recent years, there has been increasing hue and cry from employees for more equitable and consistent benefits under the four retirement plans offered by the city. The concerns of employees have been heightened and exacerbated by recent changes in retirement plan benefits which have dramatically changed long-standing correlation among benefits offered to city employees.

Historical Relationships Between City Pension Funds
The city's three defined benefit pension plans were established in the 1920s. In the ensuing decades, changes to the plans were generally coordinated, resulting in little change in the relationship and comparability between the plans. The Police and Fire plans did gain a lower retirement age in 1955, but for the most part revisions through the years that affected employee contribution rates, benefit calculation, disability benefits, survivor benefits, early retirement, etc. were consistently applied to each of the three plans.

In recent year's, the city's responses to employee demands for greater benefits and the city's proffering of "early retirement" options as a budget reduction tool have led to a number of actions being taken which have impacted categories of city employees differently. This has given rise to a clamor for parity in the treatment of employees with respect to the provision of retirement plans.

The issue of "parity" has become highly emotional, tied to the perception of unequal and unjust treatment of categories of city employees. Parity has become the rallying cry for employees dissatisfied with their retirement benefits. The reality is that there are a number of fundamental issues around retirement plans at the city that need to be addressed, and it would be a mistake to deal with "parity" in a vacuum. The fact is that "parity" issues will best be addressed in a comprehensive approach to pension reform.

There clearly is now a significant level of disparity between the four retirement plans offered by the city. The city did not get to this current state of disparity through a cohesive, rational, and deliberate decision making process. The traditional maintenance of comparability between the different funds began to be eroded in the 1990s, but the current state of affairs is largely the result of precipitous actions taken in 2001.

Pension Changes of 2001

In 2001, a series of actions were taken that marked a dramatic change in the relationship between the defined benefit plans and in the parity of retirement benefits offered to various categories of employees. Three revolutionary revisions were enacted:

1) The service credit factor for the Police plan was raised from 2 percent (.02) per year of service, to three percent (.03). This had the effect of essentially increasing pension benefits for Police Officers by fifty percent (50%).

2) The service credit factor for the Firefighters plan was raised from 2 percent (.02) per year of service, to three percent (.03), but only prospectively, for service after the effective date of March, 2001. While not as dramatic a change as that the Police officers plan, this was a significant increase in benefits compared to all other city employees.

3) Effective July 1, 2001, a new "Defined Contribution" plan was put into place for all employees not members of the Police Officers or Firefighters plans. This had the effect of closing the General Employees Pension Fund to new members, and created a fourth set of retirement benefits. This new plan does not provide a defined, "guaranteed" benefit, marking the first time that regular, permanent employees were not covered by a defined benefit pension plan.

The actions of 2001 had a profound effect on city employee retirement plans, and shattered the basic relationships that had existed for nearly eighty years. In cumulative effect, these actions have created the greatest disparity the city's history of offering retirement plans to city employees.

The changes of 2001 were not the result of a thorough and comprehensive analysis of city retirement plan objectives, and were not taken as a cohesive set of adjustments. They have created "haves" and "have nots" among city employees, have generated great dissatisfaction among those employees that view themselves as "have nots", and have created "parity" as the overriding city pension benefit issue.

Unfortunately, "parity" has come to be defined for most employees who are not members of the Police Officers Pension Plan as increasing their benefits to the level of police, specifically a retirement age of 55 and a service credit factor of three percent. Meanwhile, members of the Police Officers Pension Plan are asking for increased benefits in the form of an even earlier retirement age.

Getting Retirement Benefits Back on Course
The Pension Technical Advisory Committee (PTAC) made an excellent recommendation that the city establish a policy that determines the city's targeted percentage of an employee's retirement income. Put another way, the city needs to have an underlying philosophy and a clear objective for its retirement programs that will guide policy decisions over time.

The establishment of this philosophy and objective should precede any discussion of parity and any changes to city retirement plans.

The cornerstone of the city's retirement plan objective will be the target retirement income. As discussed in the PTAC report, most experts estimate that the average retiree will need between 70% and 80% of pre-retirement income to maintain their lifestyle in retirement. It is important to note that this assumes a "normal" retirement age; by definition pension income is not intended to provide equivalent income for persons in the middle of their earning years, still rearing children, or otherwise at the height of a consumption lifestyle.

The traditional approach to the provision of retirement income has been that there are three roughly equal components: one-third to come from the employer; one-third to come from the federal government (through social security); and one-third to come from the employee. Given that the city does not participate in social security, it is reasonable to allow that the city should be responsible for both the employer and federal government shares, or two-thirds of the retirement income. If the city were to accept a retirement income target of 75% of pre-retirement income, that translates to the city being responsible to provide roughly one-half, or fifty percent (50%) of the pre-retirement salary as a retirement benefit.

The Police Officers Pension Plan already allows for members to draw up to eighty percent (80%) of their pre-retirement salary in benefit from the city's pension fund alone. Additionally, most officers participate in the state's Peace Officers Annuity Fund, which provides a monthly pension benefit, and with the prevalence of outside jobs, most are likely to have earned social security coverage as well. Thus, the retirement benefits for members of the Police Officers pension fund already significantly exceed any reasonable, rational retirement income target the city is likely to set. To allow that generosity to be the basis for giving others "parity" with the Police plan benefits would be compounding the mistakes of 2001.

The group of employees with the greatest disparity in retirement benefits is thosedecisions could leave them with nothing at the end of a city career. They have no disability benefit, and no access to health insurance at retirement age. The highest priority for city pension adjustment must be to address these employees. employees outside of the uniformed police and fire services hired since July 1, 2001, who are covered by the defined contribution plan. Unlike most participants in defined contribution plans, they do not have social security coverage. They have no set retirement benefit at all, and poor investment

Even though the recent hires covered by the Defined Contribution plan are the highest priority, there should not be any attempt to address the shortcomings of this plan in the short-term or in a vacuum. The city should undertake a methodical, rational, and thorough process to make pension changes, starting with establishing the policy objectives and the target retirement income to be provided.

There is a clear sequence of decisions that will lead ultimately to addressing all of the retirement plan issues facing the city:

 

	Determine the city's retirement plan objectives, and establish the percentage of pre-retirement salary for which the city takes responsibility to provide in retirement. This objective will guide the evaluation of existing plans and the structure of a new plan or plans going forward.
	Determine whether there is a rational basis for different benefits for different categories of employees, and whether multiple plans are desirable or whether the city and employees are best served by a single plan covering all employees.
	Design a new plan or plans for application to all persons hired after a date certain. The design of this plan(s) will incorporate decisions about whether the provision of social security should be part of the mix, and whether the plan(s) will be defined benefit or defined contribution, or a hybrid of both.
	Establish the new plan or plans prospectively, for all persons hired after a date certain.
	Determine what to do with existing employees in existing plans. The benefits provided under the existing plans should be evaluated against the established retirement plan objective and percentage of pre-retirement salary that the city takes responsibility for providing in retirement. If current plan benefits are less than those of the new plan(s), it should be easy to transfer employees to the new plan(s). In cases where the existing plan has greater benefits than the city establishes as policy, it will be more problematic. Members of the existing plans have vested, legal property rights to the benefits promised under those plans. These rights cannot be abridged. It may be that benefits will have to be left in place that exceed that which the city determines to be it's policy going forward.

 

 

It should be noted that literally thousands of employees have retired under the current benefit provisions, or in the case of police, significantly lesser benefit provisions. If the city makes significant changes in benefits for current employees in plans under which those employees retired, it will have to deal with a new disparity that will be created between members of the same plan whose benefits will differ greatly depending solely upon the date of retirement.

 

Summary

 

The city reached the current point of disparity and dissatisfaction with retirement

benefits through a series of retirement plan adjustments that were not

comprehensive or cohesive, and were highly reactionary to pressure from city

employees and city budget shortfalls. It is critical that the city not fall into the trap

of again reacting to pressure by applying more grease to squeaky wheels.

 

Only through a comprehensive and methodical process can the city put into place a

rational, well reasoned retirement plan going forward, and make any adjustments to

the benefits of existing plans in accordance with adopted policy objectives.

 

Response to the Rick Anderson Pension Issues Discussion Memo Dated October 5, 2004

By P.A.C.E. Atlanta Executive Board, October 25, 2004

 

At the October 20, 2004 Work Session of the City Council Finance-Executive Committee regarding the City of Atlanta pension plans, a memo written by former CFO Rick Anderson was presented. This memo provided Mr. Anderson’s perspective on the pension issues facing the City. This paper is in response to this memo.

Historical Relationships Between City Pension Funds and Pension Changes of 2001

In the first two pages of Mr. Anderson’s memo, he gives a brief historical review of the pension systems with specific information regarding the 2001 pension changes that have so dramatically affected the City’s pension plans. In the last part of this review his comments include:

“The actions of 2001 had a profound effect on city employee retirement plans, and shattered the basic relationships that had existed for nearly eighty years. In cumulative effect, these actions have created the greatest disparity the city's history of offering retirement plans to city employees.

The changes of 2001 were not the result of a thorough and comprehensive analysis of city retirement plan objectives, and were not taken as a cohesive set of adjustments. They have created "haves" and "have nots" among city employees, have generated great dissatisfaction among those employees that view themselves as "have nots", and have created "parity" as the overriding city pension benefit issue.

Unfortunately, "parity" has come to be defined for most employees who are not members of the Police Officers Pension Plan as increasing their benefits to the level of police, specifically a retirement age of 55 and a service credit factor of three percent. Meanwhile, members of the Police Officers Pension Plan are asking for increased benefits in the form of an even earlier retirement.”

 

What is “unfortunate” is that the City of Atlanta implemented an ill conceived and unfair pension program for only a selected group of employees. What is not mentioned is that the defined contribution plan that was implemented for only non-safety employees was identified at the time as the source of savings to help pay for the police and fire pension improvements. This has the net effect of creating a greatly reduced benefit for employees in the general pension fund (new employees from July 2001) to subsidize a greatly improved benefit for public safety employees. No wonder employees in the general pension employees pension fund feel like “have nots” and want parity. The overwhelming application of benefits and pension programs in other cities and counties treat all employees the same (in many cases, the age of retirement is lower for public safety employees while all other benefits are the same).

 

In addressing parity, it is true that employees want “parity” with their fellow employees in public safety, since they have all contributed the same amount over the years for their pensions and must all live with the same costs for their retirements. While the easiest way is to just provide the same benefits to all employees, the City appears to be unwilling to do so. Mr. Anderson’s memo and the P.TA.C. report implies that the benefits given to police and fire were a mistake. It is one thing not to be willing to spend the resources necessary to improve pension plan for the general employee’s pension fund, it is quite another to close the defined benefits plan only to general fund employees, and allow the existing inequities of a 50% greater benefit in retirement salary and a five year earlier retirement age to continue.

 

The concept of “parity” can be evaluated in a more direct way. What is the actual cost to the City (not including unfunded liabilities that the City itself has created) the City spends on benefits for each employee. Since each employee has contributed the same for these benefits, the value of the benefits should be the same. Given the City has three separate groups and pension funds (plus the DC plan group); provide the same value of benefits to all without necessarily matching benefit features.

 

For example: perhaps a plan of a 2.5% multiplier (retroactive with an 80% cap) with a Rule 80 and 10 year vesting is roughly equivalent in value to the current Police plan. Allow a window where any city employee can move to this plan which is comparable with what surrounding county governments offer their employees.

 

Getting Retirement Benefits Back on Course

 

Preceding a step by step approach is a dialog addressing the philosophy of retirement compensation and the defined contribution plan. Some general comments before addressing the step by step approach:

 

	The 70% to 80% replacement salary is a standard range. However, with so many employees at the lower end of the pay scale and with salaries lower than their counterparts in other local governments due to years of neglect, the 80% replacement range is more appropriate than the 75% figure Mr. Anderson cites.
	The two-thirds formula cited as the City’s responsibility for an employee is low, again because over a prolonged period of time the City’s salaries have been low. This has made the ability for the average City employee to make the investment for their third of the part leg extremely difficult while meeting their family’s needs.
	The comment on “normal” retirement age must be taken in context with what is normal in the metro Atlanta area for local governments of similar size. Most other governments have an “age and years of service rule” which translates into an earlier retirement for career employees. Also, many have a retirement age of 55 instead of the age 60 retirement age for the City of Atlanta.
	The defined contribution plan instituted for only employees in the general employee’s pension fund was a cynical move by the City of Atlanta’s executive leadership at the time to generate financial savings while providing what is clearly a substandard retirement benefit. This being done while at the same time providing a tremendous improvement to public safety pension plans has created an “economic caste system” within City government and must be addressed.

 

Responses and comments on the recommend sequence of decisions from Mr. Anderson’s memo:

“There is a clear sequence of decisions that will lead ultimately to addressing all of the retirement plan issues facing the city:

•_ Determine the city's retirement plan objectives, and establish the percentage of pre-retirement salary for which the city takes responsibility to provide in retirement. This objective will guide the evaluation of existing plans and the structure of a new plan or plans going forward.”

 

AGREE IN PRINCIPLE. WE BELIEVE THIS PERCENTAGE SHOULD BE TARGETED AT 80% AS A CAP WITH THE CITY RESPONSIBILITY FOR A CAREER EMPLOYEE OF 20 YEARS TO BE A 50 % REPLACEMENT VALUE (2.5% MUILTIPLIER AT A QUALIFYING AGE OF RETIREMENT OF 55).

 

· “Determine whether there is a rational basis for different benefits for different categories of employees, and whether multiple plans are desirable or whether the city and employees are best served by a single plan covering all employees.”

 

OBVIOUSLY, A SINGLE PLAN FOR ALL EMPLOYEES IS THE BEST SOLUTION. GIVEN THE ESTABLISHMENT OF SEPARATE PLANS WITH BENEFITS THAT CANNOT BE INVOLUNTARILIY REVOKED, EITHER ALL EMPLOYEES SHOULD BE GIVEN THE SAME BENEFITS AS THE POLICE EMPLOYEES NOW ENJOY OR AN EQUIVALENT IN VALUE RESULTING FROM RANGE OF PENSION IMPROVEMENTS SHOULD BE MADE (SEE EARLIER COMMENTS REGARDING PARITY).

 

· “Design a new plan or plans for application to all persons hired after a date certain. The design of this plan(s) will incorporate decisions about whether the provision of social security should be part of the mix, and whether the plan(s) will be defined benefit or defined contribution, or a hybrid of both.”

 

THIS IMPLIES BASED ON THE P.T.A.C. REPORT A NEW MANDATORY DC PLAN FOR ALL CITY EMPLOYEES. THIS ALMOST CERTAINLY MEANS A DIMUNITION OF BENEFITS FOR ALL EMPLOYEES EXCEPT FOR THOSE UNDER THE CURRENT DC PLAN. A DEFINED BENEFIT PLAN IS UNQUESTIONABLY A BETTER PLAN FOR THE VAST MAJORITY OF EMPLOYEES. A VOLUNTARY DC PLAN WITH A MODERN DB PLAN IS ACCEPTABLE WITH A PRE-DETERMINED WINDOW FOR A DC PLAN EMPLOYEE TO MOVE TO THE DB PLAN AT THEIR OWN EXPENSE.

 

· “Establish the new plan or plans prospectively, for all persons hired after a date certain.”

 

AGREE IN PRINCIPLE, BUT WITH THE ABOVE PROVISO.

 

· “Determine what to do with existing employees in existing plans. The benefits provided under the existing plans should be evaluated against the established retirement plan objective and percentage of pre-retirement salary that the city takes responsibility for providing in retirement. If current plan benefits are less than those of the new plan(s), it should be easy to transfer employees to the new plan(s). In cases where the existing plan has greater benefits than the city establishes as policy, it will be more problematic. Members of the existing plans have vested legal property rights to the benefits promised under those plans. These rights cannot be abridged. It may be that benefits will have to be left in place that exceeds that which the city determines to be its policy going forward.”

 

ASSUMING AN ADEQUATE NEW PLAN IS CREATED, ALL NEW EMPLOYEES SHOULD MOVE TOGETHER TO SUCH A PLAN. BUT TO CONSTRUCT A PLAN PRIMARILY TO REDUCE THE CITY’S FINANCIAL COSTS WHILE LOWERING BENEFITS THAT ARE NOT IN LINE WITH STANDARD LOCAL GOVERNMENT PENSION PLANS IS SHORT SIGHTED AND WILL NEGATIVELY IMPACT THE CITY IN ITS ABILITY TO ATTRACT AND RETAIN GOOD EMPLOYEES.

 

IT IS IMPORTANT TO NOTE THAT THROUGHOUT THIS MEMO NO REFERENCE IS MADE TO THE OTHER METRO ATLANTA GOVERNMENT’S PENSION PLANS. IT IS AS IF THE CITY OF ATLANTA OPERATES IN A VACUUM REGARDING ITS PENSION AND BENEFITS POLICIES WITH NO REGARD TO ITS LOCAL COMPETITORS IN THE MARKET PLACE AND WHAT IS APPROPRIATE FOR LOCAL GOVERNMENT EMPLOYEES’S NEEDS.

 

 

“It should be noted that literally thousands of employees have retired under the current benefit provisions, or in the case of police, significantly lesser benefit provisions. If the city makes significant changes in benefits for current employees in plans under which those employees retired, it will have to deal with a new disparity that will be created between members of the same plan whose benefits will differ greatly depending solely upon the date of retirement.”

WHILE IT IS UNFORTUNATE THAT PREVIOUSLY RETIRED EMPLOYEES CANNOT BENEFIT FROM PENSION IMPROVMENTS, IT IS IMPERATIVE FOR THE CITY NOT TO COMPOUND ITS ERRORS OF THE PAST BY PERPETUATING THEM ON EMPLOYEES THAT CAN STILL BE HELPED.

 

 

 

The City of Atlanta

Employee Pension Task Force:

Some Key Points On Pension Program Review

September 22, 2004

The PTAC 2004 Pension Report and the City of Atlanta Employee Pension Task Force 2001 Report should both be used to help evaluate the current situation facing the City and its employees.

The most meaningful comparison regarding pension plans and needed changes are those comparisons made to other similar sized local government agencies in the Metro Atlanta area. Cobb, DeKalb, Fulton and Gwinnett County governments are in direct competition for the work force needed to support local communities; they face nearly identical costs and standards of living, and represent the same social context in how government employees should be treated during their active employment and in their retirement.

Employee pension plans or medical benefits should not be used to compensate for work assignments with the possible exception of absolute age of retirement (such as age 55 vs. 60). The use of “hazardous duty” pay and other salary classification adjustments is the methodology that most organizations utilize.

Action needs to be taken now (this fall) regarding refinancing current pension plans and updated benefits. The concept of setting up a two year “trial or shadow” period is fallacious in that you will never know at the moment of any decision what events will take place in the next two years that might impact your decision positively or negatively. Also, many employees deserve to have the benefits now just like their counterparts in the other local governments have.

In comparing the City’s internal pension plans, an important financial aspect is to evaluate the “value” of the City’s pension plan to each employee vs. the cost the City pays each year per employee into the pension fund. The unfunded debt liability skews the figures because the City did not fund the programs equally over the years. The unfunded debt liability is the responsibility of the City of Atlanta in that full payments were not made at various times in order to completely fund the pension plans. This has now built up over time that a refinancing is the appropriate method to deal with this.

 

The City of Atlanta

Employee Pension Task Force:

Review of the 2004 Report By The Pension Technical Advisory Committee

September 22, 2004

At the request of the Finance-Executive Committee during the September 8, 2004 work session reviewing the City of Atlanta’s pension systems, the City of Atlanta Employee Pension Task Force is presenting this review of the 2004 Report by the Pension Technical Advisory Committee (PTAC). This report is being used as a basis for considering changes to the City of Atlanta’s employee pension plans.

This review will be presented in three sections:

§ The first section will give general comments concerning the report and the process that has been put in place to conduct this review of the City of Atlanta’s pension systems.

§ The second section will review and comment on the nine primary recommendations by the PTAC.

§ The third section is the set of recommendations from the City of Atlanta Employee Pension Task Force (2001) regarding pension policy and addressing the inequities of the City of Atlanta’s pension systems both within the City and in comparison with other Metro Atlanta local governments of similar size.

This review represents the consensus of the current members of the City of Atlanta Employee Pension Task Force. With representatives from all the major stakeholders making up this committee as crafted by the 2001 legislation, at this time the active members are primarily from the City’s unions and pension boards/actuaries due to a period of adjournment since 2002.

It is hoped that members/representatives from the City Council (Council President, Chair of the Finance-Executive Committee) and the Administration of the City (COO, Commissioner of Personnel, CFO) will more actively participate in future meetings of the City of Atlanta Employee Pension Task Force. Remember: this task force was created by resolution of the City Council and signed by the Mayor in 2001 as a standing official body to review and recommend/advise the City on pensions and other related matters affecting the pension system (pay, benefits, working conditions, etc.).

SECTION ONE:

General Comments on the Process

Of the 2004 Pension System Review

In October 2001, the City of Atlanta Employee Pension Task Force presented a comprehensive report reviewing and recommending changes to the City’s pension systems for general employees, fire, and police. This report had the support of all of the City’s unions, pension boards, review and approval of the actuaries at that time, and favorable input from both the City Council and the Mayor’s representatives. This report was not acted upon due to the financial crisis facing the City in 2002 and 2003. In July 2002, the Employee Pension Task Force was told by the CFO that a group of experts would be assembled to review the pension systems that summer in order to address the problems with the Defined Contribution plan that had not yet been implemented, and to address concerns of employees regarding the Defined Benefit plans. The Employee Pension Task Force adjourned waiting for this study. In September 2002, the Defined Contribution legislation was passed to activate this program for new general fund employees hired after July 1, 2001 without any coordinated review or input by the Employee Pension Task Force.

The promised study was finally realized in the spring of 2004 with the creation of the Pension Technical Advisory Committee and its meetings during May through August 2004. This committee’s members represent financial expertise heavily slanted to the private sector. Based on the tenor of the report, the committee seems to be primarily concerned on how to save the City money. The recommendation to retain a Defined Contribution Plan (though modified) for general fund employees, and to consider creating a Defined Contribution Plan for new Fire and Police employees instead of having all employees in the Defined Benefit plans is focused not on providing the best benefits for employees, but in saving money for the City of Atlanta. Pension issues that are addressed in the report do not adequately deal with the obvious inequities both within the City of Atlanta (different treatment of Public Safety employees vs. general fund employees who all make the same financial contribution) and without the City of Atlanta (that other local governments of similar size to the City of Atlanta pay less and receive much better benefits).

The Employee Pension Task Force asks that both reports be thoughtfully considered and the needs of the employees and the financial considerations of the City of Atlanta be carefully balanced. It is not appropriate for either report to be taken as the authoritative basis for action. These work sessions should represent the opportunity for frank discussion, and to make decisions based on the best information available at this time based on actuarial evaluations of benefits and amortizations.

We believe both the employee’s need for improved pension benefits and the City’s need for helping with annual financial payments can be met. It is important that decisions and actions be taken now (in the next few months).

Recommended Work Session Procedures and Actions

§ A member from each recognized Union (Fire, Police, PBA, AFSCME, P.A.C.E.), and a representative from the Employee Pension Task Force should be allowed to actively participate in the City Council work sessions during their deliberations (not just during a public comment period after the sessions deliberations) – this will be more productive (save time), and allow for more reasoned and orderly work sessions.

§ Work Sessions should be held (every two weeks) until pension decisions (both amortization and benefits) are made and then acted upon by the City Council and Mayor– pension changes enacted by ordinance even if some benefits are to be phased in over time.

§ Actuarial studies to address pension changes should be commissioned by the City as soon as possible in order to evaluate the financial impact of these changes in both the short and long terms (costs)

§ Refinancing options for the City’s pension funds should be evaluated as soon as possible to evaluate the financial impact of these changes in both the short and long terms (reduction of annual payment)

§ Savings generated by City decisions involving refinancing and the creation of a DC plan should primarily be used for improvements to the current DB plans.

§ There is no reason why decisions regarding improvements to the pension systems and refinancing of the pension funds cannot be responsibly performed (with actuarial studies) in a few months (not a two year period of evaluation).

§ Existing members of the DC plan should be given an opportunity to become DB members at their expense given the confusion in implementing this plan during 2001 and 2002.

 

SECTION 2:

Comments on the Nine Recommendations

In the PTAC Report

o Adoption of two-year process

§ While it is true that pension changes have long term consequences, over the next few months the actuaries can calculate these effects and decisions can be made to chart the course for the City’s pension plans. Waiting to implement basic changes in the pension plans is unnecessary and needlessly delays critically needed improvements to the pension plans and restructuring of the pension’s unfunded liability. Also, the savings generated by “refinancing” the plans past 2018 need to be linked to pension improvements at the time of the refinancing.

o Income replacement targets

§ The initial statement “… 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.” is accurate but implies that the retirement age to qualify for this is 65, rather than the standard for most local governments of 55-60 (the City’s retirement age is 60 for general fund employees and 55 for police and fire). It is important to note that as the Employee Pension Task Force found, employees at the lower end of the pay scale need a higher replacement percentage (80+%) than employees at the higher end of the pay scale (70+%). Thus, the recommendation is for a “tiered” annual multiplier system. This should be considered as the City makes its decisions regarding changes to the multiplier for the DB plans.

o Parity

§ The idea of addressing the disparity between the General Employee pension fund employees and Police and Fire employees by lowering the General Employees contribution rate to the DB plan and moving that to a City match of those funds is patently unfair to existing DB employees in the general fund. Those who have been paying into this fund for decades would not recover the 50% benefit differential by the time of their retirement.

§ Both DC and DB systems need to be improved and addressed now (assuming the City must have a DC Plan) – simultaneously with the savings to be generated by refinancing the plans. These improvements may be implemented over a two year plan, but they must be taken as a complete plan and implemented into City code by ordinance at the same time as changes to the financing of the pension plans and for any implementation of new DC plans for Fire and Police.

§ The DC plan improvements by adding Social Security or a similar type of benefit is very important. Social Security, while a portable permanent benefit, does not provide as good a return to the employee as a similar investment in the existing DB plans.

§ Parity also involves having a comparable and competitive pension plan in relation to other similar sized local governments in the Metro Atlanta area. The fact is that City of Atlanta employees pay more and receive much less than their counterparts in the surrounding counties. The surrounding local governments have placed a priority in providing their employees with adequate and appropriate pension plans as compared to a history at the City of Atlanta of neglect as to benefits and fully funding the pension plans.

o Amortization of Unfunded Liabilities

§ This has been a recommendation to the City for at least three years (the 2001 Employee Pension Task Force Report); and it should definitely be tied to improving the DB plans (for the General Employees in particular). These funds have been dedicated to employee benefits and really should remain so for the most part with the City also benefiting with a reduced annual payment. Only an actuarial analysis will give the complete picture to how much money is available to accomplish what. It is imperative that all of the significant options that other local governments have be calculated so everyone knows what can be done.

o Pension Plan Governance

§ Having separate boards, plans, and funds really makes no sense. Any sound, financial approach to accomplishing this is worthy of consideration; however, this will be difficult to accomplish given the current status of the funds and boards. This aspect can be dealt with later than the other issues.

o Employee Education / Counseling

§ Of course, a more informed employee regarding their financial status is good.

o Vesting

§ The City does have an unreasonably high vesting of 15 years. This should be reduced to at least 10 years, and the PTAC group to their credit recommends a lowering of the vesting requirement (they do not say to what level).

o Best in Class

§ Salaries at the City have been in a declining condition as compared to other government agencies in the Metro Atlanta area for well over a decade. Recent improvements in overall cost of living increases have not touched the result of years of decline. The majority of City workers are underpaid in relation to their counterparts in local governments in Atlanta.

§ Salary is a critical component not just in day-to-day living for City employees and their families, but also in the value of any pension plan since it is based on the three highest years of salary of an employee. By all means, salaries should be improved as a major component to an employee’s compensation plan. But competitive salaries do not replace pension plan improvements that also need to be competitive as well, and more importantly provide a reasonable retirement for employees. The much mentioned “3 legged stool” requires that to provide the 70-80% replacement salary for an adequate retirement, it should be a combination of personal savings by an employee, an employer based plan, and a permanent benefit plan with medical coverages. City employees under the DB plan solely rely on their City pension because there is no Social Security and in the last 15-20 years, their salaries have afforded them little opportunity to have spare funds to invest and save. The DC plan is even worse. This mandates improvements in the DB plan now.

§ It is clear that the City has assumed the “moral” responsibility for at least 2/3 of the replacement salary for a retiring employee (no Social Security). Due to the low salaries for most of the employees (which effects the value of their pension), there has been little to no opportunity for employees to have savings in order to contribute to the other 1/3 of the pension as they try to provide for the day to day needs of their families. For this reason, it is imperative that the City basically provide almost all of the 80% replacement salary needed for an adequate retirement.

§ The comment in this section relating to low turn over rates at the City is particularly disturbing. At a time of a precarious economy and the large reductions in force mandated by the City in 2002 and 2003, this figure is misleading. This is no way a “best in class” situation.

o Drop Plans

§ As PTAC admitted, they had limited discussion of this topic. This really needs to be discussed in detail. There are examples of plans that have worked well and some that have not.

 

SECTION 3:

Recommendations Based on the 2001 Report Of the Employee Pension Task Force

GOALS FOR PENSION PLANS:

	· Value long term employees
	· Retain institutional knowledge
	· Attract and retain qualified “good” employees
	· Create a retirement system that represents equitably all groups of employees

 

CHANGES TO EXISTING PENSION PLANS:

	Tiered Pension Plan Retroactive: 3.25% Multiplier First $0-$20,000 3.00% Multiplier Next $20,001-$40,000 2.75% Multiplier Next $40,001- and higher
	Tiered Plan capped at 90% of employee’s highest average annual salaries
	Tiered Plan to be tied to the COLA (Urban Atlanta Index)
	Permanent 75 Rule (combination of age and years of service)
	10 years of service for full vesting in Pension Plan (5-10 vesting)
	Age 55 Retirement without penalty for vested General Employees
	Age 51 Retirement without Penalty for Vested Police and Fire Employees
	Rescind Existing Defined Contribution Plan
	Gradual Reduction in Employee Pension Contribution

 

RECOMMENDATIONS:

· Salary adjustments:

o Cost of Living Adjustment (COLA) performed annually

o Competitive salaries with Atlanta area local governments

· Consider participation of all employees in Medicare Benefits

· Adjust Health Benefits back to 75% of Medical Plan selected by employees to be competitive with other local governments

· Look at Disability Benefit Issues and Legislation Needed to Protect City Workers

 

 

The City of Atlanta

Employee Pension Task Force:

Comments On Council Pension Work Session #2

September 08, 2004

Task Force Comments on Pension Work Session #2

Wednesday, September 8, 2004

 

Note: Task Force Comments Are in Bold Italics

 

Review Key Points of Major Discussion Topics (Work Session #2)

 

§ Amortize the Unfunded Pension Liability

o CFO Janice Davis confirms that “…the City’s method is the most conservative that is allowed under Georgia law, and there is no true rationale for continuing the 40 year terminal amortization.” – Agree with the CFO’s assessment. This has been a standing recommendation of the Employee Pension Task Force.

o Proposal is for a “rolling amortization period”. – A variety of amortization plans should be evaluated to afford the best fit for improvement of the City’s pension plans with appropriate financial considerations for payment of long term City obligations over time.

o “What is the point of saving money?” – (Ms. Davis: The funds are available to the general fund for benefit improvements or any other purpose the City decides.) – The citizens of the City of Atlanta and the employees should share the benefit of the annual reduction in pension fund payments. Because of the years of under funding the pension plans and the lower standard of benefits ( in comparison to similar sized local governments in the Metro Atlanta area), the majority of annual cost savings should be applied towards bringing the pension benefits up to local standards.

o “This is a separate decision …” – While the decision to refinance stands on its on merits, the application of the annual payment savings should be focused primarily on improving employee pension benefits and not just reducing the City’s overall budget.

o Does the State of Georgia have to approve changes to the City’s pension Systems? – (Law Dept: No formal process other than filing paper work (amendments and actuarial certifications) showing that the changes are in accordance with State Law.) – Agree with the opinion of the Law Dept.

§ Can the re-amortization be accomplished (legally) in time for the 2005 Budget? - (Law Dept: Yes) - Agree with the opinion of the Law Dept.

§ Do the actual pension funds have to approve the changes? (Law Dept: The pension boards must give their opinion on changes to the financing of the pension plans but their opinion is non- binding; Ms. Starnes – all three pension boards have already approved the refinancing of the pension funds) - Agree with the opinions expressed.

§ How are School Board Employees affected by changes in the pension plans? – (Law Dept: any changes must be approved by the School Board before School Board employees receive any benefit changes; a two-step process.) - Agree with the opinion of the Law Dept.

o Pay and Class Study for City (Salaries, Classifications)

§ What is left to do to accomplish a City-wide Pay and Class Study?

· Ms. Ransom: Last study was performed in 1993 and implemented in 1995; Airport and WaterShed have performed pay and class studies with some other departments having made some adjustments. Progress has been made, however, the “market” moves as well, therefore at some point in time a comprehensive study is warranted. Industry standards indicate a study should be performed every 10 years or so. – A study is overdue and is a critical component of protecting an employee’s standard of living and pension benefits.

· How do you keep a study current? - The implementation of a Cost Of Living Adjustment (COLA) based on standard indexes, which apply to the metro Atlanta area, will greatly help in keeping our pay within classes more current. This will also help protect pension benefits from becoming eroded as well.

§ How much will a comprehensive study cost? (Ms. Ransom: $600,000) – This cost is related to reviewing classifications, not how many employees the city has. The cost is shared between the Enterprise and General funds.

§ The Airport and Watershed should be pulled out of a comprehensive study; the cost will be under $500,000 and they should do it. – In order to address common classifications and any work that has been done at the Airport and Watershed, these departments should be included and the cost will be not be significantly higher.

§ How long will it take?

· Ms. Ransom: about a year. Implement changes in the 2006 Budget is doable with funding availability. – A complete study should be able to be completed and be included in the 2006 Budget.

o Process of Implementation (Two Year Period)

§ State Process: (Mitch Paul: long term actuarial studies and watch salaries and economy over a two year period; do a study now, then 6 months later, and then again to study it again). – Strongly disagree – the reason actuarial studies are conducted is that actuaries, by statistical analysis, long term trend (10-20 year time lines) analysis of the economy and investments, and tables of longevity, etc., incorporate a financially sound and credible plan with detailed information of the financial impacts and benefits. Other Key Points:

· When does one ever know for sure what events will happen that positively or negatively impact financial scenarios? For example, the Bull Market of the 1990’s, the Dot-Com decline in the late 1990’s and early 2000’s, the impact of 911 and oil prices, or the discovery and application of new technologies. The answer is- you will never completely know the future, and you will not know any better two years from now. You pay the actuaries their fee to prudently manage this process with the best information available at the time and make a decision. This does not take years, but a few months at most. Making a decision two years from now will not change the probability of unseen events affecting financial decisions so you make a decision now with the best available information you have at the time. As a case in point, pick any two year period over the last 50 years and see how it could be misleading as compared to other two year periods. The “State” system of implementation is geared more to understanding the commitment in terms of an institutional policy and its impacts.

· Employees need improvements now to bring their pension plans up to local standards of similar sized governments (see charts in report). Delaying these benefits has an unnecessarily negative impact on many long-term, loyal employees.

· Logically, if you delay the benefit improvements for pension plans in order to “shadow” economic impacts, the refinancing of the plans must be “shadowed” as well! Again, this is unnecessary and not the appropriate use of the cost of the actuarial studies the City will pay for.

§ Pilot / “Shadow” System (Ms. Davis suggestion) – Strongly disagree for the reasons stated above.

§ Separate set of books concept as part of the “shadowing process” - Strongly disagree for the reasons stated above.

§ Mr. Maddox: It is unfair to employees to wait two years for any improvements with such a discrepancy; there is no gain for them during this period. Concerned about the adverse effect on the employees and give them false hope. – Agree with Mr. Maddox.

§ Ms. Fauvre: Because you would not have the information you will need by November to evaluate economic decisions, shouldn’t you have more than just one “shadowing” process. - Strongly disagree for the reasons stated above. Also, there is no reason that complete actuarial studies cannot be completed in a couple of months.

§ Costs of various types of plans (3% for all employees, etc.), Ms. Davis – An actuarial study is needed to give an accurate answer. – Agree.

o City Philosophy Regarding Retirement of City Employees (Replacement Salary Benefits)

§ 80% of what an employee earns should be the replacement salary goal of the City (Ms. Starnes assumption) – Agree in general concept, but with observations and caveats (see below).

§ “Three Legged Stool” (Social Security type program, employer program and personal savings) (Ms. Starnes) – Agree to the basic concept.

§ The City is “morally” obligated to cover the “Social Security” leg of the stool since the City does not provide that coverage. (Ms. Starnes) – Strongly agree.

§ The City should therefore only be responsible for 2/3 of the 80% replacement salary benefit to the employee. – Disagree with an explanation:

· Because City employees have been so far behind their local government counterparts in the Metro area regarding not only pension benefits, but also salary benefits, there has not been the appropriate salary for pension calculations (to be applied) nor has there been sufficient earnings to provide a capability to save for retirement (particularly during the period of 1989 – 2002). Again, because of this, the City is really obligated to provide all of the 80% replacement salary, particularly in the case of currently vested long term employees who are almost completely relying on the City for retirement.

· Employees will retire with varying levels of service. An employee with 20 years of service to the City should not expect the same replacement salary as someone with 30 years of service to the City. A working career thus needs to be evaluated and determined in this calculation. Looking at current local government standards in the Metro Atlanta area, an employee with 30 years of service can expect to retire at age 50 with between 60 to 82.5 % of his salary (see Charts in PTAC report) just from the governments themselves. They also provide Social Security retirement benefits as well. All of this is excluding the employee’s ability to save as well since they generally have higher salaries and better medical benefits than do City employees.

· It is also important to note that employees at the lower end of the pay scale need a higher replacement salary percentage (80-85%) than those at the higher end of the pay scale need (70-75%). Using a “tiered” approach with a higher multiplier times years of service at the lower range of salary, gradually decreasing as the salary range increases (see Employee Pension Task Force Recommendations 2001 Report) accomplishes this in an equitable and understandable way.

· In the work session there was a constant reference to the age 65 for this target of replacement salary. This is not in keeping with local government retirement plans in the Metro area or in general around the country. Employees who have gone to work for governments expect a solid retirement benefit for their careers where the salaries are significantly lower than in the private sector. The City’s retirement age of 60 is already higher than most other retirement systems in governments of similar size in the Metro Atlanta. This is even made much worse considering there is not an “age plus years of service” rule at the City as there is in most other governmental retirement systems.

§ “Held Hostage” Issue; (Ms. Starnes) – Employees who begin their careers at age 20 and work for thirty years cannot retire without huge penalties. Ms. Starnes indicated that they can simply wait until age 60 without penalty, and that the penalty simply addresses the “extra” 10 years of payments. – There is definitely an issue considering if these people worked for any of the local Metro governments of similar size could retire without any penalty at age 50. In fact, in some cases, they could have retired at age 47 and ½. These are comparisons with programs that have the employees paying less than City of Atlanta employees do for these benefits. The “Held Hostage” feeling is because the City of Atlanta has chosen not to be competitive in pension benefits for their long term, loyal employees as have other local governments. This is particularly the case with the artificially higher penalty added to the last five years (55-60) of an employee’s career to apparently punish anyone who chooses to vest and receive benefits before age 60. This will cause many employees who achieve basic vesting to look to transfer to other local governments in order to receive better treatment.

§ “Discovery” concerning Retirement and Medical Benefits Dilemma – (Ms. Starnes) – The discussion centered on why an employee who is vested must go ahead and retire when they leave early. - The reason for this is that unless an employee goes ahead and retires, the employee waives the right to the City’s medical benefit forever. This is an important benefit particularly since City employees do not have Social Security and Medicare. The employee (age 50 with 30 years of service) is basically faced with the choice of losing medical benefits or incurring a huge penalty (45% penalty on the pension benefit of 60% of the three highest years of salary which equates to about 1/3 of their full annual salary. And this after 30 years of service!!!

o Combining of Three Pension Boards

§ Complicated Issue that needs to be referred to the Internal Auditor, Finance and Law Department for review and recommendation concerning roles and functions. (Ms. Starnes) – Agree that a process and review is needed.

 

(more to come later)