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HomeMy WebLinkAbout03. Presentation from John Bartel on pension issuesE3 I- E L CENTRAL CONTRA COSTA SANITATION DISTRICT `i�(.)CIAFI S 1 I C Pension Issues Presented by John E. Bartel, President Bartel Associates, LLC June 17, 2014 is Agenda CCCERA Compared to Ca1PERS 1 Is one system safer, cheaper, etc. than the other? Pension Benefits 3 Ability to negotiate or change benefits 4 Defined Benefit versus Defined Contribution 7 Major risks for each? Who assumes risk? Cost if target benefit at retirement is the same? Benefit at retirement if cost (annual contribution) is the same? o B clients cemral comra costa sanitary dislncl projects 2014 ba ccmralsan 14-07-I2 docx r CCCERA COMPARED TO CALPERS ■ Cost for any retirement system Contributions — Benefit Payments + Expenses Investment Return • Contribution policy can result in short term volatility • Ultimately, if benefits are the same then Investment Return - Expenses drives plan cost (B A)June 17, 2014 CCCERA COMPARED TO CALPERS Investment Return (Net of Expenses) 30.0 °0 I 20.0% 10.0% 0.0% - -100%, — — -20.0%. CCCERA (12.31) CAIPERS(6 30) -3000o (B'AD June 17, 2014 - `D AI-C r I al 00 0 0 - - C11 Cl m cn g 0 0 0 0 0 0 0 0 fl 1 tp CI ip 1 a f`l tp �' eCCD CURRENT BENEFITS ��A� June 17, 2014 cCC �1 ABILITY TO NEGOTIATE OR CHANGE BENEFITS r� ■ Current Employees:I • California Supreme Court has ruled that pension benefits are individual vested right....this means Board cannot unilaterally or negotiate lower future benefit accruals unless each employee is given something of equal or greater value • Could negotiate to allow employees to opt into lower future accruals but: ❑ Negotiations would be very difficult and ❑ IRS has refused to rule on this when asked to do so through the private letter ruling process This is a legal issue and since Bartel Associates is not a law firm we strongly suggest the (B* 4 17, 2014 A S Tier 1 Tier 2 Tier 3 Post 1/1/2011 PEPRA Membership Pre 1/1/2011 Pre 1/1/2013 Post 1/1/2013 • Formula • 55 2.00% 2.00% 1.3% 0 62 • 67 2.37% 2.42% 2.37% 2.42% 2.0% 2.5% • Benefit Cap 100% Comp. 100% Comp None 60% 60% • Post Retirement Survivor 60% Allowance Continuance Continuance Continuance 3% 3% 3% • Cost of Living Adjustment • Final Average Salary 12 months 12 months 36 months • Terminal Pay • Pensionable Wages Cap Unlimited No ca wear No Cap None 2014 $138,077 IN Social Securi None None None ��A� June 17, 2014 cCC �1 ABILITY TO NEGOTIATE OR CHANGE BENEFITS r� ■ Current Employees:I • California Supreme Court has ruled that pension benefits are individual vested right....this means Board cannot unilaterally or negotiate lower future benefit accruals unless each employee is given something of equal or greater value • Could negotiate to allow employees to opt into lower future accruals but: ❑ Negotiations would be very difficult and ❑ IRS has refused to rule on this when asked to do so through the private letter ruling process This is a legal issue and since Bartel Associates is not a law firm we strongly suggest the (B* 4 17, 2014 A S F ABILITY TO NEGOTIATE OR CHANGE BENEFITS I 1 :1 ■ Future Employees • PEPRA members: ❑ Member on or after 1/1/13 ❑ Much lower benefit formula (2% @ 62) ❑ Cap on salaries used to determine benefit ❑ Membership before 1/1/13 but hired on or after 1/1/13 ❑ Same benefit as those hired before 1/1/13 ❑ Limits on compensation that can be used to determine benefit (L/-jl June 17, 2014 5 ABILITY TO NEGOTIATE OR CHANGE BENEFITS r S • Could negotiate to provide lower benefits to future hires Tier 12 Tier 23 Tier 34 ❑ Employer Normal Cost 21.23% 18.79% 10.92% ❑ Member Contribution Rate 11.25 11.25 11.00 ❑ Total Normal Cost 32.48 30.05 21.92 ❑ Percent of current workforce 77% 21% 2% ❑ Likely requires legislation to provide lower benefits for future PEPRA members ❑ Likely requires legislation to provide lower benefits for future hires that are not PEPRA members. This group will make up a decreasing portion of new hires (Likely decreasing to approximately 0% in about 20 years) O Would have no impact on Unfunded Liability 2 Became member before January 1, 2011. 3 Became member between January 1, 2011 and January 1, 2013. ° Became member on or after January 1, 2013. BA June 17, 2014 6 ' DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Defined Contribution Defined Benefit Plan Plan Nature of Promise Can vary from year to % of base pay each year Annuity, beginning at into employee's account. retirement, payable for as Can vary from year to Employer long as employee lives. year Retirement Benefit the next — "Whatever is Level Necessa " Whatever account Benefit Formula balance at retirement can Employee % of Final Average provide promise does employee Compensation based on Always 100% "own " ?) agency service and Employer benefit factor (EA) June 17, 2014 DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Defined Contribution Defined Benefit Plan Plan Contribution Level Can vary from year to Employee Usually set by statute but year can be negotiated Can vary from year to Employer Varies from one year to year the next — "Whatever is Necessa " Vesting (How much of the Employee Employee Contributions promise does employee Contributions Always 100% "own " ?) Always 100% Employer Retirement Benefit Contributions Typically 100% after 5 or Typically 100% after 5 or 10 years. 10 years. A 1' June 17, 2014 AML DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION i Defined Contribution Plan Defined Benefit Plan Plan Portability Plan Retirement Very Portable Generally Very Portable Employee takes vested Employee chooses account balance with between them when leaving. 1. deferred retirement Significant tax benefit (benefit earned disadvantage for amounts while at District, distributed and not protected by "salary" "rolled over" < age 59%2. inflation if working for Who Accepts most CA public Risk & Reward agencies) or Employee Investment Return 2. accumulated employee Employee Mortality contributions with Employee Retirement interest (B' 1" June 17. 2014 cC S DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION 1 Defined Contribution Defined Benefit Plan Plan Pre - retirement - Same as Death Pre - retirement — retirement, except Employee contribution employer contributions with interest become 100% vested at Post - retirement — death Employee can elect lower benefit to provide survivor continuance Who Accepts Risk & Reward Employee Investment Return Employer Employee Mortality Employer Employee Retirement Employer Employee I Inflation Employer (B* �ll June 17, 2014 to cCC DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION i ■ Studies consistently show defined contribution plans earn 1 to 2 percentage points less (net of expenses) than defined benefit plans • DC plan investments tend to be more conservative • DC plan expenses tend to be higher as a percentage of assets ■ For individual to be certain they get benefit for life they must: • buy an annuity • accumulate more than is necessary on average or • run the risk of outliving balance ('B June 17. 2014 COST IF TARGET BENEFIT AT RETIREMENT IS THE SAME ■ If target is to replace 60% of earnings at age 65 retirement • DB plan does this with 13% of pay (7% assumed earnings) • DC plan does this with 18% of pay (6% assumed earnings) • DC plan does this with 21% of pay (5% assumed earnings) BAJune 17, 2014 1 BENEFIT AT RETIREMENT IF CONTRIBUTION IS THE SAME ■ If contribution each year is 10% of earnings the benefit for age 65 retirement • DB plan gets to 50% of pay replacement (7% assumed earnings) • DC plan gets to 35% of pay replacement (7% assumed earnings) • DC plan gets to 30% of pay replacement (7% assumed earnings) (SA-) June 17, 2014 13 V'5cw(s-