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Home My WebLink AboutADMINISTRATION ACTION SUMMARY 06-18-14�l Central Contra Costa Sanitary District SPECIAL MEETING OF THE CENTRAL CONTRA COSTA SANITARY DISTRICT ADMINISTRATION COMMITTEE ACTION SUMMARY Chair McGill Member Williams Wednesday, June 18, 2014 8:00 a.m. Executive Conference Room 5019 Imhoff Place Martinez, California BOARD OF DIRECTORS: DAVID R. WILLIAMS President MICHAEL R. MCGILL President Pro Tem PAUL H. CAUSEY JAMES A. NEJEDLY TAD J. PILECKI PHONE: (925) 228 -9500 FAX: (925) 372 -0192 www.centralsan.org 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 and Associates (left after Item 3.), 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 and Associates regarding defined benefit versus defined contribution plans Mr. Bartel distributed essentially the same backup material (attached) as handed out at the April 2, 2014 Committee meeting, when he began his presentation regarding comparisons between Contra Costa Employees Retirement Association (CCCERA) and California Public Employees' Retirement System (Ca/PERS). He briefly recapped his view stated on April 2 that the two systems are virtually identical from contribution and investment return standpoints; Administration Committee Action Summary June 18, 2014 Page 2 therefore, any decision about switching from CCCERA to Ca/PERS would most likely hinge on more intangible issues. Mr. Bartel began the discussion comparing defined benefit plans (DBP) with defined contribution plans (DCP) by referring to slides 3 -9 of his backup material. He said 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 DBPs. Study after study consistently shows that DBPs enjoy a higher net rate of return than do DCPs. In a DBP, the agency assumes the risk and reward if returns exceed the set benefit formula; conversely, in a DCP, the employee assumes the risk and reward because there is no set benefit formula. Mr. Bartel said the main reasons that private sector companies switch from DBC to DCPs are (1) employees understand them better (even though benefit levels may be less); (2) management is able to accurately predict pension costs, and (3) changes to the regulatory environment. In the public sector, Mr. Bartel said the issues are not the same because the focus is much longer term. The chief problem with a lot of public sector DBPs is that benefit levels have been unsustainably high. Recent regulatory changes will result in lower, more sustainable benefit levels in the years ahead. In response to a comment from General Manager Roger Bailey as to quantifying the cost ramifications to the District with a DBP versus a DCP, Mr. Bartel said it is important to understand there are limits to the ability of the Board to make changes to current employee pension benefits. So, realistically, changes can only be made for future employees, either as a mandated change or a negotiated benefit. The Committee asked staff to obtain clarification from labor counsel on this issue. Mr. Bartel also pointed out that no matter the legal clarification, the District's unfunded liability will not be immediately impacted, even for future hires. Any savings from switching from a DBP to a DCP would be the difference between the normal costs and what would normally be contributed to a DCP, and those savings will not appear for another 25 -30 years. Only then will the District experience less volatility in its pension costs. In 15 years, the impact will not be noticeable, except possibly in the District's ability to recruit. COMMITTEE ACTION: Received the presentation and set up another meeting on July 2, 2014 at 8:00 a.m. to conclude the discussion with a view toward making a recommendation to the full Board on both the CCCERA vs. CaIPERS issue and the DBP vs. DCP issue. Requested that (1) staff obtain clarification from counsel as to the District's ability to change from a DBP to a DCP for current employees, either as a mandated change or Administration Committee Action Summary June 18, 2014 Page 3 negotiated benefit; and (2) Mr. Bartel provide additional hypothetical cost information comparing a DBP and DCP. 4. Announcements a. Future scheduled meetings: Wednesday, June 25, 2014 at 8:00 a.m. Wednesday, July 2, 2014 at 8:00 a.m. (Special) Wednesday, July 23, 2014 at 8:00 a.m. Wednesday, August 27, 2014 at 8:00 a.m. b. Human Resources Manager Teji O'Malley made an announcement regarding the compliance issues under the Affordable Care Act with the District's Health Flexible Spending Accounts component of the Section 125 Cafeteria Plan, as discussed at the April 2, 2014 meeting. She said that based on recent transitional clarifying regulations from the Internal Revenue Service, the District is once again in compliance. COMMITTEE ACTION: Received the announcements. 5. Suggestions for future agenda items None. 6. Adjournment — at 10:00 a.m. * Attachment CENTRAL COSTA COUNTY SANITATION DISTRICT Pension Issues Presented by John E. Bartel, President Bartel Associates, LLC June 17, 2014 Tonic Agenda CCCERA Compared to CalPERS 1 Is one system safer, cheaper, etc. than the other? Defined Benefit versus Defined Contribution 3 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? B/ 1 ,:',1icn1Meen1m1 contra —M sanitary dis1nWp,,,1cc1.,,2014 \ha ccnlm]= 14- 0647.doce l 3 �s.�� 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/1 June 17, 2014 1 CCCERA COMPARED TO CALPERS Investment Return (Net of Expenses) 30.0% 20.0% 10.00/0 0.0% _ T fl N CI _ f ri fl fl Z cJ Ci m fl .p f1 7 c1 „ C7 Cd N - 10.0 % -20.0% —*— CCCERA (12.31) —W- Ca1PERS (6.30) -30 O',b B/1 June 17, 2014 2 O E Nr `7 CI fl ('I CI ci CC S DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION � I Defined Contribution Defined Benefit Plan Plan Nature of Promise % of base pay each year into employee's account. Annuity, beginning at retirement, payable for as Contribution Level long as employee lives. Employee I Retirement Benefit year Level Can vary from year to Whatever account Varies from one year to Benefit Formula balance at retirement can the next — "Whatever is % of Final Average provide Necessary" Compensation based on Vesting agency service and (How much of the Employee benefit factor B/t June 17, 2014 3 DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Defined Contribution Defined Benefit Plan Plan Contribution Level Can vary from year to Employee I 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 Employee (How much of the 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. Bjj June 17, 2014 4 7 DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Defined Contribution Defined Benefit Plan Plan Portability Very Portable Retirement 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 City, protected distributed and not by "salary" inflation if "rolled over" < age 59'h. working for most CA Employee public agencies) or Employer 2. accumulated employee 6 contributions with interest BA June 17, 2014 5 ' DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION Defined Contribution Plan Defined Benefit Plan Pre - retirement - Same as retirement, except employer contributions become 100% vested at death Death Pre - retirement — Employee contribution with interest Post - retirement — 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 B/I June 17, 2014 6 tM DEFINED BENEFIT VERSUS DEFINED CONTRIBUTION ■ 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/I June 17, 2014 7 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) /1 B June 17, 2014 8 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) BAJune 17, 2014 r7cs: