HomeMy WebLinkAbout05.a.1) (Handout) Presentation comparing (1) Contra Costa Employees Retirement Association (CCCERA) and California Public Employees' Retirement System (CalPERS), and (2) defined benefit plans and defined contributiC Nand CENTRAL CONTRA COSTA SANITATION DISTRICT Pension Issues I Presented by John E. Bartel, President Bartel Associates, LLC July 17, 2014 AGENDA Topic Summary 1 I � CCCERA Compared to CalPERS 3 Is one system safer, cheaper, etc. than the other? Pension Benefits 5 Ability to negotiate or change benefits 6 Defined Benefit versus Defined Contribution 9 Sample Alternative Plan Benefit Designs 16 (BA-) July 17, 2014 SUMMARY ■ CCCERA vs. Ca1PERS • Single biggest driver of system cost is investment return • Two systems have almost identical historical returns • Other issues impact short or long term cash flow • Moving from CCCERA to Ca1PERS would have noticeable staff and consultant cost I I (B l 1 July 17, 2014 1 SUMMARY � 1 ■ Defined Benefit vs. Defined Contribution Plans • Moving to DB or DB /DC Hybrid likely requires legislation • Defined Benefit Plan ❑ Generally more efficient than Defined Contribution Plan ❑ Creates more volatility (risk) for District i ❑ Requires employees accept some risk to mitigate District risk ❑ Not consistent with private sector benefits • Defined Contribution Plan ❑ Generally less efficient than Defined Benefit Plan ❑ Results in less volatility (risk for District ❑ Consistent with private sector benefits Jul y 17, 2014 2 .499& I - CCCERA COMPARED TO CALPERS 1 • Cost for any retirement system Y 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 1 L1f i ! July 17, 2014 3 Ag& CCCERA COMPARED TO CALPERS Investment Return (Net of Expenses) 30.0% - - - - -- 20.0% 1000. 0.0% � OO H 9 H ` ` N N C! N f"J CJ O O O `! N \! N C, N N N N � r r Ni C-1 3 tF) izi - 10.0oAu -20.0% t-CCCERA{0 -2L31 j — — —0—Ca1PER5(6 30) - 30.0�% 0 - (BOA") July 17, 2014 4 CURRENT BENEFITS BA) July 17, 2014 5 C"C ABILITY TO NEGOTIATE OR CHANGE BENEFITS i ■ Current Employees:' • 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/ 1 ' July 17, 2014 6 ' Tier 1 Tier 2 Tier 3 Membership Pre 1/1/2011 Post 1/1/2011 Pre 1/1/2013 PEPRA Post 1/1/2013 • Formula • 55 • 62 • 67 2.00% 2.37% 2.42% 2.00% 2.37% 2.42% 1.3% 2.0% 2.5% • Benefit Cap 100% Comp. 100% Comp None • Post Retirement Survivor Allowance 60% Continuance 60% Continuance 60% Continuance • Cost of Living Adjustment 3% 3% 3% • Final Average Salary 12 months 12 months 36 months • Terminal Pay Unlimited 1 year None • Pensionable Wages Cap No cap No Ca 2014 $138,077 ■ Social Security None None None BA) July 17, 2014 5 C"C ABILITY TO NEGOTIATE OR CHANGE BENEFITS i ■ Current Employees:' • 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/ 1 ' July 17, 2014 6 ' ABILITY TO NEGOTIATE OR CHANGE BENEFITS ■ Future Employees • PEPRA members: ❑ Member on or after 1/1/13 ❑ Much lower benefit formula (2% @ 62) ❑ Cap on salaries used to determine benefit • Non PEPRA members: ❑ 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 i 4BM/1. July 17, 2014 7 ABILITY TO NEGOTIATE OR CHANGE BENEFITS i • 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 I, 2011 and January 1, 2013. 4 Became member on or after January 1, 2013. qBJuly 17, 2014 8 ' DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION i Defined Contribution I 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 Ion as employee lives. year Retirement Benefit the next — "Whatever is Level Necessary" Whatever account Benefit Formula balance at retirement can provide Employee % of Final Average Compensation based on Contributions promise does employee agency service and Always 100% "own " ?) benefit factor (B July 17, 2014 DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Prc"ICKS Defined Contribution I 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 Necessary" 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. 0-) (B'A July 17, 2014 10 r3cm-ni DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Defined Contribution Plan Defined Benefit Plan Defined Benefit Portability Retirement Very Portable Generally Very Portable Employee takes vested retirement, except Employee chooses account balance with employer contributions between them when leaving. become 100% vested at 1. deferred retirement Significant tax death benefit (benefit earned disadvantage for amounts while at District, distributed and not protected by "salary" "rolled over" < age 59'/2. inflation if working for continuance most CA public agencies) or Employee 2. accumulated employee Employer Employee contributions with Employer Employee interest (B !)July 17, 2014 11 cCC DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION i 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 Inflation Employer 1' July 17, 2014 12 USD DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION l ■ 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 9July 17, 2014 13 ' 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) BJuly 17, 2014 14 VC-C S P q BENEFIT AT RETIREMENT IF CONTRIBUTION IS THE SAME i ■ 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 (6% assumed earnings) • DC plan gets to 30% of pay replacement (5% assumed earnings) BAJuly 17, 2014 15 BENEFIT AT RETIREMENT IF CONTRIBUTION IS THE SAME �C S l 1 July 17, 2014 16 ACC Alternative Tier 3 1 2 3 PEPRA DC Plan Hybrid DB • Formula • 55 • 62 • 67 1.3% 2.0% 2.5% N/A 0.65% 1.00% 1.25% 1.3% 2.0% 2.5% • Benefit Cap None N/A None None • PRSA 60% N/A None None • COLA 3% N/A 2% 2% • Final Average Salary 36 months N/A 36 months 36 months • Terminal Pa None N/A None None Is DB Member Contribution 50% NC None 50% NC 50% NC l 1 July 17, 2014 16 ACC BENEFIT AT RETIREMENT IF CONTRIBUTION IS THE SAME (B"*) / 1 July 17, 2014 17 �C S DI I BENEFIT AT RETIREMENT IF CONTRIBUTION IS THE SAME I i Alternative Tier 3 1 2 3 PEPRA DC Plan Hybrid DB • CCCSD DC Contribution • Guaranteed N/A 4% 2 % N/A • Match - 100% up to 100% up - • Member DB Contr. 11.00 6% to 3% 10.00 • Member DC Contr. 0.00 Member Member - • Total Cost 21.92% Contr. Contr. 20.00% • Contribution Vesting 10.92% 10.0% 10.0% 10.0% • Member Always Always Always Always 100% 100% 100% 100% • District (DC only) N/A 100% at 5 100% at 5 N/A ears ears (B"*) / 1 July 17, 2014 17 �C S DI I BENEFIT AT RETIREMENT IF CONTRIBUTION IS THE SAME I i • Likely requires legislation to provide lower benefits for future • PEPRA members • New hires that are not PEPRA members. • Would have no impact on Unfunded Liability (EAD July 17, 2014 18 �C S Alternative Tier 3 1 2 3 PEPRA DC Plan Hybrid DB • Total Cost • CCCSD DB Normal Cosi 10.92% - 5.00% 10.00% • CCCSD DC Contributio - 10.0% 5.00 - • Member DB Contr. 11.00 - 5.00 10.00 • Member DC Contr. 0.00 6.0 3.00 - • Total Cost 21.92% 16.0% 18.00% 20.00% • District Cost 10.92% 10.0% 10.0% 10.0% • Likely requires legislation to provide lower benefits for future • PEPRA members • New hires that are not PEPRA members. • Would have no impact on Unfunded Liability (EAD July 17, 2014 18 �C S