Exh 5AAGENDA ITEM SA
JULY 14, 2003
PENSION COMMITTEE REPORT AND RECOMMENDATIONS
JULY 14, 2003
BACKGROUND AND OBJECTIVES:
On October 14, 2002, the City Commission established a Pension Review Committee
consisting of Commissioner Mike Bomo and Pension Boazd Member Ed Lipscomb to
review the benefits provided to City employees, specifically: Should the City add a 30
year; any-age, retirement option to the current General Employee retirement eligibility of
Age 60 with at least 5 years of service. The scope of the review was subsequently
expanded to include a broader evaluation of the employee benefit packages as changes in
any one benefit may have a direct, or indirect, affect on other benefits.
The committee was not chazged with recommending a means of reducing the current cost
of the existing benefit plans. Therefore, the focus was on identifying opportunities to
reallocate current costs to better achieve the objectives of the benefit plan (listed below).
In evaluating the existing benefit plans, the following criteria.were considered. These aze
not in priority sequence.
1. Employee Retention -How important aze each of the benefit plan components to
employees and what is the current degree of satisfaction of employees with the
existing program.
2. New Employee Recruiting - Do the individual components of the benefits plan
provide an effective tool for management to attract the level of talent needed a$d
compete effectively against other employers.
3. Workforce Behavior - Do the existing benefit programs contribute towazd
aligning the economic interests of the city and its employees in order to encourage
behavior which is in the best interest of both.
4. Current and anticipated changes or trends which will influence the future ability
to deliver a current benefit.
The individual elements of the benefit plans for both general employees and police which
were evaluated by the committee included the following.
1. Pension
2. Employee Supplemental Investment
3. Health and Medical Insurance
4. Flexible Spending Accounts
5. Paid Time Off
6. Holidays
7. Life Insurance
$. Short Term Disability
9. Long Term Disability
10. Overtime Policy
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The above elements of the benefit package were evaluated with respect to the four criteria
of employee retention, employee recruiting, workforce behavior, and anticipated future
trends affecting the benefit.
Recommendations proposed are based upon six meetings of the committee and after
presentations of representative from Palmer & Cay consulting group and the Pension
Boazd attorney Bob Sugarman of Sugarman & Susskind. Recommendations bring
Atlantic Beach's benefit package more in line with those of other azea employers, to
improve the City's ability to recruit and retain employees and better utilize funding
available for employee benefits. It is not intended for there to be either a significant
increase in the City's cost of benefits or an overall change in the amount of benefits
provided, but rather a shift to reflect the local mazket. Phasing in these changes is
recommended both to minimize any adverse effects on individual employees and to allow
for identifying funding sources available to the City.
PENSION PLANS:
The general employee pension plan is a generous benefit and is very rich by virtually
every measurement. It is a Defined Benefit plan which guarantees a certain payout. All
actuarial and investment risk is born by the city. With a multiplier of 2.85% per yeaz of
service, an employee can, with 35 yeazs and 1 month of service, retire with a city pension
of 100% of his last 5 year average compensation. The benefit payable to an employee is
capped at 100% of his last 5 year average compensation: Therefore, with a few long term
employees, they continue to pay into the pension plan with little to no increase in benefit
after 35 yeazs.
In addition, employees are entitled to a social security benefit (50% funded by the city)
which provides a total retirement compensation potential well in excess of their final
compensation at the time of retirement. The plan calls for the employee to complete 5
years service before being vested within the retirement plan.
Employee Retention -The existing plan is highly valued by employees v~ith significant
years of service and those with the knowledge and sophistication to understand to value
of the benefit provided
Employee Recruiting -City management does not believe that the pension plan is a
significant decision factor in the recruiting of new employees. The lack of portability in
the plan requires a commitment exceeding that generally contemplated by new hires. The
portability issues can be addressed in a defined contribution plan with a step vesting
schedule.
Workforce Behavior -The existing plan provides a strong incentive for an employee to
plan a lengthy career with the city. This can provides awin/win for city and employee as
it encourages continuity. It also can increase costs resulting from over-qualified
individuals remaining in positions that could be filled by lower cost new hires.
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NLY 14, 2003
Anticipated Trends -Over the coming yeazs, it is expected. that the actuarial tables that
determine in part the city's cost of the pension plan will be revised. This is to reflect the
increased life expectancy of retirees. This will increase the cost to the City as it will
anticipate a longer payment period for retirees. In addition to actuarial tables, investment
assumptions also drive the cost of the pension plan.. If, as a result of investment
performance, there is a decrease in investment earnings assumptions, this could increase
the cost of the plan. On the other hand, an improvement in investment earnings could
reduce the cost of the plan.
Pension Plan Recommendations
a. General Employees:
(1) Retain the current Age 60 with 5 Yeazs of Service (YOS) criteria for
retirement eligibility.
(2) Discontinue employee contribution of two percent (2%) once an employee
reaches their maximum accrual date (currently at 35 years and 1 month of
service).
(4) Establish a cost neutral s yeaz Deferred Retirement Option Plan (DROP).
(5) Establish a Defined Contribution (DC) plan for all new employees while
retaining the Defined Benefit Plan for current employees.
Note:
A Defined Contribution (DC) plan is a plan where the contribution is defined
and the benefit is based upon the individual employee's account balance.
A Defined Benefit (DB) plan is a plan where the benefit is defined and the
contribution depends on the variables in order to fund the "promised"
benefit.
If a Defined Contribution Plan is not established for new employees:
(1) Increase the contribution rate for all employees.
(2) Decrease the multiplier for new employees to 2.5% (currently 2.85%):
b. Police Employees:
(1) Add additional benefit items as required by FS185 based upon receipt of
sufficient Section 185 funding.
(1) Retain the Defined Benefit plan. The City would lose State Section 185
funding ($85,719 received for 2001) if changed to a Defined Contribution
plan.
(2) Establish a cost neutral s year Deferred Retirement Option Plan (DROP)..
(3) Increase the employee contribution rate for current employees by a one-
time employee salary increase.
(4) Increase the employee contribution rate for new employees.
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EMPLOYEE SUPPLEMENTAL INVESTMENT PLAN:
The City provides an additional voluntary retirement planning vehicle for individuals
interested in accumulating additional retirement savings. This is similaz to a traditional
401K plan and includes no city contribution other than the administrative cost of the plan.
Recommendation
No changes to the current voluntary employee ICMA 457 plan.
HEALTH AND MEDICAL INSURANCE:
The city currently provides HMO and PPO medical insurance plans either of which may
be selected at the option of the employee. The City currently pays 100% of the cost of
the employee coverage and a portion of the cost of dependent coverage. The coverage is
effective on the first day of the month following the official hire date. The dependent
coverage contribution by the employee is based on historical dollaz amounts and is no
longer commensurate with the total cost of the coverage.
As a result of recent claims experience and relatively small size of the insured employee
population, the premium rates are extremely high with the PPO exceeding the HMO in
cost.
Employee Retention -The existing plan is highly valued by existing employees and is
believed to be a key reason for the retention of employees.
Employee Recruiting -The current plan is a significant tool in attracting new employees
to work for the City. Management believes that it is sometimes the primary reason for an
employee seeking employment. The experience rating which has driven up the cost of
medical insurance to the City may well. be evidence of that.
Work Force Behavior -The medical insurance plan provides options that allow access to
medical caze and prescription drugs at minimal cost. The interests of both the employees
and City aze served by maintaining a healthy. workforce with minimal absenteeism. The
cuaent plan provides two options including an HMO and a PPO plan. While the cost of
the PPO exceeds that of the HMO, the cost to the employee for employee only coverage
is the same - Zem.
Anticipated Trends -The annual escalation in medical insurance premiums has
significantly affected the cost of the employee benefit plan.: Management believes that
there is a potential for cost reductions based on improved claims experience. However, it
is prudent to anticipate the potential that costs may stabilize briefly at their current level
and continue the trends seen over the past yeazs. With no cost participation by the
employee, there is no incentive for an employee with other available coverage to decline "
participation in the City funded plan in favor of another plan. If only healthy employees
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opted out because of alternate coverage, some of the benefit of reduced premiums maybe
lost.
Recommendation
There is the potential that the City of 7acksonville may allow the City employees to join
their plan. This has major implications and action on recommendations pertaining to
health insurance and related employee benefits (flexible spending accounts, life, vision
and dental insurance) should be delayed pending receipt of a decision from the City of
Jacksonville on a proposal to allow the City to join Jacksonville's health and benefit
plan(s). Recommendationsaze as follows:
a. Change effective date from the-first day of the month following the month in
which an employee is hired to first day of the third month following the month
that the employee is hired.
b. During future premium rate increases/decreases, adjust the percentage that the
City pays for employee only coverage with a goal of the City paying 90% of
the HMO employee only premium. This would discontinue the current policy
of the City paying more for an employee that selects the PPO plan over the
HMO plan and would also result in a cost shaze between employees and the
City for basic health insurance.
c. Change the percentage that the City pays for employees that select additional
insurance to be a standard percentage. Note: Currently the City pays 67.70%
percent of the difference for Employee/Family coverage, 70.69% of the
difference for Employee/Spouse coverage and 76.70% of the difference for
Employee/Child(ren) coverage.
FLEXIBLE SPENDING ACCOUNTS:
The City provides the opportunity for employees to pay certain child care and health Gaze
expenses out of pre-tax earnings. This program is consistent with the benefits provided
by many employers and is consistent with the objectives defined for the benefit plans in
temps of enhancing employee retention and recruiting. It is cost neutral to the City.
The City should publicize the benefits of the FSAs during the next open enrolment period
and hold group meetings with employees.
PAID TIME OFF:
The City has a program for paid time off that combines sick leave, vacation time and
personal leave. Twice a year, the City pays employees for all leave that exceeds the
maximum accrual. limit as established by the employee.
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JULY 14, 2003
Employee Retention/Recruiting -The current plan provides flexibility to employees to
utilize their paid time off as is appropriate for the individual circumstance. This is an
important benefit to employees and is well received by new hires.
Work Force Behavior -The current plan is beneficial to employees and the City in that it
allows the appropriate allocation of personal leave time to be defined by the employee.
The policy of paying employees for unused leave may have the result of discouraging
employees from taking leave. This may not be a good thing as it increases payroll
expense and reduces zeliance on cross training to cover periods of leave time.
Recommendation
Consider modifying buy back policy to require taking a certain amount. of leave. This
reduces cost except where absence is required to be covered by overtime and encourages
cross training.
LIFE INSURANCE:
The City's "one time annual salar}~' rounded up with a maximum of $50,000 life
insurance is an average to below average benefit. Most employers offer a basic benefit of
1'/z to 2 times annual salary.
Employee Retention/Recruiting -While the current plan is somewhat below competing
plans,. it is unlikely to adversely affect either retention or recruiting of employees.
Recommendation '
Consideration should be given to increasing basic life insurance to 1 %z to 2 times annual
salary upon identification of a source of funding.
SHORT TERM DISABILITY:
The City currently provides no short-term disability coverage. Employees may utilize
their personal time for this purpose or may receive contributed days off from other
employees.
Recommendation
An optional employee paid short-term disability insurance policy should be provided.
LONG TERM DISABILITY:
The City currently provides no long -Term disability coverage. Employees may utilize
their personal time for this purpose or may receive contributed days off from other
employees.
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Recommendation
Long-term disability insurance is a valuable benefit, and should be provided upon
identification of a source of funding.
OVERTIME POLICY:
(a) General Employees:
(1) Overtime:
Change the current policy of paying overtime for all hours worked that
exceed the employee's normal scheduled workday to paying overtime in
accordance with the Fair Labor Standazds Act for all hours worked that
exceed 40 hours in any 7 calendar work period.
(2) Hours Worked:
Change the current policy of considering all hours paid to the employee
(including holidays, personal leave and compensatory time) as hours
worked to considering only hours actually worked in determining
overtime.
(b) Police Employees:
(1) Overtime:
Change the current policy of paying overtime for all hours worked that
exceed the employee's normal schedule workday to paying overtime'm
accordance with the Fair Labor Standards Act for all hours worked that
exceed 80 hours in any 14 calendaz work period.
(2) Hours Worked:
Change the current policy of considering all hours paid to the employee -
(including holidays, personal leave and compensatory. time) as hours
worked to considering only hours actually worked in determining
overtime.
EMPLOYEE BENEFIT STATEMENTS:
The City should enhance communication for benefits available, as well as their cost (on
an individual basis), to all employees by use of an Empooyee Benefit Statement.
Summarizing employee benefits and their related cost is considered a valuable method to
provide employees with a summary of benefits, as many employees do not know the
benefits that they receive or their related costs.
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