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HomeMy WebLinkAboutADMINISTRATION ACTION SUMMARY 07-02-14sd. / a, Central Contra Costa Sanitary District environment Ith and the • SPECIAL MEETING OF THE BOARD OF DIRECTORS: CENTRAL CONTRA COSTA DAVID R. WILLIAMS SANITARY DISTRICT President ADMINISTRATION COMMITTEE MICHAELR M President Pro Tent PAUL H. CAUSEY ACTION SUMMARY 'AMEN A. IYEJEDGY TAD J. PIGECKI PHONE: (925) 228 -9500 Chair McGill FAX: (925) 372 -0192 Member Williams www.ceiztralsan.org Wednesday, July 2, 2014 8:00 a.m. Executive Conference Room 5019 Imhoff Place Martinez, California PRESENT: Chair Mike McGill, Member David Williams, General' Manager Roger Bailey, Director of Administration David Heath, Finance Manager Thea Vassallo, Human Resources Manager Teji O'Malley, Finance Administrator Todd Smithey, Human Resources Analyst Twila Mullenix, John Bartel of Bartel Associates, LLC, and Assistant to the Secretary of the District Donna Anderson Call Meeting to Order Chair McGill called the meeting to order at 8:00 a.m. 2. Public Comments None. 3. Receive presentation from John Bartel of Bartel Associates, LLC, and continue discussion regarding (1) Contra Costa Employees Retirement Association (CCCERA) /California Public Employees' Retirement System (CaIPERS), and (2) defined benefit versus defined contribution plans. (Previous discussions took place on April 2 and June 18, 2014.) John Bartel of Bartel Associates, LLC, confirmed with the Committee Members that they were satisfied from an educational perspective with the information he presented at the April 2 and June 18, 2014 meetings comparing pension plan administration under CCCERA and CaIPERS. Therefore, he proceeded to the next topic on the potential ramifications of switching from a defined benefit plan (DBP) to a defined contribution plan (DCP), a discussion begun with the Administration Committee Action Summary July 2, 2014 Page 2 Committee on June 18, 2014. He referred to the new material distributed with the agenda packet, which included the addition of several slides containing information requested by the Committee. Mr. Bartel explained the chart on slide 3 which set out three tiers of pension benefits used by CCCERA since enactment of the California Public Employees' Pension Reform Act of 2013 (PEPRA) on January 1, 2013. Tier 1 (employees hired before 2011) and Tier 2 (employees hired during 2011 and 2012) differ in the amount of terminal pay (spiking) that can be included in the final average salary, which he said can matter quite a bit in terms of final compensation. The terminal pay for Tier 1 employees is, on average, 20 -22% of pay because it includes vacation, sick leave, and holiday compensation. The percentage for Tier 2 is much lower because the terminal pay includes just one year of vacation and no sick leave or holiday compensation. No spiking is allowed for Tier 3 (employees hired after January 1, 2013, subject to PEPRA). Chair McGill noted that it can be confusing to distinguish between the tiers utilized by CCCERA and those used by the District. It was explained that while both sets of tiers are based on employee hire date, the CCCERA tiers relate to pension benefits and the District's tiers relate other District issued benefits. For purposes of this discussion on pension matters, only the CCCERA tiers are relevant. Chair McGill also asked how the "legacy employees" and "estoppel class" fit with the tier descriptions. It was noted that legacy employees are those hired prior to January 1, 2013. The estoppel class is composed of legacy employees hired prior to January 1, 2011. Mr. Bartel explained that while the age 67 benefit factor is a bit higher for Tier 3 employees (2.5% versus 2.42 %), the pensionable wage cap (the base number used to determine retirement benefits) is substantially lower. In 2014, the cap is $138,077. Even though it is indexed to inflation, Mr. Bartel believes more and more Tier 3 District employees will exceed the cap as time goes by, which could prove problematic from a recruitment standpoint. Lower benefit formulas under PEPRA mean that newer employees will need to contribute more toward their retirement. While there is no big sense of urgency for the District, it is something he believes the District may want to address, perhaps sooner than other agencies. It was noted that some agencies have begun making contributions to individual deferred compensation accounts to make benefit packages more attractive to prospective employees. Referring to slide 6, General Manager Roger Bailey asked if, from a legal standpoint, salaries could be increased to cover the difference between "normal cost" and the total cost to the District, with the increased amount placed in a deferred compensation plan, without affecting the pensionable wage cap. Mr. Bartel said yes. Administration Committee Action Summary July 2, 2014 Page 3 In response to a question from Chair McGill, Mr. Bartel said that PEPRA was implemented via AB340 effective January 1, 2013. AB197 is a separate but related issue, in that District employees have relied upon CCCERA to determine terminal pay, and CCCERA has historically taken a broad view of what may be included in terminal pay. AB 197 was enacted to clarify the components of terminal pay, which will effectively reduce the amount that CCCERA may include in its terminal pay calculations going forward, to the detriment of some current District employees. Mr. Bartel explained that the District's DBP is a tax qualified plan that enjoys favorable tax treatment in that benefits are not taxed until paid. However, one of the rules of such plans is that retirees are not paid more than what is allowed under the plan. While unlikely, he noted a potential issue with plan disqualification due to CCCERA's past liberal interpretation of terminal pay. Mr. Bartel briefly reviewed slides 7 -10 which compared the differences between a DBP and DCP in terms of the nature of the promise to employees, retirement benefit levels, contribution levels, vesting, portability, death, and who accepts the risk and reward. Mr. Bailey asked if the District could expect reduced costs with comparable benefits by moving to a DCP. Mr. Bartel said no. While the risk can be transferred from the District to the employees by switching to a DCP, which is what most companies in the private sector have done, investment returns under DCPs are, by and large, lower than with a DBP. With regard to risk, Mr. Bartel said the agency assumes the risk and reward under a DBP if returns exceed the set benefit formula. In a DCP, the employee assumes the risk and reward because there is no set benefit formula. As explained at the June 18 meeting, studies consistently show that administrative costs are almost always greater with a DCP because expenses tend to be higher as a percentage of assets and the investments tend to be more conservative. Also, movement of assets in a DCP increases the profits made by investment advisors, which is not the case in a DBP. Member Williams asked if educational programs for employees on the basic concepts of investing could mitigate these findings. Mr. Bartel said it was his belief that investment results under a DCP will always be lower than in a DBP, regardless of any such programs, because individual employees are unable to enjoy the lower expenses afforded DBPs. Chair McGill said that while there are cost issues, there are also issues of fairness in considering the two types of plans. There needs to be a balance between what is appropriate for the District's rate payers and its employees. The question is where to balance that fairness. Mr. Bartel said he is absolutely convinced that Tier 1 and Tier employees must have a stake in relieving the unfunded actuarial accrued liability (UAAL). He has seen this be successful when there is upside potential for the employees (e.g., a higher benefit formula). Chair McGill said if he were to be asked to make a recommendation to the full Board at this point, he would recommend remaining with CCCERA as the Administration Committee Action Summary July 2, 2014 Page 4 District's retirement plan administrator, and keeping the existing DBP. While Member Williams agreed with the retirement plan administration recommendation, he was not comfortable making a recommendation on the DBP /DCP issue because he believes ratepayers expect that District employees should assume at least some risk associated with their retirement package. Chair McGill did not disagree, but said he was unaware of any reasonable mechanism for accomplishing that. Mr. Bartel noted that in another ten or so years, PEPRA (Tier 3) employees will comprise a majority of District employees, which will affect future labor negotiations. He also reiterated the impact to the District on recruitment of future employees. To that end, he said he could bring back to the Committee a sample DCP as well as a hybrid DBP /DCP for illustrative purposes. Given the importance of this issue, the Committee Members agreed that it would be beneficial to review the new material prior to making any recommendation to the full Board. COMMITTEE ACTION: Received the presentation and scheduled a further discussion with Mr. Bartel on July 16, 2014 at 3:00 p.m. to review samples of a DCP and a hybrid DBP /DCP with a view toward making a recommendation to the full Board on July 17, 2014 after Mr. Bartel's scheduled presentation. 4. Announcements a. Future scheduled meetings: Wednesday, July 16, 2014 at 3:00 p.m. (Special) Wednesday, July 23, 2014 at 8:00 a.m. Wednesday, August 27, 2014 at 8:00 a.m. Wednesday, September 24, 2014 at 8:00 a.m. (Alternate for Member Williams to be determined) COMMITTEE ACTION: Received the announcement. 5. Suggestions for future agenda items None. 6. Adjournment — at 10:20 a.m.